Relationship between Inequality and Financial Crisis Essay

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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
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It suggests that given the rise in levels of inequality, the credit expansion in the personal sector before the recession was both necessary for supporting aggregate demand and employment, and it was unsustainable. According to this hypothesis, government policies that explicitly aimed at promoting lending to low income groups were the one to blame for the crisis. It also blames economists for not learning from the previous depression that occurred in 1920. A more simplified explanation is that given by economists from the International Monetary Fund and academia. The overall discovery from their research was the trend where the rich got richer while the poor struggled even more to make ends meet decades before both recessions of 1920 and 2008. The debts levels increased due to the availability of cash from the rich which they used to buy bonds and bank deposits. Cash in the banks was provided to the poor and middle class in form of debt as they tried to maintain their standards of living. One groups’ increasing wealth and the others’ increasing reliance on debt spurred growth in the financial sector due to the boom in lending, an imbalance which would rectify itself through a reversal at the end of 2007 causing the bank crisis of 2008.
It is from this explanation that I draw my conclusion that the increasing levels of inequality did indeed have a role to play in each of the
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