Credit <=> crisis
7/8/11 17:22![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
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talkpoliticsWe often hear the assertion that economic crises occur as a result of personal incompetence, greed and bad credits. Never mind the structural inconsistencies in a society. Now, two economists (Michael Kumhof and Romain Ranciere) are proposing a different approach in explaining these phenomena. They've explored an aspect of the US market which is often overlooked, but which is closely related to bankruptcy. And that is the relative level of financial disparity between the various layers of society.
They investigated the economic data around the two biggest financial crises in modern history (1929 and 2008). In both cases they concluded that the crisis happened when the "scissor" between the rich and poor was opened too widely, until at some point it turned out that the top-5% layer was in possession of 34% of the wealth. That was coupled with a simultaneous increase of the share of private credits - in fact it doubled.
They argue that the logic is very simple. In order to sustain the tempo of consumption, people with weaker financial capabilities were compelled to take credits, which eventually they were unable to pay back. Meanwhile, the wealth of the rich (I'm sorry, did someone say "job creators"?) was increased to such an extent that they would invest significant amounts into presumably highly profitable (but also very volatile) credit deals. When the credits stopped being served by a significant number of debtors, the whole system would collapse.
The authors are also proposing some solution to the situation. They argue that workers and employees should be paid such a level of salaries as to allow them a minimum level of living standard without taking credits. Now, the objection is that with increasing their income their needs would automatically increase as well, and this does make sense, but only to some limited extent. The data shows that the usual consumption levels of the wealthy would rise at a slower rate compared to their income, and the remaining extra money they'd rather invest into speculative deals and luxurious items, as opposed to actually fueling the engine of the economy.
Sources:
http://www.smarterearth.org/content/inequality-leverage-and-crises
They investigated the economic data around the two biggest financial crises in modern history (1929 and 2008). In both cases they concluded that the crisis happened when the "scissor" between the rich and poor was opened too widely, until at some point it turned out that the top-5% layer was in possession of 34% of the wealth. That was coupled with a simultaneous increase of the share of private credits - in fact it doubled.
They argue that the logic is very simple. In order to sustain the tempo of consumption, people with weaker financial capabilities were compelled to take credits, which eventually they were unable to pay back. Meanwhile, the wealth of the rich (I'm sorry, did someone say "job creators"?) was increased to such an extent that they would invest significant amounts into presumably highly profitable (but also very volatile) credit deals. When the credits stopped being served by a significant number of debtors, the whole system would collapse.
The authors are also proposing some solution to the situation. They argue that workers and employees should be paid such a level of salaries as to allow them a minimum level of living standard without taking credits. Now, the objection is that with increasing their income their needs would automatically increase as well, and this does make sense, but only to some limited extent. The data shows that the usual consumption levels of the wealthy would rise at a slower rate compared to their income, and the remaining extra money they'd rather invest into speculative deals and luxurious items, as opposed to actually fueling the engine of the economy.
Sources:
http://www.smarterearth.org/content/inequality-leverage-and-crises
(no subject)
Date: 7/8/11 16:10 (UTC)(no subject)
Date: 7/8/11 16:22 (UTC)(no subject)
Date: 7/8/11 16:24 (UTC)(no subject)
Date: 8/8/11 03:13 (UTC)Government logic
Date: 7/8/11 16:25 (UTC)"Sorry kids, government official ddstory lowered my salary to a living wage and government official yahvah says it makes more sense to rent! Time to move out of our 3 bedroom house (payment of $1300/month) to a 2 bedroom apartment (market adjusted price of $1400/month). We were living beyond our means anyway!"
Re: Government logic
Date: 7/8/11 16:31 (UTC)Re: Government logic
Date: 7/8/11 19:01 (UTC)Re: Government logic
Date: 7/8/11 20:47 (UTC)They argue that workers and employees should be paid such a level of salaries as to allow them a minimum level of living standard without taking credits.
Re: Government logic
Date: 7/8/11 20:52 (UTC)Re: Government logic
Date: 8/8/11 02:21 (UTC)