The second reason is debt. The debt levels of the top 1% increased more than threefold since the 1980s, and many of the rich loaded that debt pile onto speculative bubbles or paper wealth. Leverage can be deadly, no matter how much you think is "manageable."
The third reason is spending. Some of the wealthy went overboard with homes, cars, yachts, planes, vacations, handbags, shoes and other luxury goods because they thought they could afford it. As it turned out, many looked rich but were actually living one crisis away from financial collapse. Some of the wealth of the past decade was a mirage.
Prince: The best parts of this book are the personal stories. Tell us one or two.
Frank: Well, I profile Tim and Edra Blixesth, who were on the Forbes list with an estimated net worth of $1.2 billion. They owned the Yellowstone Club, the private golf and ski resort. They had three private jets, two yachts and an estate in California with a household staff of 110 people. As they told me in 2007, "We'll never really have to worry about money again."
Flash forward to 2010. They divorced and Edra had to file for Chapter 7 bankruptcy liquidation. When I went to visit her at the house, all her staff was gone and the phones were cut off because she couldn't pay the bill. In the book, Edra talks about what it's like to lose everything, and suddenly cook, clean and drive herself and fly on a commercial plane. She has some amazing stories. But in the end, she feels that the wealth loss wasn't all negative-that in some ways, she found herself by losing her fortune.
I also profile a couple in Florida who was building the largest home in America-until they had a cash crunch. The house is now for sale for $75 million. But in the book, I explore their lives and detail the numbers that led them to their current troubles.
Prince: Are you suggesting we should feel sorry for the high betas?
Frank: Not at all. My approach to covering wealth is never to judge or take a political view but to tell the true, up-close stories of today's rich. Readers can make up their own minds. We shouldn't shed a tear for people whose idea of a life trauma is giving up the Gulfstream and being forced to fly commercial. But high-beta wealth matters because more of our economy depends on this group. The 1% pays 40% of the country's income taxes and they're the biggest spenders. When they take a hit, taxes drop, spending drops and they employ fewer people. My fear is that our growing dependence on the rich will also make the rest of the economy more high beta.
Prince: What do you think of the so-called "class wars" in America today?
Frank: Politics has turned the wealthy into silly stereotypes-either fat cat bankers who benefit at the expense of the rest of the country or job-creating heroes who will stop hiring or leave the country if they have to pay another dollar in taxes. Neither is accurate. The wealthy are a more diverse group than ever, and on the subject of taxes, they're as divided as the rest of the country. By sticking to this rich-get-richer narrative, the country may be missing the real danger, which is that we're more dependent than ever before on a group that is highly unstable.
Prince: So what's the solution?
Frank: That was the hardest question to answer in the book. To solve the problem of high-beta wealth you have to roll back all the forces that have created inequality. You'd have to roll back all the recent advances in technology, you'd have to roll back globalization and you'd have to somehow wipe out most of the financial markets around the world. Not going to happen. So the practical solution is to better prepare for these wealth and income shocks. Governments need to create bigger, more robust rainy day funds that they can fill during good times and drain down during crises. As consumers and workers, we need to save more, spend less and borrow less to survive these cycles. And for those who aspire to be wealthly, they need to take money off the table as they're on the way up and use debt sparingly. You can't get around risk if you want to get rich today. But you can manage those risks and price it more intelligently.
Prince: Do you aspire to become wealthy yourself?
Frank: If there's one thing I've learned in my many years of interviewing rich people it's that wealth isn't all it's cracked up to be. It brings terrific freedoms and choices in life. The private jet is the one thing that the rich say they miss when they lose their wealth, and I can see the attraction because you're really buying time and freedom.
But wealth also brings its own problems and anxieties. And in a high-beta world, wealth no longer ensures stability and security in your life. What really matters in this world is doing something you love, having strong connections to family and friends, and making a contribution to your community or the world at large. I feel lucky to have all of those things. My family and two wonderful daughters make me feel like the richest guy in the world. Having said that, I still wouldn't mind having a G550.