Increasing Inequality, Status Insecurity, Ideology, and the Financial Crisis of 2008

The current financial crisis has been blamed on inadequate regulation stemming from laissez-faire ideology, combined with low interest rates. But beneath these widely-acknowledged causal factors lies a deeper underlying determining cause that has received less notice: the dramatic increase in inequality in the U.S. over the preceding 35 years. This rise in inequality generated three phenomena that heightened conditions in which this crisis could occur. The first is that greater inequality meant that individuals were forced to struggle harder to find ways to consume more to maintain their relative social status. The consequence was that over the preceding three decades household saving rates plummeted, workers worked longer hours, and households took on ever-greater debt. The second phenomenon is that, flush with ever greater income and wealth, the elite were able to flood financial markets with credit, helping keep interest rates low and encouraging the creation of new credit instruments. The third phenomenon is that, as the rich took larger shares of income and wealth, they gained relatively more command over everything, including ideology. Reducing the size of government, deregulating the economy, and failing to regulate newly evolving credit instruments flowed out of this ideology.