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The contribution of wealth concentration to the subprime crisis: a quantitative estimation

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  • Thomas Goda

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  • Photis Lysandrou

    ()

Abstract

The crisis that broke out in mid-2007 was caused by the fact that the CDO market had grown to a size sufficient to wreak general havoc when it suddenly collapsed. Several authors have argued that economic inequality was important to the growth of this market. This paper attempts to strengthen this argument by concentrating attention on global wealth concentration. After summarising recent evidence on the negative impact of investor demand on US bond yields in the pre-crisis period, new evidence regarding the specific contribution of high net worth individuals to this negative impact is presented. The paper then goes on to show how, after having helped to caused a yield problem in the major US debt markets, high net worth individuals (via hedge funds) continued to be a major source of the pressure on US banks to resolve this yield problem through the mass production of CDOs

Suggested Citation

  • Thomas Goda & Photis Lysandrou, 2011. "The contribution of wealth concentration to the subprime crisis: a quantitative estimation," DOCUMENTOS DE TRABAJO CIEF 010718, UNIVERSIDAD EAFIT.
  • Handle: RePEc:col:000122:010718
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    References listed on IDEAS

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    1. José Gabriel Palma, 2009. "The revenge of the market on the rentiers," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 829-869, July.
    2. Photis Lysandrou, 2011. "The primacy of hedge funds in the subprime crisis," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 34(2), pages 225-254.
    3. De Loubens, A. & Idier, J. & Jardet, C., 2007. "Determinants of long-term interest rates in the United States and the euro area: A multivariate approach," Working papers 170, Banque de France.
    4. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.
    5. Harm Bandholz & Jorg Clostermann & Franz Seitz, 2009. "Explaining the US bond yield conundrum," Applied Financial Economics, Taylor & Francis Journals, vol. 19(7), pages 539-550.
    6. Stockhammer, Engelbert, 2009. "The finance-dominated accumulation regime, income distribution and the present crisis," Department of Economics Working Paper Series 136, WU Vienna University of Economics and Business.
    7. Mustiers, J P. & Dubois, A., 2007. "Risks and return of banking activities related to hedge funds," Financial Stability Review, Banque de France, issue 10, pages 85-94, April.
    8. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
    9. Adrian Blundell-Wignall, 2007. "Structured Products: Implications for Financial Markets," Financial Market Trends, OECD Publishing, vol. 2007(2), pages 27-57.
    10. Viral V. Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09," NBER Working Papers 16079, National Bureau of Economic Research, Inc.
    11. Palma, J.G., 2011. "Homogeneous middles vs. heterogeneous tails, and the end of the ‘Inverted-U’: the share of the rich is what it's all about," Cambridge Working Papers in Economics 1111, Faculty of Economics, University of Cambridge.
    12. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
    13. Ricardo J. Caballero & Arvind Krishnamurthy, 2009. "Global Imbalances and Financial Fragility," American Economic Review, American Economic Association, vol. 99(2), pages 584-588, May.
    14. Özlem Onaran & Engelbert Stockhammer & Lucas Grafl, 2011. "Financialisation, income distribution and aggregate demand in the USA," Cambridge Journal of Economics, Oxford University Press, vol. 35(4), pages 637-661.
    15. Thomas Goda & Photis Lysandrou & Chris Stewart, 2011. "The contribution of us bond demand to the us bond yield conundrum of 2004 to 2007: an empirical investigation," DOCUMENTOS DE TRABAJO CIEF 010719, UNIVERSIDAD EAFIT.
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    Citations

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    Cited by:

    1. Barry Z. Cynamon & Steven M. Fazzari, 2016. "Inequality, the Great Recession and slow recovery," Cambridge Journal of Economics, Oxford University Press, vol. 40(2), pages 373-399.
    2. Lysandrou, Photis & Shabani, Mimoza, 2017. "The Greenspan conundrum of 2005-7 and the acceleration in US ABCP supply: a single ‘reach for yield’ story," MPRA Paper 79917, University Library of Munich, Germany.
    3. Thomas Goda, 2014. "Global trends in relative and absolute wealth concentrations," DOCUMENTOS DE TRABAJO CIEF 010897, UNIVERSIDAD EAFIT.
    4. Thomas Goda & Özlem Onaran & Engelbert Stockhammer, 2014. "A case for redistribution? Income inequality and wealth concentration in the recent crisis," DOCUMENTOS DE TRABAJO CIEF 012186, UNIVERSIDAD EAFIT.
    5. repec:mes:postke:v:39:y:2016:i:4:p:444-472 is not listed on IDEAS
    6. Photis Lysandrou, 2014. "Post-Keynesian stock-flow models after the subprime crisis: the need for micro-foundations," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(1), pages 113-126, April.
    7. Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Study Group (PKSG).
    8. Photis Lysandrou & Anastasia Nesvetailova, 2013. "The Shadow Banking System and the Financial Crisis:A securities production function view," Working papers wpaper05, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    9. Alberto Botta & Eugenio Caverzasi & Daniele Tori, 2015. "Financial–Real-Side Interactions in an Extended Monetary Circuit with Shadow Banking: Loving or Dangerous Hugs?," International Journal of Political Economy, Taylor & Francis Journals, vol. 44(3), pages 196-227, July.
    10. Thomas Goda & Alejandro Torres García, 2017. "The Rising Tide of Absolute Global Income Inequality During 1850–2010: Is It Driven by Inequality Within or Between Countries?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 130(3), pages 1051-1072, February.
    11. Thomas Goda, 2013. "Changes in income inequality from a global perspective: An overview," Working Papers PKWP1303, Post Keynesian Economics Study Group (PKSG).
    12. Thomas Goda & Alejandro Torres, 2015. "Class or location? What explains the rising tide of absolute global income inequality during 1850-2010?," DOCUMENTOS DE TRABAJO CIEF 012663, UNIVERSIDAD EAFIT.
    13. Anastasia Nesvetailova, 2015. "A Crisis of the Overcrowded Future: Shadow Banking and the Political Economy of Financial Innovation," New Political Economy, Taylor & Francis Journals, vol. 20(3), pages 431-453, June.
    14. Jo Michell, 2014. "Factors generating and transmitting the financial crisis; Functional distribution of income," Working papers wpaper41, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    15. Photis Lysandrou & Anastasia Nesvetailova, 2015. "The role of shadow banking entities in the financial crisis: a disaggregated view," Review of International Political Economy, Taylor & Francis Journals, vol. 22(2), pages 257-279, April.
    16. repec:oup:indcch:v:26:y:2017:i:1:p:1-20. is not listed on IDEAS
    17. repec:psl:pslqrr:2017:22 is not listed on IDEAS

    More about this item

    Keywords

    Wealth concentration; Income inequality; CDOs; Subprime crisis; Bond yields;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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