Income Inequality and Financial Crises:

The 2007-2008 financial crises has been considered as amongst the worst the world has faced. This is since the great depression of the year 1930s ((Shiller, 7). This crisis was characterized by the collapse of large financial institutions, a downward fall in stock markets, bailout of banks by government, and the laying off of workers by business organizations. There are a variety of reasons given as to why the 2008 financial crisis emerged. MacEwan and Miller argue that it was an increase of income inequality that led to the emergence of the financial crisis (MacEwan and John, 5). On the other hand, others believe that it is the failure of the banking mortgage system that led to the emergence of the financial crisis (Paulet, 22). This paper examines the reasons as to why McEwan and Miller link economic instability, to income inequality. It further examines their proposal on how to solve this problem. Furthermore, this paper gives an explanation on the reasons for the emergence of the 2008 economic crises.

There is a varying argument on the effects of income inequality on the growth of the economies of rich and developed countries. One of the major arguments is that income inequality was the major reason for the emergence of the 2008 global economic crisis. This is an argument that McEwan and Miller believe in (MacEwan and John, 5). Proponents argue that there are three major ways in which income inequality has the capability of destroying the economic system of a state. The first argument is that due to income inequality, there is a sharp increase in the debt ratio to income ratio amongst middle and low income households. This ratio increases because of their bid to maintain their consumption level, while they fall behind in relation to income or revenue that they are able to acquire. For example, a growing demand for loans and mortgages was as a result of a rise in the costs of college and homes. There was also a relaxed standard for lending, and it was easy to acquire mortgages. The failure by these low income earners to pay these mortgages and loans led to the beginning of the financial crisis, and the collapse of major financial institutions such as Citigroup and Lehman Brothers (Paulet, 17).

The second argument is that the creation and development of a large pool of idle wealth leads to an increase in the demands of investment assets, fueling financial innovation and increasing the size of the financial sector. This is dangerous for the economy, because it may lead to speculative buying of financial assets. It is this speculative buying of financial assets that contributed to the collapse of financial institutions such as Lehman brothers during the 2008 crisis (Schiek, 39). It is important to denote that the collapse of the Lehman brothers was the beginning of the financial crisis, and it was followed by the collapse of several financial institutions and business organization such as General Motors. To protect the economy, the American government had to bail out companies such as General Motors, Citigroup, Bank of America, etc (Shiller, 22).