The most galling part of the Wall Street bailout is not so much the $700 billion our government put up, but the billions that got away.
Think of brokers luring people into unaffordable mortgages. Or financiers peddling mortgage securities to gullible investors. Obviously, a lot of people cashed in. Now, taxpayers get to clean up the mess, while the same sharpies cheer them on.
There is a bright side to the aggravating state of affairs, however, according to some leading economists.
The money grab of the past five years could very well boost stock prices in the future. That’s correct: When the rich get richer, stocks go higher. At least that’s a reasonable conclusion to draw from “Junior is Rich: Bequests as Consumption.”
This detailed academic paper arrived in draft form two years ago and, predictably, almost no one paid attention. But as co-author George Constantinides of the University of Chicago’s Graduate School of Business explains, it contains a timely lesson.
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For decades, the distribution of wealth and income in America has become less and less equal, with those at the very top taking a much higher share of the total.
Some attribute the shift to tax policy, educational advantages, the decline of unions or the impact of information technology. Deregulation looms large, too, particularly in the mortgage bonanza.
The five biggest investment banks paid their 185,687 employees nearly $66 billion in 2007, just as the subprime market turned into a debacle, according to Bloomberg. That amounts to average pay of $353,089 per employee.
Of course, the distributions were tilted in favor of the brass. Between 2003 and 2007, Goldman Sachs’ top five executives grabbed $859 million.
Since you can’t take it with you, a lot of those megabucks will flow to the offspring of the superrich. As Baby Boomers die out, bequests will total “many trillions of dollars,” Constantinides writes, “including the majority of the stock market’s capitalization.”
The paper addresses a well-known puzzle: Investors generally play it too safe, favoring less-risky investments over stocks. Since fewer people have the stomach for them, stocks have performed substantially better. In theory, stock prices should be higher. Constantinides and his colleagues conclude that when bequests are factored in, security prices rise “dramatically.”
Now, the superrich certainly love stocks. So it’s reasonable to assume that when they control a greater share of the nation’s wealth, more flows into the equity market.
Further, those inheriting vast portfolios tend to invest still more into stocks. After all, the young generally worry less about the market’s ups and downs, given their longer investment horizons. As Constantinides said in an interview, that behavior would be “good for stocks.”
So everyone who owns a few shares of this or that can take heart: The enormous riches from the mortgage boom could trickle down in the form of higher stock prices in the future.
Don’t spend it all at once.
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