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The yawning wealth gap
We all know that income inequality has been widening in recent decades. Less appreciated yet even more disturbing over the long run is increasing wealth inequality. Wealth plays a large role in life experiences and opportunities, from education to neighborhood. The latest report from Pew Research Center's Social & Demographic Trends is bleak on the wealth front: Wealth Gaps Rise to Record Highs Between Whites, Blacks and Hispanics.
The typical white household in 2009 had $113,149 in wealth (assets minus debts), according to the report. The typical black household had $5,677 in wealth and the comparable Hispanic household $6,325.
In other words, the median wealth of white households is 20 times that of black households and 18 times that of Hispanic households.
These lopsided wealth ratios are the largest since the government began publishing such data a quarter century ago and roughly twice the size of the ratios that had prevailed between these three groups for the two decades prior to the Great Recession that ended in 2009.
The primary culprit behind recent surge in wealth inequality is the collapse of the housing market. Homes are a much larger share of net worth for minorities and the subprime debacle was concentrated in minority neighborhoods.
For instance, from 2005 to 2009 the real wealth of the median Hispanic household plunged by 66% and by 53% percent for blacks, the report said. Over the same time period the wealth drop for white families was 16%.
Washington should be far more concerned about increasing income and wealth inequality than sinking into fiscal irresponsbility over the debt limit. The two inequalities are feeding off and reinforcing one another. It means falling equality of opportunity for more and more Americans, especially their children. That's bad economically and morally.
So the author is pointing out that the housing bubble and necessary bust that followed, hurt the very people that the government claimed to be helping with the liberalization of lending standards. That by guaranteeing the mortgages of people who would have been better served by renting, they facilitiated a huge financial set back for a group of people already in poor financial positions.
The other thing that needs to be pointed out is that in a free society, while you can try for equal opportunity, you will not get equal outcome in all measures. Different people have different priorities for their life pursuit and the measure of success they are judged by. And different people are new to the land of opportunity and are starting from zero when they arrive.
So let me get this right, what you are saying is that all of those bad loans that greedy banks made were only done because uncle sam put a gun to their heads and said, "Loan or Die"? Try again.
You condescendingly say that these poor folks are not as well off as everyone else because they have "different priorities". Well, that may be so but they are nonetheless entitled to a fair shake and opportunity.
Bottom line is that the banks, on their own accord, took the risk of lending money to folks that probably should not have been qualified under rational lending standards - standards that the banks themselves maintained. Even if some government guarantees where made by the government the bulk of the risk was born by the lender so no less risk should have been discounted.
If government did anything to facilitate this mess it was the egregious lack of regulatory oversight and enforcement on entire lending industry, including all of the parties involved in the alphabet soup of derivatives marketed, sold and insured.
Wait a minute... that's hardly a middle ground. The truth is that the government placed requirements and incentives in place to make bogus loans to people who shouldn't have gotten them in the first place. Then, instead of placing risk squarely where it belongs (the shareholders,) provisions were made to protect the very businesses who didn't keep sound business practices.
Here's how messed up things were: only the first house payments had to be made in order to pass the loan assets into a secondary market. Ensuing risk just moved on to a new set of investors & lending firms washed their hands of their unscrupulous deals.
Now, if you want to address ethnic gaps in wealth, you have to approach it socially. Public schools are ridiculous, there is a social cancer of spending beyond our means, and financial prudence is most often discouraged. No wonder these things happen over time.
I grew up in an upper middle class black household complete with the best private schools and I have a bachelor's from one of the best universities in the country. I currently work with very low-income women, mostly white and black. I can honestly say that I received nearly the same financial education as many of these women growing up. My parents told me to simply save my money. Save it for what? And how do I save it? I never fully understood what it meant to save for a future purchase.
Outside of the home, no one is teaching people about personal finance. Because of my education and thirst for knowledge, I found the tools (Chris Farrell, Tess Vigeland, other personal finance gurus, investing books, etc) to teach me what I need to know about personal finance. Even though my parents and their friends are good savers and are on the path to a fruitful retirement, they never thought to spend the time teaching those lessons to their children. One white CPA friend of my parents' sheepishly told me the other day that he has never talked to his 22 year old son about investing or retirement.
Let's arm people with the education they need so everyone has a fighting chance at the American Dream and so that we can avoid the mistakes EVERYONE made during this recession. Finance is far too complex to assume people will be able to learn it on their own.
