Income Inequality Didn’t Cause the Financial Crisis

There’s something intuitively compelling about the idea that America’s growing income inequality helped fuel the 2008 financial crisis. The narrative, which got an official stamp from Congress’ Democrat-led Joint Economic Committee back in 2010, goes something like this: As middle class wages stagnated, families borrowed more to prop up their standard of living. Banks, along with Fannie Mae and Freddie Mac, happily provided them with unaffordable mortgages, which they then skillfully repackaged and sold as securities. Eventually, the whole house of cards collapsed, plunging us into the Great Recession. 

The story is downright elegant — a sort of grand, unified theory of our present economic woes. But according to a new study, it’s plain wrong.

The working paper, from Professors Christopher Meissner of the University of California, Davis and Michael Bordo of Rutgers, looks at whether there is a consistent historical relationship between rising income inequality and financial crises, using economic data on fourteen countries, including the United States, from between 1920 and 2008. It finds that although big financial busts tend to follow on the heels of credit booms like the mortgage bubble, there is no statistical relationship between the expansion of credit and the share of a country’s income going to it’s top 1 percent. 

What does drive loose lending? Low interest rates and an expanding economy. When credit is cheap and times are good, people borrow. Simple.

Read more.

1. cristinagarafola reblogged this from theatlantic and added:

   I honestly didn’t even know...people were making this argument—I just thought that...

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21. littleyanners reblogged this from theatlantic and added:

    Hmmm…

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38. squashed reblogged this from theatlantic and added:

    I disagree. At least, I disagree with the conclusion in the headline. The article’s argument that looser lending has...

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42. nhaler said: Historical tendency does not a priori dictate the terms under which unique events may arise. Implying so here is shameful.
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46. moneyisnotimportant said: Thanks for sharing this. Very interesting thoughts.
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