He was called Raghuram Rajan, the economist introducing the controversal hypothesis about a causal link between increasing income inequality and the financial crisis, at the annual meeting of the American Economic Association.
One of the articles in the Economist’s ‘special report on the global elite‘ presents this theory the inventor published in his book ‘Fault Lines’.
The core statement is, that the political response to the increasing gap between the ‘rich and the rest’ helped causing the crisis. But how come?
Starting of with the technological revolution, Rajan argues it created a higher demand for skilled workers. Being hard to keep the supply of skilled ones close to the demand, the difference in wages to the rest of the workers increased majorly.
And now comes the point where the government’s response has to provide. Though especially the American state didn’t meet the new need with educational means, but took the easy way out: the short-termed solution of boosting living standard by ensuring access to credits.
Enabling this ‘strategy’, the two state-backed housing companies, Fannie Mae and Freddie Mac, took the lead. Therefore, instruments like subprime mortgages rose from 4% to 15% soaring a the housing bubble.
So far so good, but not everybody was convinced of this explanation.
– Mr Acemoglu (MIT) argues only the rich became even richer, yet the poor didn’t get poorer. So where is the point of necessity to boost living standards. He does believe in a link between both sides, though he doesn’t think of it as a causal one. Moreover, are both aspects consequences of the deregulation of the finance sector, enforced by lobbying power.
– Mr Glaeser (Harvard University) even questions the role of easy credits in the housing bubble, prices only been pushed by 4.3%.
To read even more about what Mr Rajan has to say about the idea behind the scenes, you are welcome to an interview by the New York Times.
As we have probably all recognised by now, bankers didn’t suddenly develop a conscious for the poor. Thus, the derivation of the influence of income differences on our today’s crisis could sound sensible; at least where the culture and government environment really did react as described above to sooth the problems of inequality. Though finally, I would be careful when making a statement about the impact of this linkage.