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Inequality-Led Financial Instability

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  • Fadhel Kaboub
  • Zdravka Todorova
  • Luisa Fernandez

Abstract

The paper uses Minsky's Financial Instability Hypothesis as an analytical framework for understanding the subprime mortgage crisis and for introducing adequate reforms to restore economic stability. We argue that the subprime financial turmoil has deeper structural origins that go beyond the housing market and financial markets. We argue that inequality has been the real structural cause of today's financial markets meltdown. What we observe today is only the manifestation of the ingenuity of the market in taking advantage of money-making opportunities at any cost, regardless of macroeconomic and social consequences. The so-called "democratization of homeownership" suddenly turned into record-high delinquencies and foreclosures. The sudden turn in market expectations led investors and banks to reevaluate their portfolios, which brought about a credit crunch and widespread economic instability. The Federal Reserve Bank's intervention came too late and failed to usher adequate regulation. All attempts to stabilize financial markets will be temporary fixes if the structural inequality problem is not adequately addressed. Finally, the paper argues that a true democratization of home-ownership is only possible through job creation and income generation programs, rather than through exotic mortgage schemes.

Suggested Citation

  • Fadhel Kaboub & Zdravka Todorova & Luisa Fernandez, 2010. "Inequality-Led Financial Instability," International Journal of Political Economy, Taylor & Francis Journals, vol. 39(1), pages 3-27.
  • Handle: RePEc:mes:ijpoec:v:39:y:2010:i:1:p:3-27 DOI: 10.2753/IJP0891-1916390101
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    References listed on IDEAS

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    Cited by:

    1. Timothy A. Wunder, 2016. "Setting a Principal to Interest Cap on the Issuance of Home Mortgages: a Proposed Change to Mortgage Underwriting Rules Designed to Control Housing Price Inflation," World Economic Review, World Economics Association, vol. 2016(6), pages 1-86, February.
    2. Thomas Goda, 2017. "A comparative review of the role of income inequality in economic crisis theories and its contribution to the financial crisis of 2007-2009," REVISTA FINANZAS Y POLÍTICA ECONÓMICA, UNIVERSIDAD CATOLICA DE COLOMBIA, vol. 9(1), pages 151-174, February.

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