Opinion

The Great Debate

The middle class’s missing $1.6 trillion

The United States was the world’s first middle-class nation, which was a big factor in its rapid growth.  Mid-19th-century British travelers marveled at American workers’ “ductility of mind and the readiness…for a new thing” and admired how hard and willingly they labored. Abraham Lincoln attributed it the knowledge that “humblest man [had] an equal chance to get rich with everyone else.”

Most Americans still think of themselves as middle class.  But the marketing experts at the big consumer goods companies are giving their bosses the unsentimental advice that the middle class is an endangered species. Restaurants, appliance makers, grocery chains, hotels are learning that they either have to go completely up-scale, or focus on bargains for the struggling and budget-conscious.

Current income surveys, for statistical reasons, usually segment families by broad categories, which obscure the recent radical shift of income to a thin stratum of the super-rich. Well-to-do people may buy $100 coffee pots, but the lion’s share of the income growth has been going to folks with five houses and staff to make the coffee.

For the last 15 years, an international consortium of economists has been building data bases on the income shares of the richest people in the developed countries, based on pre-tax market income including capital gains and tax-exempt income, and excluding government transfers. The American data reveals the greatest inequality by far, followed by Great Britain.

The stunning income distribution has a remarkable symmetry.  In 2012, the top 10 percent captured half of all reported income. But the top 1 percent got almost half of that — 22.5 percent — while the top 10th of 1 percent (0.1 percent) captured half of that. All three are within a few decimal places of the previous highs — which occurred in 1928, just before the market crash that ushered in the Great Depression.

from Rolfe Winkler:

Go for it Gary

Gary Gensler -- regulator and, yes, Goldman alum -- has distinguished himself in Washington. As CFTC Chairman, he's fought to impose stricter rules on OTC derivatives and recently proposed rules that would cut the leverage currency traders are allowed to deploy from 100:1 to 10:1. Lest we all forget how dangerous leverage can be when traders misuse it, there's LTCM to serve as exhibit A. In a clear sign that Gensler is fighting the good fight, traders are screaming about the proposed rule. Fantastic.

From Carolyn Cui and Sarah Lynch at WSJ: Foes take on leverage curbs from CFTC

An attempt by regulators to protect investors from volatile global currency markets has triggered an uproar among lawmakers, currency dealers and thousands of small traders.

The Commodity Futures Trading Commission has proposed rules that would reduce the amount of borrowed funds that retail investors can use when investing in the U.S. foreign-exchange market to as much as 10-to-1, from the existing 100-to-1 for major currencies.

from MacroScope:

Step aside capitalism, how about leverageism

Our recent post on the End of Capitalism triggered much interest and comment.  There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?

Anthony Conforti suggested in a comment that we need a name for what is happening,:

The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?

from Rolfe Winkler:

The elusive leverage ratio

By Peter Thal Larsen and Rolfe Winkler

LONDON/NEW YORK, Oct 5 (Reuters) - Of all the reforms proposed by global financial regulators over the past 12 months, none looks as appealingly straightforward as the leverage ratio. What could be simpler than linking the total amount of assets a bank can hold to the amount of capital it has to absorb losses it makes on them?

Alas, such a task is more difficult than it appears. There is little international agreement about how to calculate banks' assets or capital, let alone what the ratio between the two should be.

A few years ago, even the idea of such a simple measure seemed hopelessly out of date. Banks were busy building sophisticated computer models to measure the risks they faced. They were allowed to tweak the amount of capital they held against assets depending on how risky the computer thought those assets to be. Then those models failed.

from Rolfe Winkler:

When genius (finally) gets wise

The people who brought you the Long-Term Capital Management debacle want banks to get serious about cutting their own leverage, applying fair value accounting to a wider range of assets.

Writing with two colleagues in the Financial Times on Tuesday, Nobel Laureate Robert Merton said banks, their regulators and legislators are conspiring to conceal depressed asset prices in order to avoid dealing with the consequences of insolvency. He wants wider adoption of fair value accounting to force banks to fess up to losses and raise more capital.

Speaking on Bloomberg radio, Merton’s long-time associate and fellow laureate, Myron Scholes, concurred.

from For the Record:

Watching our language: Writing about the financial crisis

dean-150Dean Wright is Global Editor, Ethics, Innovation and News Standards. Any opinions are his own.

The global financial crisis may have drained the coffers of investors, businesses and nations, but it’s making our language a bit richer as we discover, revive, coin and develop words and phrases to help make sense of it all.

Some take hold quickly and spread far and wide. “Bailout,” naturally, was voted Word of the Year for 2008 by the American Dialect Society and by Merriam-Webster and was No. 2 on Time’s “Top 10 Buzzwords” (a list that also included “staycation,” a frugal vacation spent close to home). Interestingly—and predictively, as it turned out—the dialect society’s 2007 Word of the Year was “subprime.”

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