The financial gap is everyone’s problem

Marketplace Staff Jun 25, 2007

The financial gap is everyone’s problem

Marketplace Staff Jun 25, 2007


Kai Ryssdal: The undercurrent running through the stock market today was uncertainty. Especially about the housing market. There’s talk Bear Stearns will have to borrow maybe $10 billion to keep its troubled hedge funds afloat. They and a bunch of other funds are buried in subprime mortgage problems.

On top of that, we learned this morning we’ve got the biggest overhang of unsold houses in this country in the past 15 years. And sales are still sliding. Commentator John Authers points out some of Wall Street’s banks are warning their clients about rising economic inequality.

He says it’s about time.

John Authers: The rich are getting richer and the poor are getting poorer. And that could be a problem — for the rich.

That’s not an original observation. It goes back at least as far as Karl Marx, who talked of “two great hostile camps” that could sort out their differences either through revolution or in “the common ruin of the contending classes.”

Nobody on Wall Street is advocating revolution. But if UBS, the biggest bank in Switzerland, can say it finds that “low-income Americans have been in a recession all this century” that says something.

UBS believes that inequality is a deepening problem for everyone, and not just the poor.

And Wall Street is right to be worried. First of all, it makes the job of investing harder.

That’s because numbers on the aggregate economy become meaningless when you have two separate economies, one built around the rich and the other around the poor.

So, good luck on deciding where to put your money. If you want to lend, look no further than the subprime mortgage debacle. The headlines show the U.S. economy barely slowing down, and yet the subprime mortgage industry is in crisis.

The theory is that diversification will look after you. Mortgages and other loans are now packaged up and sold on as securities. If you buy a security representing a range of mortgates, defaults should stay at a manageable rate.

But that assumes all borrowers are living in the same economy. If they are living in two, one of which is in crisis, such comfortable assumptions go out of the window.

And if you want to invest, luxury goods are a good investment but there is a limit as to how many of those goods the rich will buy. Selling to the increasingly poorer economy looks risky.

Marx said that inequality could be a problem for everyone. He proposed his own solution, which would certainly not go down well with the wealthy. But remember his other option was “common ruin.”

Wall Street is taking that more seriously than you’d think.

Ryssdal: John Authers is the investment editor at The Financial Times.

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