28 November 2010

The Real Problem: Income Inequality

The Real Problem: Income Inequality, by David Futrelle (Money Magazine, 24 November 2010)

Raghuram Rajan wasn't the only economist who warned of the financial crisis before it struck. He was, however, the sole one brave enough to make this prediction in front of Alan Greenspan at a 2005 Jackson Hole Conference devoted to celebrating the legacy of the once-seemingly infallible Fed chief.

Nor is Rajan unique in blaming the panic on the decoupling of risk and reward in the financial sector. But he stands out as one of the few economists who cite income inequality as another root cause.

That's hardly the type of theory you'd expect to hear from an economist at the University of Chicago, a bastion of free-market thinking. But he argues that this income gap inspired politicians on both sides of the aisle to push low-income housing loans as a palliative for the poor, which helped to send the housing sector into overdrive.

The author of Fault Lines tells MONEY contributing writer David Futrelle that unless we come to terms with our economy's structural problems, we may be setting ourselves up for another fall.
Link: The Real Problem: Income Inequality