Many economists, including former Fed chairman Alan Greenspan and New York University's Professor Edward Wolff, have put their fingers on what is perhaps the most worrisome cause of instability in financial markets: growing income inequality and stagnant wages. While many factors have contributed to the collapse of the market for subprime mortgages--those for buyers with poor credit ratings--the most important one is the ballooning proportion of working-class homeowners in societies the world over whose incomes have stood still or even regressed.
Like the average wage earner, people with relatively low incomes and poor credit ratings aspire to own their own homes. They, and virtually everyone in the middle class, hope their investment in a home will bring a handsome future return, or at least maintain the value of their limited wealth in an environment where inflation has chronically outpaced interest on savings. Americans in lower income brackets therefore have striven to cash in on the housing boom that began in 2001.
Alas, the boom has become a bubble, the bubble began showing signs of bursting in 2005, and now it definitely has burst in the United States. Property values there are plunging, wiping out homeowner equity and leaving them with mortgages with face values higher than the value of their homes.
By contrast, the market for upscale, multi-million-dollar homes is booming, unaffected by the credit woes of the growing "underclass." And while Wal-Mart and Home Depot are having to cut prices to match their pocketbooks, retailers who cater to the rich are doing better and better.
"If you don't counteract the extreme inequality trends, I see some social upheaval coming. That's my worst fear," said Wolff, as quoted in a USA Today report. This fear, indeed, is shared throughout the world, Taiwan included. The subprime mortgage crisis will have served a valuable purpose if it spurs people to take concrete steps to create more equitable societies.
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