Income Inequality and Financial Crises, NYT, Aug 21

by Polly Cleveland | August 22, 2010

A New York Times article by Louise Story asks, “Do widening gaps between rich and poor necessarily lead to financial crises?” (Aug. 21)  The answer is yes, for a reason observed over 100 years ago by American economist and reformer Henry George: Economic growth enhances the value of titles to real estate and other natural resources (like broadcast spectrum). This widens the wealth gap between individual or corporate title-holders and the rest of the population. As growth progresses, overoptimistic projections of future growth widen the gap even further. Come the inevitable collapse, imaginary wealth evaporates, and the gap shrinks. Only, as pointed out by Gretchen Morgenson (“Debt’s Deadly Grip” Aug 22), this time is different. By holding short-term interest rates near zero for the big banks, the Fed is supporting the value of their toxic assets at the expense of everyone else.

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