28 Apr Wealth and Income Gaps

A NYT article today reports on the loss of wealth among Americans since 2007. The article cites many findings in a recent Urban Institute study, “Less than Equal: Racial Disparities in Wealth Accumulation.” Racism is alive and well in the U.S., but it would be a mistake to confuse racism with a dysfunctional economic structure.

The U.S. financial system (and, by extension, the economy) run on some intellectually bankrupt financial theories that assume (i) companies don’t go out of business; (ii) risk can be neutralized through dynamic hedging; and (iii) the supply of capital is infinitely available in case dynamic hedging doesn’t work. In practice, such theories invite people who have been indoctrinated, who control the capital, to make dangerous, foolish or heartless financial decisions without batting an eye.

A key point in the Urban Institute’s report is that the wealth gap is more insidious than the income gap. Financially speaking, this is a truism. P&Ls change; balance sheets are relatively stable; and a healthy balance sheet has equity sufficient to cover unexpected risk and finance improvement. Everybody who has ever been a lender knows this about the balance sheet. Unfortunately, nobody lends anymore. These basics of life are not part of the mindset of our financial wizards, theorists or decision-makers. They are someone else’s problem.

People need savings. But it is impossible for the average person to pay for every amenity and contingency that constitutes The Good Life. Governments have a role in creating the good life, not by fostering dependency but by supplying an enlightened mix of safety net and incentives for new, private businesses, so that people can create wealth and assume more responsibility.

I fear that the biggest obstacle we face in reviving the American Dream is not selfishness, racism or greed, but a fear of cutting loose from bad financial doctrine. The people who need to lead with a better idea be unable to take a risk on leading with a better idea.