What Hawaii's Costliest Homes Say About the U.S. Economy

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Who owns the 25 most expensive homes in Hawaii? The answer offers a window into the changing nature of the U.S. economy.

While extrapolating data about the super-wealthy to an entire economy is hardly an exact science, the sources of the ultra-wealthy's assets reflect what parts of the economy are thriving. For example, the Forbes list of the richest 400 Americans changes along with the economy. Swollen with 40 to 50 new technology-Internet fortunes a year in the go-go late 1990s, the list has stagnated along with the economy: The list has far fewer new entries nowadays (only 16), and these fortunes are largely based in "old industries" such as coal, natural gas, chemicals and gambling/casinos.

In the same way, the list of who owns $30 million estates reflects the pecking order of who's merely doing well and who's doing very, very well in the U.S. economy today.

Who Does (and Doesn't) Own Hawaii's Most Expensive Homes?

Luxury homes in world-class resort areas like Hawaii tend to attract a posh global crowd. There are plenty of non-American billionaires, after all -- so the complete dominance of U.S. luxury homeowners in the region is somewhat of a surprise.

Given Hawaii's international reputation, political stability, natural beauty and relative proximity to Asia, we might expect to find some nouveaux riche from China or Southeast Asia there. But no. The number of homeowners from China, Taiwan or Hong Kong is zero. Non-U.S. homeowners make up 20% of the list, and they're all from Japan. This representation is rather low, given that Japanese companies were snapping up hundreds of prime Hawaii properties for cash during Japan's Bubble Economy of the late 1980s.

Entertainers often own posh estates in tropic island paradises, and two owners from the entertainment/arts world are on the list. But two of 25 is not exactly major representation.

You might anticipate that some technology heavy-hitters would own $30 million second (or third) homes in Hawaii, and yes, four computer/software-based fortunes are on the list, starting with Michael Dell's $60 million manse.

How about those who made fortunes in coal, oil, natural gas, retail, aerospace, mining, telecommunications, pharmaceuticals, biotechnology, railways, autos, the media or real estate development? Zero, zip, nada. Only one business mogul is in the 25, and that fortune was built in health care services.

So who dominates the list?

Investment bankers, hedge fund managers and others whose fortunes flow from financial services own half of these super-costly homes.

Finance Dominates the U.S. Economy

This isn't happenstance: Academic studies have documented the growing dominance of finance in both the economy and in corporate profits. This has led to spectacular increases in compensation for CEOs and managers in financial services, far outstripping the wages earned in other sectors of the economy.

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Even after reforms supposedly reined in the "too big to fail" banks, the five largest banks on Wall Street -- Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS) -- earned a combined $147.4 billion before paying compensation and taxes last year. They reinvested $31.2 billion into their companies and paid out a total of $2.1 billion to shareholders in the form of dividends. The amount they paid to their employees in wages and bonuses: a staggering $114.1 billion.

This reflects the dominance of finance in American corporate profits. Financial services profits went from just under 20% of corporate profits in the early 1970s to above 40% before the financial crisis in 2008.

The materials, energy and industrial sectors have all lost market share in the S&P 500 in the past 35 years, even as financial services rose from a trivial percentage in 1975 to become the largest component, with 21% of the index by 2006. (These profound changes to the composition of the S&P 500 were documented by Jeremy Siegel and Jeremy Schwartz in a paper issued by the University of Pennsylvania's Wharton School of Business.) Overall, the share of the nation's GDP contributed by real estate and finance has more than doubled to over 20% in the post-war era.

The "Financialization" of America

The current dominance of finance was achieved through what analysts call the "financialization" of the American economy, and the process has been painstakingly documented in academic studies by Greta Krippner of UCLA and Ozgur Orhangazi of the University of Massachusetts-Amherst.

The consequences of this are far-reaching for the nation. Financialization has produced extreme concentrations of wealth, which can then be used to influence elected officials and government agencies tasked with regulating the financial sector. Former Chief Economist of the International Monetary Fund (IMF) Simon Johnson has exhaustively documented how large financial services firms and investment banks influence the machinery of federal governance -- a process he calls "the quiet coup."

Professor Krippner's research suggests that this financialization of the U.S. economy was an indirect result of the opening global capital markets in the 1980s -- a development, she says, that allowed Congress and every administration since the Reagan era to sidestep the federal budget constraints that confronted the Ford and Carter administrations in the 1970s. That is, the financialization of the U.S. economy enabled the borrowing and leveraging of gigantic sums, on a global scale.

Who benefited from this new dominance of finance, debt and leverage in America? For the answer, look no further than who owns all those $30 million second homes in Hawaii.
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