Curbing Inequality is crucial to avoiding another financial crisis
As I argued at the launch of the Global Inequalities Programme @CeASR_Leeds a few weeks ago, it has become common to argue that increasing inequality created the conditions for the financial crisis that triggered the more generalised economic, social and political crises that still afflict European countries, seven years after the ‘credit crunch’. In my debate with Hilary Benn MP, I suggested that the declining share of overall wealth of those at the bottom of the income distribution led to increased demand for credit to maintain living standards. This then was part of the explanation for increased personal indebtedness.
However, what I didn’t discuss was the growth in demand for mortgage and personal debt in the financial markets, as assets that could fuel further credit expansion. Had I done so I would have certainly recalled an excellent seminar given by my colleague Dr Jamie Morgan who elaborated this very argument in an explanation of the role of Private Equity funds as intermediary institutions in capital markets to my Masters students and a group of international Higher Education Agents April 2013 (also published here, by Palgrave).
I remembered that seminar just now when reading Photis Lysandrou and Anasatasia Nesvetailova’s excellent account of the role of the Shadow Banking System in the run up to the financial crisis. They argue against the prevailing explanations which suggest that it was the operation of the shadow banking system which caused the crisis. Instead they suggest that the growth and role of the Shadow Banking institutions in creating the now infamous CDOs and other complex and unstable financial products, was driven by increased demand in the wider system for these products to act as assets.
Their argument is that while some institutions – such as governments, pension funds etc – have a socially legitimate reason for wanting to hold such assets, others – such as exceptionally wealthy individuals – do not, and that regulation of the Shadow Banking sector needs to be matched with measures to curb this additional demand through measures to radically redistribute the wealth of the very rich.
It was precisely the incomes of this group: not just the top ten percent of income earners but the top one percent, that I discussed as one of the most significant drivers of increased inequality over the past three decades, both in the UK and internationally. The wealth of this group is discussed at length in the excellent work of Thomas Picketty. But what the Lysandrou and Nesvetailova paper shows is just how powerful this group of people are likely to be as the ongoing debate about financial reform.
Inequality in power then and not just resources is at the centre of both a moral problem and some of the structural weaknesses in contemporary capitalism.