Best Columns: Business

The mortgage mess should come as no surprise; When the rich get richer, the poor don’t starve

The mortgage mess should come as no surprise

Herb Greenberg

The Wall Street Journal

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The red flags were there, said Herb Greenberg in The Wall Street Journal. Signs that “the mortgage industry was starting to spin out of control” were apparent to anyone who read the financial reports of NovaStar Financial. Once a leading subprime-mortgage lender, NovaStar had an enthusiastic following among investors, thanks to its steadily rising stock price and “a dividend yield in excess of 10 percent.” Sure, a few skeptics (like me) asked why NovaStar didn’t consider borrowers’ incomes when making lending decisions. But NovaStar’s fans would counter that “the company couldn’t lose because its loans were insured.” Not quite. The loans were insured as long as they were properly granted. So investors should have paid heed when NovaStar’s main insurer, PMI, stopped paying off defaulted loans, citing problems with NovaStar’s paperwork. Alarm bells should have sounded again when PMI stopped doing business with NovaStar altogether. But many NovaStar investors, “blinded, no doubt, by the stock and dividend,” refused to listen. Now, the stock has collapsed, the dividend has been suspended, and NovaStar admits that “a bankruptcy filing is a possibility.” NovaStar’s investors are kicking themselves, of course. But that’s what happens when greed overrules rational fear.

When the rich get richer, the poor don’t starve

Tim Harford

Income inequality is a hot topic” these days, said Tim Harford in How could it be otherwise, when Bill Gates and Mexico’s Carlos Slim are worth more than $60 billion and the rest of us are worth considerably less? Indeed, some argue that income inequality is more pronounced than ever, and that this is unhealthy. But a new study of income distribution throughout history by Branko Milanovic of the World Bank suggests a different conclusion. It turns out that incomes are most equal in poor and primitive societies, where there’s little wealth to go around. But in societies such as imperial Rome or modern-day America, where the very rich are fantastically wealthy, the middle-class and the poor are also quite well off, relative to other countries. Income inequality, in other words, is a sign of societal health. “The richer a society is, the more unequal it could be without its working class starving to death.’’ Incomes in present-day Tanzania, where almost the entire population is barely getting by, are much more equal than incomes in the U.S. That may be “faint praise for the United States,’’ but history indicates that wealth and inequality go hand in hand. Ask yourself: Would you prefer to live in Tanzania’s more equal society, or ours?

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