IS INEQUALITY to blame for the financial crisis? Not at all, say economists Michael Bordo and Christopher Meissner:
We find very little evidence linking credit booms and financial crises to rising inequality. Instead, the two key determinants of credit booms are the upswing of the business cycle or economic expansion and low interest rates. This is very much consistent with a broader literature on credit cycles. While inequality often ticks upwards in the expansionary phase of the business cycle, this factor does not appear to be a significant determinant of credit growth once we condition on other macroeconomic aggregates. Neither is income concentration a good predictor of the financial crises that often follow above average growth in credit. The anecdotal evidence from several historical credit booms finds little support for the inequality/crisis hypothesis.