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Are Hedge Funds Evil Incarnate?

March 1, 2021 (1,734 words)

Not that anybody is paying attention to this sort of thing, but the corruption of the Catholic mind over the course of the last sixty years has had a distinctly economic component.

As recently as 1960 the official party line celebrated the common good and a concern for the less fortunate. These broad principles enjoyed unanimous support from all concerned – the hierarchy to the lay intelligentsia to the simple folk in the pews.

That consensus began to crumble when firebrand conservatives decided to reject papal critiques of free-market excess, and interpret traditional Church teaching on social justice as tantamount to endorsing socialism. While the revolt erupted publicly and made headlines in 1961, the process actually started before WWII, when certain Catholics intellectuals took issue with New Deal policies designed to address the severe economic ramifications of the Great Depression.

This raised an eyebrow at the time, since those policies were known to be influenced by what’s referred to as the Catholic Magisterium. During his first campaign for president in 1932, Franklin Delano Roosevelt quoted Pope Pius XI’s 1931 encyclical “Quadragesimo Anno,” calling it “just as radical as I am” and “one of the greatest documents of modern times.”

(QA, for those who may be unfamiliar, expressed grave doubts about capitalism’s one-size-fits-all approach in light of the October 1929 crash on Wall Street. It echoed concerns first articulated forty years earlier by a previous pope (Leo XIII) when confronting the Robber Barons of the Gilded Age. That 1891 encyclical, “Rerum Novarum,” kicked off Catholic teaching on social justice for the modern era.)

In the years following WWII the same critics became increasingly emboldened, and their understanding had now become unduly colored by the Cold War with the Soviet Union. Making an either/or choice between competing political ideologies undermined their adherence to a much more comprehensive ideology – Christianity. And this time instead of limiting their criticism to a politician or a party platform, by 1961 they came right out and criticized a different pope’s articulation of the same teaching on social justice.

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Spurred on by these influencers the general public began to strenuously extoll all things “American,” which unfortunately came at the expense of long-held religious identity. The trade-off was most evident in the realm of economic life. Average believers who were upwardly mobilizing at a steady clip naturally embraced “capitalism” as superior to the only other option under discussion – all without giving the matter much thought, I might add.

The great divide within American Catholicism we are so familiar with today between liberals and conservatives actually began with the latter’s open rebellion against any restraint on unfettered capitalism’s obvious and unfortunate excesses. But since this seminal event was immediately followed by a noisy breach on sexual mores, many everyday Catholics never quite got their feet under them in the wake of the conservatives’ economic heresy.

Those who still held to the Church’s traditional stance on sexual ethics found themselves taken in by the conservatives’ opposition to the defining moral issue of our time: a woman’s right to choose.

Since the 1970s political conservatives have made hay with the religious mainstream, successfully wielding a well-known opposition to abortion as a shield to fend off any legitimate criticism of their ‘trickle down’ fiscal policies. In this they have had lots of help from Catholic intelligentsia of a traditionalist stripe, kindred spirits of those who first trashed FDR’s take on “Quadragesimo Anno.”

In recent decades esteemed scholars with a political science orientation have gained fame and fortune for themselves by assuring the rest of us capitalism is “inherently moral.” This has proven to be a soothing idea many have been only too happy to swallow, despite all peripheral evidence to the contrary. Other tradition-oriented scholars who focus on theological matters and don’t much go in for monetary theory have adopted their colleagues’ economic proscriptions at face value.

This has led the dwindling number of rank-and-file Catholics to adopt the conservative brand – lock, stock, and barrel. An important element of that branding is the questionable belief our economic system is a sophisticated, self-contained entity – a science, if you will – that functions according to its own inner logic, and is not subject to the basic imperatives that guide our private lives.

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The splintering of the Catholic mind over the economic question has put the American hierarchy in a tough spot, at least where Church teaching on social justice is concerned. Faced with ongoing examples of collateral damage created by the laissez-faire free-for-all, even our most orthodox bishops can manage only a tepid response in support of the common good.

They don’t want to get too pushy in challenging certain cherished assumptions held by the remaining loyalists, who tend to support the economic status quo, and are usually the ones who can afford to make the charitable donations so vital to keeping our parishes and dioceses afloat.

The clergy is faced with the daunting task of trying to maintain as much of the inherited physical infrastructure as they possibly can, while continuing to serve the poorest of the poor. Funding for the former continues to shrink, while the number of disadvantaged falling into the latter category continues to grow.

For their herculean efforts in these worldly matters our prelates run the risk of being labeled “the Democratic Party at prayer.”

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Ah, if only I knew how to get through to the religious right – including my dear friends, the Catholics – who have turned a blind eye to unfettered capitalism’s obvious and unfortunate excesses. They key word in that last sentence is “unfettered,” of course. Capitalism as a system of exchange has much to recommend it, as we all know, and has been responsible for lifting waves of the previously downtrodden out of their once-dire circumstances.

But nothing that involves human agency can be considered “inherently moral.” One would think the religiously-minded would grasp this concept more readily than their secular counterparts. That so many earnest believers have suspended their wariness of flawed human nature, to buy into the fallacy of capitalism as inherently moral, can only be attributed to a willful ignorance that’s fueled by widespread material complacency.

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The best illustration of the unfortunate excesses of unfettered capitalism can be found in the highly speculative fields of venture capital, hedge funds, and private equity. Only the best and brightest receive initiation into the elaborate machinations of these financial instruments, with the instruction dispensed to the chosen few at our most prestigious business schools.

This segment of the financial industry receives the least amount of regulatory oversight from the SEC, which may explain why it yields the highest compensation for those aggressive acolytes who are practiced in its arts.

The fee structure enjoyed by hedge funds is shocking enough: 2% for just sitting on a pile of investor cash, and 20% of whatever profit is generated once those funds are put into play. But it’s more the day-to-day activity of hedge funds that should give us pause, above and beyond the lavish fee structure.

We all know what hedge funds do, right? They leverage their way to a majority stake in a ‘vulnerable’ company only to cut expenses by slashing jobs, raid the balance sheet of any assets, before eventually selling off the dead carcass to the highest bidder. Then they move on to their next victim.

The slash-and-burn technique obviously does not bode well for the job prospects of average wage-earners. Companies done in by hedge funds are frequently pillars in their communities, employing hundreds – if not thousands – of minding-their-own-business, middle-class citizens. Once the hedge fund takes over, these people are left twisting in the wind with nowhere else to go. And in the case of older established companies, whatever pension the ex-employees may have accrued ends up in the pockets of the hedge fund managers, since the new owners are not obligated to meet that prior commitment.

This ransacking and pillaging is going on in plain sight, right under our noses. None of it is technically illegal, but neither can any of it qualify as the least bit ‘moral,’ no matter how watered-down your definition of the term has become.

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In an impressive display of single-mindedness, principled conservatives are able to maintain their equilibrium in the face of the financial carnage that continues to pile up. They keep themselves distracted from the debris with abstract discussions worthy of a college debate team: ‘taking care of one’s neighbors in need is a personal responsibility’ versus ‘the state taking care of neighbors in need by confiscating resources from other neighbors.’

The key to their unflappable self-assurance is to dismiss the excesses as not being systemic. Rapacious greed on the part of certain flamboyant individuals is not a concern, only ‘big government’ that oversteps its bounds and interferes with a citizen’s God-given right to ‘freedom.’

And speaking of freedom, conservatives see no downside whatsoever to the “economic freedom” they hold in the highest esteem. They are convinced the American version of “faith” and “liberty” go hand-in-hand to form a more perfect union.

The really, really principled conservatives are the ones who insist President Joe Biden is disqualified from proposing solutions to society’s great inequities, because he supports abortion. They tell us social justice begins with recognizing the value of all human life, even life in the womb. And that trying to solve social issues without having a conversation about the value of human life is like trying to grow a plant without acknowledging the critical element of its root system.

This is a beautiful analogy, but I would suggest the root system we need to nourish is economic in nature. Since abortion is nothing but the bitter fruit from the tree of “economic freedom.”

At the end of the day we all desire peace, and most can agree nothing shouts a lack of peace quite like an abortion. But in order to achieve peace there must be a level of justice for all. That starts with a more just and equitable economy.

A woman’s decision to abort – whether out of desperate economic circumstances or to fulfill a misguided notion of ‘self-actualization’ – is merely the tragic by-product of the rugged individualism we have allowed to define our economic life.

And the most blatant example of this philosophy’s perils when applied to economic activity just might be hedge funds.

Robert J. Cavanaugh, Jr
March 1, 2021

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