Global Financial Crises: Cause or Inequality?

Financial crises are considered as an intricate phenomenon and the diverse number of reasons for why they transpire is verification to this intricacy.

Since the middle of 2007, the global economy has had to overcome what is judged as the most lethal global financial crisis ever documented together with a recession, which had drawn comparisons to the Great Depression of 1929 ( Eichengreen and O’Rourke, 2009). As the crisis began inflating into many economies and countries, some of the leading and most esteemed banks and insurance companies were declaring themselves bankrupt or in the need of aid economically. The United States were under tremendous economic pressure in October 2008, when the Lehmann Brothers declared bankruptcy. This led to credit flows being stationary and the confidence of investors to deteriorate thus leading to economies around the world dipping into recession. This paper aims to see if inequality was a cause of the global financial crisis or whether the cause is more conventional then inequality.

The leading elucidations of the current global crisis have focused on deregulation, ideologies from the classical laissez-faire, low interest rates due to the exceptionally slack monetary policy, ‘animal spirits’ as well as moral hazard (Wisman, 2013). Deregulation has been a contributing factor to the rise in banking concentration and this was due to the removal of the Glass-Steagall legislation law. The banking concentration made the financial sector insubstantial due to the creation of a few monopolised financial institutions that controlled over half of the sector. The top four banking organisations held a total of approximately 40 per cent of the total bank assets. Another conventionalist approach into the cau...

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...nal studies that linked inequality and the financial crisis. Using this evidence there was indication that rising inequality has been a contributing factor towards household debt which saw the poor being pushed into debt through a decrease in wages. Contrariwise there were also arguments that rising household indebtedness was due to the actions of the affluent. Maki and Palumbo (2001) used their study to argue that it is not the poor that seem to be accruing the debt, but in fact is those at the heights of the income distribution chain.

Rajan (2010, 43) argued that growing income inequality occurred in the United States due to unequal access to superior schooling and this subsequently led to political burden for more housing credit. This would then lead to distortions within the borrowing market of the financial sector. What does Rajan mean by political pressures?