Morningstar - Q2 2021 - 13

That said, retail investors certainly may
short if they wish, by using margin with their
brokerage account. Thus, the argument
that short selling is purely a technique for the
wealthy or institutions does not hold. It is
true that retail investors who are not accredited
cannot own hedge funds-but they may,
if they wish, short stocks directly.

certainly acceptable. The latter, though,
is a step too far. What's more, such claims harm
those who have not yet invested, by
dissuading them from doing so. The vitriol
punishes the less fortunate. K

a decade ago by economists Darrick Hamilton and
William Darity.

Everyone's Included

In simplest terms, the government
would contribute to savings accounts for children
under 18, with the amount determined
by household income. When a recipient turns
18, the money would go toward wealthbuilding uses such as paying for college or buying
a house.

In short (so to speak), it is not true that Wall
Streeters receive the cream of the investment crop
while others are stuck with the remains.
Anybody with $1,000 to spare could have turned
a 260% profit over the past decade by buying
a U.S. stock index mutual fund. Such a
profit would have exceeded that earned by most
Wall Street professionals. The investment party
truly is for everybody.

Morningstar supports the concept of baby
bonds as a way to help children from lower-income
families. We are not endorsing any particular
bill or program design, but we believe it is
important to use our expertise to analyze the effect
such programs could have on reducing
the racial wealth gap and the trade-offs in
program designs.

There's no question that Wall Street's business
practices are often distasteful. The unholy
arrangement between the investment bankers
who repackaged leaky mortgages before
the global financial crisis and the ratings agencies
that obediently certified those securities
as being investment-grade cannot be justified.
(Note: Morningstar has since become a nationally
recognized statistical ratings organization
itself after those events.) Nor can one defend
revenue-sharing agreements between funds and
brokerage platforms.
The animus toward hedge funds is also
understandable. By design, hedge funds operate
in near secrecy and do not accept ordinary
investors. Employees who refuse to talk to their
peers, while also excluding them from their
social circles, are likely to be roundly detested by
their coworkers. It is therefore no surprise
that hedge funds are deeply unpopular with the
public. That hedge fund managers benefit
from the carried-interest tax provision, which
permits them to pay a lower federal tax rate than
do everyday workers, does not enhance their
reputations, either.
However, there is a difference between disliking
Wall Street-or at least, disapproving of
the favors it receives-and criticizing the integrity
of the investment process. The former is

John Rekenthaler is a vice president with Morningstar
Research Services LLC. He is quick to point out that the
views expressed in Ivory Towers are his own.

Baby Bonds Would
Reduce the Racial
Wealth Gap But would
low interest rates
minimize their impact?

POLICY

Aron Szapiro

Along with huge gaps in many economic indicators,
the racial wealth gap in America is staggering.
According to the Federal Reserve's Survey
of Consumer Finances, white families had more
than 7 times the wealth of the average
Black family in 2019. Furthermore, that ratio has
not moved meaningfully in decades.
Income gaps between races in America are
also high-white families had a median income
of more than $70,000 compared with slightly
over $41,000 for Black families-but not
nearly high enough to fully explain the wealth
gap. This disparity makes it much more
difficult for people of color, particularly children,
to build wealth.
One policy solution that could help close this gap
is an idea called " baby bonds, " originally proposed

The program most fully developed in draft
legislation is the American Opportunity Accounts
Act. Under this model, every child would
receive $1,000 in an account at birth, followed
by contributions of up to $2,000 each year
depending on household income. The money
would be invested in U.S. Treasuries and
could be withdrawn by the recipient to pay
for expenses such as college, purchasing a house,
or other activities that build wealth.
The framers of the legislation expect the baby
bonds to return 3% or so in nominal returns,
but that may be too optimistic for the foreseeable
future, given that interest rates are historically low.
In this article, we will discuss the effect of
the program as proposed and then turn to some
trade-offs involved with adding more risk into
baby-bond accounts.
We did not do our own independent estimates,
but we agree with outside analysts that
the legislation would probably cost between
$60 billion and $80 billion-far less than
the child tax credit or even the mortgage interest
deduction. Still, baby bonds would be a substantial
investment over time, and their success
hinges on how much of a boost they provide for
kids who otherwise might not be able
to attend college or put money down for
a first home.

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