Homeowners pay the price

The news on the financial pages is that private-equity group Blackstone is preparing to bring some of its secretive operations out from the shadows and into public view by launching an offering of shares on the stock exchange. We’re not recommending that you buy any.

Like all such fund managers (some call them vultures) they’ve made billions by buying up companies using money borrowed from pension funds and other institutional investors, taking the companies out of public view and accountability (such as it is), forcing mergers, stripping out any fat they can – like duplicate head offices and surplus employees, loading the company with debt, and selling it on. Talk of private-equity turning into its opposite by going public is causing concern in the world of finance. It’s being taken as a sign that the top of the market has been reached. This is adding to the volatility arising from the storms raging in the high-risk US mortgage market known as subprime lenders – the predatory dealers who’ve provided high-interest loans to people on low income on the expectation of increasing incomes and property prices.

Just like those in the UK who are now inventing new ways of lending 5 or 6 times low-paid workers joint incomes, with a 40 year stretch to pay it back who were celebrated in The Guardian at the weekend. Except that the expectations in the US have now been dashed, and lives are being smashed. Latest predictions suggest that there’ll be 1.5 to 2 million mortgage defaults in the US during this and next year as a result of increasing interest rates and falling incomes. If each default is for a family, that’s an awful lot of Americans heading for the streets.

These events are being blamed for the continuing decline on the stock markets globally. And the worry amongst super-rich investment bankers is that things may well get a lot uglier as the big banks that back the failing subprime lenders begin to feel the pain. Some like Ajay Kapur, until recently the chief global equity strategist for Citigroup, the world’s biggest bank, are getting worried about the accelerating growth of inequality.

It’s no wonder that Financial Times’ Investment Editor, John Authers, is drawing attention to the similarity between Kapur’s words and those of Karl Marx and Friedrich Engels in the Communist Manifesto: “Society as a whole is more and more splitting up into two great hostile camps, into two great classes directly facing each other.”

Authers goes further to predict that inequality “could lead to the dialectical reaction that Marx predicted.” What was the dialectical reaction Marx predicted? A social revolution. Bring it on.

Gerry Gold, AWTW economics editor