Relationship between inequality and financial crisis
The most recent global crisis has rejuvenated interest in the relationship between inequality, credit booms, and financial calamities. Many analysts propose that rising levels of inequality led to a credit boom and eventually to a financial crisis. Others, however, have distanced themselves from that notion arguing that while inequality can be blamed for many things, the global crisis may not be one of them. In deriving a personal stand regarding the above predicament I will have to evaluate the different ideologies that most economic scholars have applied in deriving their conclusions on whether the cases of inequalities in the world’s population mostly in the US, contributed to the recent economic crisis or not.
Some economists such as Borio and Eugene White deny that financial or income inequalities had anything to do with the financial crises. According to them there is very little evidence linking credit booms and financial crises to rising inequality. They further state that periods of expected low and stable inflation, coupled with strong economic growth and liberalized finance can give rise to complacency amongst borrowers, lenders and regulators which was the case that led to massive buildups in credit and finally to the 1920 and 2008 financial crisis (Borio and White pg. 150).
Professor Raghuram G. Rajan of the Booth School of Business of the University of Chicago is one of the renowned economic analysts who believe that the levels of inequality had everything to do with both the financial crises of 1920 and 2008. According to him the rising levels of inequality in the past three decades led to rise in political pressure for redistribution that eventually came in th...
... middle of paper ...
...e specific case of the U.S. financial crisis, although it is doubted whether the argument can be universally applied to other countries and crises. Therefore in order to safeguard our country from yet another financial crisis, we must not ignore the signs of growing inequality as it happened in 2008.
The government must work towards controlling the debt levels through its regulating authority. The best approach would be to try and lower the debt levels in a method commonly referred to as the orderly debt reduction technique. They can start by modifying the mortgage rules and procedures to guard against over lending to non-credit worthy consumers. Though this may be seen as a form of external interference in a self-regulating sector, it must be allowed to do so since it is the one to be tasked with the duty of bailing out the private banks using tax payers’ money.
Just as the great depression, a booming economy had been experienced before the global financial crisis. The economy was growing at a faster rtae bwteen 2001 and 2007 than in any other period in the last 30 years (wade 2008 p23). An vast amount of subprime mortgages were the backbone to the financial collapse, among several other underlying issues. As with the great depression, there would be a number of factors that caused such a devastating economic
3. What are the effects of this wealth inequality in the US and what causes it, as well as some possible solutions and their ramifications, will all be discussed and answered below. There has always been a wealth gap between the richest and poorest in society. However, in the past decade, the wealth gap between the richest and poorest citizens in the US has been growing rapidly. In the 70s and 80s, the wealth and income growth rate for both poor and rich people were similar, however, between the years 2009 and 2012 the top 1% income increased 31% while for the bottom 20%, their income actually dropped and for the vast majority of Americans, the average yearly income only increased by 0.4% [4].
Briefly state the main idea of this article: The main idea of this article is that economic inequality has steadily risen in the United States between the richest people and the poorest people. And this inequality affects the people in more ways than buying power; it also affects education, life expectancy, living conditions and possibly happiness. Another idea that he brought up was that the American government tends to give less help to the unemployed than other rich countries.
With each class comes a certain level in financial standing, the lower class having the lowest income and the upper class having the highest income. According to Mantsios’ “Class in America” the wealthiest one percent of the American population hold thirty-four percent of the total national wealth and while this is going on nearly thirty-seven million Americans across the nation live in unrelenting poverty (Mantsios 284-6). There is a clear difference in the way that these two groups of people live, one is extreme poverty and the other extremely
Social inequality has been around for as a long as history can recall. However, according to Joseph Stigliz, it was created by us and did not just appear. As we delve into the history of social inequality, several things stand out to the great economist Joseph stiglitz. In order for Stigliz to portray how inequality is alive today, he uses primarily the rhetorical analysis technique logos and a little ethos to explain how rent seeking causes inequality in many countries including our own.
It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
The highest earning fifth of U.S. families earned 59.1% of all income, while the richest earned 88.9% of all wealth. A big gap between the rich and poor is often associated with low social mobility, which contradicts the American ideal of equal opportunity. Levels of income inequality are higher than they have been in almost a century, the top one percent has a share of the national income of over 20 percent (Wilhelm). There are a variety of factors that influence income inequality, a few of which will be discussed in this paper. Rising income inequality is caused by differences in life expectancy, rapidly increases in the incomes of the top 5 percent, social trends, and shifts in the global economy.
Inequality exist and is high in America because the amount of income and wealth that is distributed through power. In America the income distribution is very inequality and the value of a person wealth is based on their income with their debts subtracted. “As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers)” (Domhoff, 2011). In contrary the poor do not get ahead and the rich get more. Americans are judged and placed in class categories through their home ownership which translates to wealth. Americans social class is often associated with their assets and wealth. “People seek to own property, to have high incomes, to have interesting and safe jobs, to enjoy the finest in travel and leisure, and to live long and healthy lives” (Domhoff, 2011). Power indicates how these “values” are not distributed equally in American society. Huge gains for the rich include cuts in capital gains and dividends and when tax rates decrease for the tiny percent of Americans income is redistributed. Taxes directly affect the wealth and income of Americans every year.
This essay will examine the causes of the 2008 Global Financial Crisis (GFC) from a Marxist perspective. This paper will specifically examine and critique how Marx’s Theory of Crisis can be applied to understand and interpret the underlying structural causes of the 2008 Global Financial Crisis.
...ment, income inequality will exist due to the rise of some economically successful people and the further development of factors that push people into poverty. Although it may not seem fair that there are rich people blowing money on impractical and meaningless things while people live in poverty, it’s a reality that the United States has experienced for centuries.
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
However, some of the people in the country wanted to go on with their life freely by being a part of a welfare, and some of them strived and worked hard to get job without bothering which class they belong. Furthermore, distribution of wealth is a huge demand of every citizen of America. Everyone nowadays are trying to look down for every lower class as they did not give any benefit for the country, that they are just there living waiting for the benefits they will receive from the government. That benefit comes from the middle class that is trying to level with what the higher class can have and give a positive reputation for the country’s economy. Because money is seen as the very important thing today to survive and to do anything. On the other side, some people in America, mostly for those who are in the lower class have gone through a financial crisis due to overspending, insufficient fund or pay from their work to support himself/herself and/or his/her family.
In conclusion, we feel that the recommendation we have suggested in this report is a suitable foundation to build a sustainable and prudent financial system in this country. This will facilitate the financial industry both, withdraw out of this crisis and in the future avoid as much as possible inducing the scale of matters at present. As the report suggest, everyone contributed in their own miniscule way to this crisis, we feel that it’s up to every one of us to contribute to the overall recovery of this financial crises and recovery of the nation in general.
Money is an essential part of life where every people can satisfy whatever they need and every person in America has a chance to find a job. However, some of the people in the country wanted to go on with their life freely by being a part of a welfare. Furthermore, distribution of wealth is a huge demand of every citizen. Everyone today is trying to look down for every people in the lower class, as they did not give any benefit to the country, waiting for the benefits that they will receive from the government. For instance, when most lower class people have gone through a financial crisis due to overspending, insufficient fund or pay for their work to support themselves and/or their family. The example shows that lower class people made the economy of the country unstable, however, the middle class and the higher class is at fault as well. Furthermore, even though the benefit of that the lower class received is from the middle class, the middle class as well benefits from the higher class. To sum up, every class is at fault towards giving the country’s economy a positive
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.