The global financial industry is one of the few institutions with the capacity to help address society’s growing income inequality, says Cole Reifler.
As the gap between societies richest and poorest continues to widen, the stark reality is that Wall Street is one of the few institutions with the ability to tackle this.
Government has failed time and time again to improve the lives of ordinary Americans. Relying on charity won’t solve the root cause of inequality either; it usually only papers over the cracks. If anything, it could make things worse by perpetuating dependency.
It’s time to get over the financial crisis
It’s easy to blame Wall Street for people’s financial struggles. We hear the same things over and over again: bankers’ irresponsibility caused the financial crash in 2008. Hard-working Americans were left with nothing, while Wall Street executives walked away with big bonuses. Wall Street executives are greed and excess personified.
Let me be clear. It’s shameful that people lost out in the financial crash, but we can’t afford to stigmatize Wall Street any more. The recklessness of a few shouldn’t write off our whole financial system. After all, America’s prosperity was built upon free enterprise and wealth creation, with Wall Street leading the way.
But rather than arguing that Wall Street is the bane of our lives; that it is structurally incapable of doing anything but make the world worse, let’s ask some difficult questions. Let’s ask, instead, how we can funnel the power of Wall Street to help more people out of poverty; help more people pay for college; help more people go on vacation; help more people buy houses.
Government isn’t working
Finance is remarkably powerful. It decides who makes more money, and who makes less. The system can allocate more money and capital to one part of the country or segment of the population than another. This is a risk, but it is also an opportunity. It is an opportunity to shift the dynamics, and make sure that more money reaches our most hard-working people.
The real travesty is that millions of hard-working people in America are unable to afford to pay for their children’s education. In many families, there are two parents are in full-time employment; they save the little bit of money they have left after food, rent, and bills, and they still can’t seem to pay for healthcare or education. After 10 years of saving for their children’s education, they end up with much less than they expect. No college. No vacation. No upgrade on your car or house.
One diagnosis of this problem is that these people aren’t making enough money to begin with. That the government needs to shift money from wealthier people in the form of taxes. But another one is that they are not getting the returns on their savings that they deserve in the first place – so all their hard work is going to waste.
Due to the miserly interest rates that many savings accounts now deliver, many families’ earnings and savings are being eroded by inflation rather than the opposite. They end up with less money rather than more.
Equality starts with equality of opportunity
How do we solve this problem at its root? How do we make sure that inflation doesn’t continue to erode the savings of millions of people? We need to give Americans the opportunity to make the most of their money. The best form of equality is equality of opportunity. Everyone deserves an equal opportunity; everyone deserves a fair chance to realise the American Dream.
For the last century, Wall Street hasn’t done this. It has offered the wealthy access to special, high yielding investment opportunities, while limiting the middle class from participating in the same opportunities. The government allows the middle class to gamble and play lotto, but limits them from investing in specific opportunities that have outperformed 401ks and pension plans for years. If one could level the investment playing field by giving everyone access to the same opportunities it would make a big difference.
Over ten years, a compound interest rate of one per cent on a base of $20,000 will become $22,092. One per cent is good for a saving account right now. Over that same period a compound interest rate of eight per cent on a base of $20,000 will become $43,178. The difference is incredible. It is huge. It is the difference between paying for college and not paying for college.
But investment opportunities at the 8 per cent mark have been keep off the books for many banks and investment companies, reserved only for wealthy investors.
The democratisation of good quality investment opportunities will be a truly disruptive force in finance over the coming years. This has been denied to millions of people for generations but several Wall Street firms are now trying to step into the void to change this.
Recognise the good in Wall Street
Wall Street has been blamed for our desperate financial situation, but it also holds the solution. The average American has been neglected from specialised investment opportunities for years, limiting their return stream, and making them less likely to pay for college, buy a new house, or take the vacation they have always dreamed of.
Wall Street can change that. But it also demands a new perspective from the government and the public. We need to recognise that as well as creating problems, finance has the potential to do a lot of good too.