The High Beta Rich

Robert Frank’s new book “High-Beta Rich-How The Manic Wealthy Will Take Us To The Next Boom,Bubble And Bust” is based on interviews with more than 100 people with net worths (or former net worths) of $10m or more. These include the Blixseth family, former billionaires who had to lay off all 110 staff in their enormous residence; the Siegels, who had to abandon the largest private house in the US before it was completed; and Jack Warner, who built a fortune from various business, but ended up a penniless handyman.It is also a tale of how the financial crash of 2008 has affected the US more generally. It includes numerous unemployed former butlers, unoccupied mansions and falling tax revenue for fiscally-pressed state governments. In addition, Frank tells the story of upmarket repo men who specialise in repossessing planes, yachts and the like from indebted millionaires.So basically Frank revisits the lives of the people he profiled in Richistan, and follows up on what has happened to them in the years since he wrote the book in 2006. By 2011, some of these rich people have since gone from riches to rags, or merely to less affluence. His follow up on the people whose jobs it was to serve the needs of the rich shows how many of them are now finding it hard to secure stable jobs from the rich since the 2008 .Since the book with vivid sketches of how the rich, and the formerly rich, really live  is a sequel to Richistan, published in 2007, in which he profiled the lives of the rich before the recent financial bust, do read it before starting on this one.

The term “high-beta” in the title refers to how the nature of wealth has changed since the 1980s. A high-beta investment is one that is relatively volatile. For instance, if a stock moves, say, 2 per cent a day on average while the market moves by 1 per cent it is said to be a high-beta stock. The high-beta rich are those who have made much of their wealth from volatile financial assets.Frank shows how 1982 was a watershed year for the wealthy because that was when the incomes of the top 1 per cent of people started to drift out of line with those in the rest of the economy. He cites three reasons why that year was a turning point in the nature of wealth: (1)deregulation and pro-government policies;(2) technological innovation; and (3)financial speculation. The rich gained enormously as the financial bubble bolstered their incomes, although they also lost heavily after the Lehman crash of 2008.

The book’s central theme is how the beta rich’s fortunes now depend largely on rising asset values, and how asset price movements correspondingly affect their over-all wealth, and so affect their consumption of services, and hence, employment of a lot of people. The book tells stories of formerly rich people, how they came into big wealth during the two decades of continuous rise in debt and asset values, and the rise in conspicuous consumption that came with it. It relates anecdotes of people who bought rich man’s toys such as Maseratis, yachts, private jets, and hired private armies of household help, from personal chefs, personal masseuses to household managers a.k.a. butlers. It tells of their experiences finding themselves suddenly back in the world of the non-rich, losing mansions, and then letting go of their butlers .The author narrates how the rich and their money took over previously more egalitarian towns, such as Aspen, and the rising cost of living that drove away the locals and the economy that thrived on serving those locals, and how in its place arose an economy that simply caters to the whims and demands of the very rich.

The author then talks about how governments like California have over the years grown more dependent on tax revenue from a few large income tax payers who are largely high-beta rich from Silicon Valley. The masses at the bottom require increased funding for entitlements and social programs. But those at the top, who are increasingly paying for those programs, will exert an outsize influence on politicians through their money and will lobby for lower tax rates. The result is that governments will have more booms and busts and permanent deficits.