More Wealth Re-Distribution: Taxpayers to Banks

[Rajiv]

Re: More Wealth Re-Distribution: Taxpayers to Banks

One example: If the top 50% of the shares are owned by 1% of the population, that suggests that 50% of the shares are owned by 99% of the population. More significantly, those in the lower 99% of the population may only own 50% of the shares, but to those individuals, their share interest may be crucial to their future livelihood.

Doing a little bit of arithmetic, I find that 75% of stock ownership is in the hands of 5%. Therefore 45% (~48.2% who own any stock minus ~5%) own 25%. Also only 36% owned stocks worth more than $5000. Doing ABC analysis, I will avow that the 12.2% owned only about 5% of the stock, while 31% owned about 20%. I would say it is unlikely that the livelihood of people owning $5000 or less of stock depended on that stock ownership.

However, I will accept it for a fact that stock ownership does in fact contribute substantially to the wellbeing of about a quarter of the population. However, if the Banks that are in trouble were allowed to fail, the major burden would be on the upper 1-5%. In order to ameliorate the burden on the small investor, who would indeed be hit harder (as a percentage of their total wealth) The distribution of the proceedings after the liquidation of bank assets could be constructed such that the smaller investors received a greater compensation than larger investors. There is a precedent for this in the way FDIC works ( with an upper limit, nominally, I believe is $100,000 of deposits)

Also, My highlighting the disparity in wealth ownership, is not so much out of a spirit of class warfare, but rather to show that there exist huge disparities in the power wielded by the rich (top 0.5%) compared to 80% of the population in the social structure of a society that is considered to be a democracy. That was the point of the later part of my reply to Miju.

[grapejelly]

Re: More Wealth Re-Distribution: Taxpayers to Banks

slightly different take on the subject, Clif Droke has an interesting public essay:

You may remember back in 1999 in the days and weeks leading into the fateful “New Millennium” of Jan. 1, 2000. So many people were expecting the lights to go out worldwide, figuratively and literally. Worst-case scenarios and an “Apocalypse Now!” mentality abounded. Yet as the fateful date drew near it became obvious that the so-called Y2K Crisis wouldn’t materialize because the stock market was making all-time highs right up until the last trading day of 1999. Had the powers-that-be foreseen a genuine Y2K collapse they would have cashed out well in advance of the date and in so doing cracked the markets big time. A strong stock market in the face of a supposed “crisis” generally means the crisis is overblown, at least as far as its ability to severely impact the economy.
Could the scare stories over the sub-prime lending debacle be the final wash-out phase of the U.S. housing market correction? I think it could be. It’s certainly typical of past wash-outs of bear markets and as usual the mainstream press is doing a stellar job of exaggerating the negatives and trying to scare the country out of its collective wits. They’ve got everyone and their brother-in-law running for the cellar screaming “The sky is falling, the sky is falling!” You can’t pick up any newspaper without seeing it plastered all over the front page in big, bold headlines. An Internet friend sent me the following example from the front page of the St. Paul (MN) Pioneer Press:

SUBPRIME MORTGAGE MELTDOWN

It doesn’t get much more bearish than that! I take this barrage of pessimistic headlines to be a contrarian indicator that the worst has already been discounted by the markets and it shouldn’t have that great of an impact on the national economy.

It almost convinced me that all is good and not to worry! I do feel rather sheepish to have gone along with the herd...

[Finster]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Doing a little bit of arithmetic, I find that 75% of stock ownership is in the hands of 5%. Therefore 45% (~48.2% who own any stock minus ~5%) own 25%. Also only 36% owned stocks worth more than $5000. Doing ABC analysis, I will avow that the 12.2% owned only about 5% of the stock, while 31% owned about 20%. I would say it is unlikely that the livelihood of people owning $5000 or less of stock depended on that stock ownership.

However, I will accept it for a fact that stock ownership does in fact contribute substantially to the wellbeing of about a quarter of the population. However, if the Banks that are in trouble were allowed to fail, the major burden would be on the upper 1-5%. In order to ameliorate the burden on the small investor, who would indeed be hit harder (as a percentage of their total wealth) The distribution of the proceedings after the liquidation of bank assets could be constructed such that the smaller investors received a greater compensation than larger investors. There is a precedent for this in the way FDIC works ( with an upper limit, nominally, I believe is $100,000 of deposits)

Also, My highlighting the disparity in wealth ownership, is not so much out of a spirit of class warfare, but rather to show that there exist huge disparities in the power wielded by the rich (top 0.5%) compared to 80% of the population in the social structure of a society that is considered to be a democracy. That was the point of the later part of my reply to Miju.

I think stocks are important for more than 25% of the people. Between stock owned directly in IRAs, 401ks and indirectly through pension plans, it's a lot of people that are adversely affected if stocks turn out bad, especially persistently. And of course this doesn't even take into account the role the public corporation - which is capitalized largely through stock - plays in providing the employment that so many people have and produces so much of the goods and services they use.

Not that I would shed a lot of tears for those banks if they failed. Probably some banks should fail, and regardless shareholders ought to he holding reckless managements to account. If there is never any adverse consequence from irresponsible business practices, you will just have that much more irresponsible business practice.

We need to remember how we came to this. Back in 1994 or thereabouts, we had the Mexican peso crisis, or so it was called. There was a bailout, and it probably saved some institutions from failing that perhaps ought to have. People learned from the experience that if you mess up bad enough, the government and the Fed will help you avoid the worst of the consequences. This changes the risk/reward equation - risk is usually what balances investors pursuit of reward - and the lengths to which they will go. People naturally puruse reward a little more aggressively when they percieve the risk to be mitigated. This is often called "moral hazard". I don't think it is mere coincidence that it was in 1995 that the stock market went into a five-year bull run culminating in what must have been the biggest asset bubble of all time.

It happened again circa 1998, with the Asian currency and LTCM crises. Again, investors learned that the consequences of imprudent actions wouldn't be proportional. Returns would accrue to the risk taker, but risk would be socialized.

Then even when the stock market did what comes naturally when things get too far out of hand, and we experienced the most severe bear market since 1929-1932, the Fed rode to the rescue again with Greenspan's "emergency" 1% Fed funds rate and prolonged "accommodation". It was much too prolonged, and the "removal of accommodation" much too gradual and predictable. There was so much easy money in the system lenders were practically falling over themselves to loan it to anybody with a pulse. So we traded one bubble for another. Meanwhile, tariffs had been aggressively cut for about three presidential adminstrations, so much of that newly created money borrowed by Joe and Jane homeowner just poured out over the world as if the country were a sieve. As a result, that immense monetary stimulus did comparatively little for the domestic economy, while China got high as a kite. And now Americans are finding themselves short on cash, while they have to compete for resources like oil with billions of other people up to their necks in expatriated US dollars.

[Rajiv]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Read this article by James Petras - Global Ruling Class: Billionaires and How They “Made It” - and then tell me why the world is not being set up for class warfare?

While the number of the world’s billionaires grew from 793 in 2006 to 946 this year, major mass uprisings became commonplace occurrences in China and India. In India, which has the highest number of billionaires (36) in Asia with total wealth of $191 billion USD, Prime Minister Singh declared that the greatest single threat to ‘India’s security’ were the Maoist led guerrilla armies and mass movements in the poorest parts of the country. In China, with 20 billionaires with $29.4 billion USD net worth, the new rulers, confronting nearly a hundred thousand reported riots and protests, have increased the number of armed special anti-riot militia a hundred fold, and increased spending for the rural poor by $10 billion USD in the hopes of lessening the monstrous class inequalities and heading off a mass upheaval.

The total wealth of this global ruling class grew 35% year to year topping $3.5 trillion USD, while income levels for the lower 55% of the world’s six-billion-strong population declined or stagnated. Put another way, one hundred millionth of the world’s population (1/100,000,000) owns more than over three billion people. Over half of the current billionaires (523) came from just three countries: the US (415), Germany (55) and Russia (53). The 35% increase in wealth mostly came from speculation on equity markets, real estate and commodity trading, rather than from technical innovations, investments in job-creating industries or social services.

[grapejelly]

Re: More Wealth Re-Distribution: Taxpayers to Banks

interesting paper Rajiv. My research shows that inflation results in certain people having access to vast amounts of cheap borrowed money, and using this money to buy up assets. Inflation robs savers, wage-earners and retirees. So the gap increases between rich and everyone else. Ultimately it is the middle class that becomes (or stays) poor, or at least poorer than they would have been absent inflation.

Inflation lets borrowers access money below the rate of inflation and buy up assets. Those who cannot buy up assets with borrowed money at these low rates fall further behind.

[Rajiv]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Ultimately it is the middle class that becomes (or stays) poor, or at least poorer than they would have been absent inflation.

From my previous post

Prime Minister Singh declared that the greatest single threat to ‘India’s security’ were the Maoist led guerrilla armies and mass movements in the poorest parts of the country

These armies are being led, not by the poor, but by the middle class - and they recruit not only from the poor, but extensively from the middle class, that is feeling increasingly deprived.