April 1, 2008, 12:08 pm
A few of my more optimistic readers have told me I’m being too gloomy about this whole recession thing. And maybe they’re right. What with all the talk about debt crises, Sudden Wealth Loss Syndrome, foreclosures and the limo glut, it’s enough to make a wealth watcher cry in his caviar.
So here’s some good news (at least for companies that serve the affluent). According to a study by Oliver Wyman, the management-consulting firm that’s part of Marsh & McLennan, total wealth held by the world’s financial millionaires — those with $1 million or more in investible assets — has grown to $50 trillion.
Here’s even better news: According to Wyman, that wealth is expected to grow 50% over the next five years to $75 trillion.
Granted, the growth rate over the next five years marks a slowdown. Between 2003 and 2007, assets held by financial millionaires grew an annual 11%, Wyman says. Growth over the next five years will be closer to 9%.
“We’ve been through one of the most intense periods of wealth creation and wealth concentration probably since the industrial revolution,” says Denis Bastin, a partner at Oliver Wyman financial services. “Clearly for all kinds of obvious reasons, that’s going to slow down.”
OK, that’s not very cheery. And I should add that Wyman’s predictions are more bullish than comparative studies. Merrill Lynch and Cap Gemini say these financial millionaires had about $37 trillion at the end of 2006. (Oliver Wyman says that it did extensive modeling and started with a “clean sheet” when doing its survey, so it would not be influenced by other studies).
Still, whether you’re
in the banking industry, luxury industry, real-estate business or travel
business, your best bet for surviving the current downturn is to go where
the money is — at the top. That’s not to say growth won’t
slow among the rich. It will. But slower growth off of a base of $50 trillion
is still enough to make a private-banker smile.
March 31, 2008, 12:36 pm
There is no freer market than Wall Street — or at least that’s the conventional wisdom. Wall Street bankers and traders, hedge-fund managers, private-equity chiefs and investors become wealthy by taking risks. The flip side is that they can also lose a lot of money by taking risks. (See Jimmy Cayne.)
But Kevin Phillips, the former
Nixon aide turned liberal author, says risk has been off-loaded by wealthy
Wall Streeters onto taxpayers. He says the government’s actions
in the recent financial crisis — especially the Fed’s backing
of $29 billion of Bear Stearns assets and lending directly to Wall Street
firms — show government will bail out financial players when they
get into serious trouble. Risk, he says, has become “socialized,”
while rewards have been privatized.
Whether or not you agree (and I disagree with some of Mr. Phillips’s views on wealth creation), his argument is worth exploring. I interviewed Mr. Phillips last week about wealth, the financial crisis and his new book “Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism.” (Questions and answers have been edited for clarity.)
Here’s an excerpt:
Robert Frank: What does the current financial crisis tell us about government’s role in creating or preserving wealth?
Kevin Phillips: Long-term, it essentially tells us that bailouts are part of a regime that the U.S. has followed since the 1980s, of essentially aggrandizing wealth in the financial sector. Two things have been essential — a bubble-minded Fed and a bailout-minded economic leadership in the Federal government.
RF: But conventional wisdom says people in the financial sector become wealthy by achieving strong returns, working hard and taking risks.
KP: (Laughter) Over the last 25 years, we’ve seen a socialization of risk. They don’t want socialization in medicine, or industry, or manufacturing, but they sure as hell want it in the financial sector.
RF: But clearly lots of people on Wall Street will lose money. Won’t the ranks of the wealthy — and their fortunes — decline in the coming year or two?
KP: It’s hard to say. I don’t think [the wealthy] are going to be happy over the next two years. But they may see the damage limited to 12% or 26%. Losing 12% is not a free market. If you believe the teachings of [Joseph] Schumpeter, or the propaganda of the free-market nuts, they should believe in the rigorous working of the market, which consumes the dead wood and keeps replenishing.
RF: What are the political consequences of this socialized risk and rising inequality?
KP: Throughout history, you’ve never had a major build-up of wealth on a grand scale without major problems. Not just in creating inequality, but also dishonesty and a money culture.
RF: But isn’t wealth in the U.S. dynamic, with the wealthy rising and falling at rapid rates?
KP: Well, I think there are studies that show there is less mobility now in the U.S. than there used to be. We see that money never really vanishes. One of the things that’s essential to the mentality is to encourage a government in which risk is socialized and bailouts are implemented.
RF: And will this change?
KP: Basically there are an
awful lot of people with a lot of money who understand what’s happened.
And a lot of them know it has to change. They don’t want to have
the tax rate go up to 40%, and they don’t want to see the qualified
dividend rate go to 25%. But they don’t feel it’s unfair.
Because if you’ve got money today, it’s so obvious that only
a small percentage of Americans find this recipe for success.