I had a chance to read the paper. I have two comments. 1) the econometrics does not say that Rajan's link between income inequality and financial crisis is wrong. Rather, it says that _in general_ increasing income inequality isn't a major proximate determinate of the existence of the expansion of credit, which is the main cause of banking crises. It's quite possible (given this paper's work) that Rajan is correct for the "banking" crisis of 2008-9. The econometric work allows for exceptions -- and the authors should say so.
2) Rajan's theory is inadequate. Ignoring his poor explanation of growing inequality, it puts too much emphasis on the "sub prime" part of the bubble and ignores the rest and completely forgets the role of what the authors call "financial liberalization" (i.e., what the Left calls "deregulation of finance"). The theory cited by Borio and White seems highly superior. Awhile back, I gave a talk that presented a simple theory of the 2008-09 crisis (but it is still more complete than Rajan's). Growing inequality -- and the working-class effort to maintain living standards (a part of Rajan's theory) -- created the demand for extreme extension of credit (the use of houses as ATMs, etc.) while deregulation crated the supply of that extension, allowing the bubble to occur. Supply and demand were brought together by the Federal Reserve, which wanted to preserve the "Great Moderation," especially since inflation was under control, and didn't see financial bubbles as a problem (following neoliberal ideology). On Thu, May 3, 2012 at 12:13 PM, Sabri Oncu <[email protected]> wrote: > http://www.nber.org/papers/w17896 > > Can you guess what the answer is without looking at the paper? > > Best, > Sabri > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l -- Jim Devine / "An atheist is a man who has no invisible means of support." -- John Buchan _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
