Income inequality and wealth concentration as a root cause of the subprime crisis

Goda, Thomas (2013) Income inequality and wealth concentration as a root cause of the subprime crisis. Doctoral thesis, London Metropolitan University.


The crisis that broke out in August 2007 was caused by the fact that the market for collateralised debt obligations (CDOs) had grown to a size sufficient to wreak general havoc when it suddenly collapsed. One of the unresolved questions arising out of the subprime crisis concerns the precise role played by economic inequality. Several authors have argued that income inequality was a root cause of the crisis, but this has remained to date a minority view. This dissertation attempts to show that not only income inequality but also wealth concentration needs to be taken into account to make economic inequality truly prominent in the subprime crisis debate. To fulfil this task, income inequality and wealth concentration trends are shown, and existing Marxian, post-Keynesian, and mainstream crisis theories are discussed. The major contributions of this dissertation are however (i) to provide empirical evidence about the negative impact of investor demand on US long-term bond yields in the pre-crisis period, which gives support to the hypothesis that the increasing global demand for safe assets led to a 'search for yield' by investors; (ii) to present estimates about the specific contribution of high net worth individuals to this negative impact; and (iii) to show that after having helped to cause 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.

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