Comment by cs702 | Hacker News Reader

Comment by cs702 | Hacker News Reader

Parent Full thread

The main claim is from a financial industry consultant quoted in the article:

"As the country becomes more unequal, there are fewer middle class customers. That means middle class bank products become unprofitable, and banks follow the money. And banking regulations make it worse because the capital requirements imposed after the banking crisis make it a lot more expensive for banks to do a startup small-business loan than go into wealth management. Startup loans are riskier than wealth management, of course, but the capital costs have become prohibitive, and banks don’t lose money on purpose."

Wait, what? I doubt this is the main or even a top-three cause of income and wealth inequality in the US.

Other factors strike me as potentially far more important causes of inequality, including increasing automation of labor, winner-take-all markets, concentration of corporate and market power, minimal antitrust regulation... to name a few.

The banking industry wants fewer regulations and lower capital requirements, as usual. This seems to be its latest rationalization for them.

One of the biggest contributors to income inequality is a lack of economic mobility. Maybe that sounds like a tautology - the difference between rich and poor solidifies the more difficult that it becomes for poor people to turn into rich people.

To oversimplify, easy access to capital can allow a poor person to turn a great idea that solves real problems and a strong work ethic into a sustainable business that pulls him out into the middle class or higher. Without access to capital, the poor man is beholden to whichever employers are in his area, and whatever is on offer from them - odds are, it won't be enough to allow the poor man to send his children to private school.

To elaborate, easy access to capital is what allows those employers in his area to actually hire him. That profitable restaurant down the road, owned not by a Wall Street mogul but by a passionate middle-class entrepreneur, needs capital to renovate a second dining room, and if it doesn't get it, it's not going to be able to hire servers for that new capacity. It's going to stagnate, maybe remain a profitable small restaurant, but never have a chance to become a multi-location or multi-state job-creation engine. And this is where the "middle class bank products" come in. Anything that artificially discourages banks from making the purely-economic decision to finance that owner to expand the business - and there's always the tantalizing option to just cater to silver-plattered large-business loans and wealthy clients instead - is going to slow growth and make general inequality in the area that much worse. There's a shrinking middle class of businesses just as there is of individuals.

Now, sure, the economic decision to finance this person should not be based on the idea that you could make subprime loans and repackage them to unwitting buyers. But there are perhaps middle grounds from a regulatory perspective. And there are also opportunities to address non-regulatory aspects that discourage capital sources from lending/investing; my company Belstone builds software to allow lower-middle-market investment bankers, the advocates for medium-sized businesses in the capital markets (who have the same dynamics described above), to close deals on behalf of their clients more efficiently, to support more businesses and more job growth. None of these efforts on its own is a panacea, but we have to try everything we can to move the needle.

>> far more important causes of inequality, including increasing automation of labor, winner-take-all markets, concentration of corporate and market power, minimal antitrust regulation

That's true but I think that winner-take-all markets exist in a large part because of the centralization of capital and how new capital enters the economy.

New money from the Fed flows into the system through massive institutions first; the money trickles down from the government to a few big corporations and then it trickles down to a few big private capital and VC firms and then it trickles down to a select few startups... VC firms collectively run an oligopoly; their main customers are big corporations so they don't have much interest in funding too many competing startups. The corporations which are funding the VCs don't want to acqui-hire too many of the same startups otherwise it gets difficult to justify their M&A strategy to shareholders.

Money doesn't trickle to a select few startups, and even so, there's a good reason: many startups operate in winner-take-all markets, so you can only once in the winner.

Reply on news.ycombinator.com