The
economist just rattled off a post critiquing the proposed relationship between income inequality and the financial crisis put forth by David Moss, an economic historian at Harvard. If you take the high road, the post is about critiquing the ideas put forth by Moss, and looking for greater academic rigor to be put forth. If you take the low road, the post fails to actually mention any of Moss’s research, and instead tries to ridicule the notion of an income-inequality/financial-crisis relationship with guns blazing.
Y’all should read the post, cuz I’ll be adding my two cents below.
The post divides the two responsible parties (wealthy, poor) and tries explain how being merely wealth or merely poor cannot have an affect on the financial crisis. The conversation somehow turns from income inequality to an attack on regulation (call it an inferiority complex – I will), presupposing that a world with less income inequality also has more financial regulation and that the lack of financial regulation caused the financial crisis. It then goes on to propose the ‘cult of homeownership’ as the reason why we’re in this mess.
As for the rich, the post proposes a scenario – Shouldn’t wealthy wall street operators (in a world with less income inequality) be as motivated to change the regulatory system in their favor as super wealthy wall street operators (world with greater income inequality)?
My sense is no, this is to say that the level of regulation affects how income inequality, but an operator in a low income inequality world faces the same incentives to increase their wealth as an operator in a high income inequality world. Wall street operators are always incentivized to take advantage of the system as much as possible to make the most money as possible while only comparing their personal benefit to their personal cost. When the system is regulated properly/improperly, income inequality is lower because these operators are constrained. When the system is unregulated, income inequality is higher because any wall street operator can disregard the public good to a greater extent.
The post then tries to explain the motivation for poor people.
The post supposes that inequality does not cause low-income homeowners to buy the houses they can’t afford. What inequality does create is a larger number of people who cannot buy houses (because they can’t afford them). What de-regulation does is create an environment where these people can buy houses they can’t afford. So now you have a lot of poor people taking out loans that they can’t pay back because of deregulation.
But let’s look in the opposite world – the low-income inequality world. In this world, there are less poor people, and therefore there is no need to offer subprime loans, thus, there is no need to break down regulations. The author tries to explain that the removal of financial regulations that intended to reduce wealth inequality is actually the forces that caused the financial crisis. But those removals are what allowed subprime lending (the ability for very poor people to buy a house).
Aside from this looking like banks trying to continually cash in on the material desires of people who don’t completely understand the consequences (requiring the government to de-regulate some of the financial measures that stood in their way, allowing them to
become loan sharks offer such packages) I can’t completely follow the logic. The author blames the cult of homeownership as the cause of the financial crisis, while defending the de-regulation of financial markets. But in reality, the reason why de-regulation was put into place was in order to allow low-income individuals to buy houses that they couldn’t afford.
If you’re not as confused as I am, please comment below.
I’m gonna go slightly off topic for a moment, but what I really find callous, is that opponents of any income inequality debate never talk about the unequal population distribution of growing income inequality. Not only do people become poor but there are more people who become poor. Income inequality isn’t simply the rich getting richer and the poor getting poorer, but a population shift of less people getting rich and more people getting poor.
In our case, not only do we have people who are getting poorer but more people who are getting poor. When you have banks and other institutions offering these subprime mortgage rates, they are doing so to a larger, more desperate population. If you’re not going to blame wall street operators for trying to eliminate as much regulation as possible to make more money, you can’t also blame people who take on these loans to try to provide homes for their families or second investments for their pockets. If we’re going to assume that no one’s a rational actor, we can’t just arbitrarily make up irrational motivations for the rich and poor to fit our own theories.
Now, I’m not inclined to believe that income inequality caused the financial crisis, but it certainly serves as a warning sign, if not a symptom of exacerbating risk-taking behavior. I’m much less inclined to say that income inequality has any causal relationship to the financial crisis, but if we’re talking about financial regulations, I would not be surprised if there was a causal relationship between the same financial de-regulations (that caused the financial crisis) and income inequality. However, I can’t just swallow the author’s words as a useful or proper critique on the relationship among income inequality, financial regulation, and the crisis.
And I’m a bit saddened that it came out of the Economist.
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