Monday, January 31, 2011

Income inequality and financial crises

Thanks to Jack Reynolds, I noticed the following interesting post by Duncan Green based on this paper by the IMF. The paper basically argues that income inequality may have contributed to the recent crisis. The idea is that workers compensated their low wage growth through loans, which generated assets held by the rich. Excessive leverage triggered the crisis. This is an important argument and one that links the obvious process of financialization with the expansion of wealth at the top.

Yet we need more research on the evolution of the asset pricing as a generator of inequality. Who has benefited from growing asset prices in both the stock market and the real state market? Who was investing there? And how was it connected to lending by the poor?

A striking difference with developing countries also emerged: there inequality is high but there is little access to credit and thus little compensation for the poor and middle class. This is a difference between developed and developing countries worth analysing.

Update: An interesting documentary in the subject has just been produced. I have not watched it but are trying to find out how to show it in St Antony´s. It would be a great opportunity to discuss some of these issues.

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