The Financial Crisis of 1929 Reexamined: The Role of Soaring Inequality

Abstract

The financial crisis of 1929 that triggered the Great Depression has been endlessly studied. Still there is little consensus regarding what caused it. This article claims that wage stagnation and exploding inequality fueled three dynamics that set the stage for a financial crisis. First, consumption was constrained by the smaller share of total income accruing to workers, thereby restricting investment opportunities in the real economy. Flush with greater income and wealth, the elite flooded financial markets with credit, helping keep interest rates low and encouraging the creation of new credit instruments, some of which recycled the rich's surplus assets as debt to those less well off. Second, greater inequality pressured households to find ways to consume more in order to maintain their relative social status, resulting in reduced household saving, greater household debt, and possibly longer work hours. Third, as the rich took larger shares of income and wealth, they gained relatively more command over everything, including ideology. Reducing taxes on the rich, favoring business over labor, and failing to regulate newly evolving credit instruments flowed out of this ideology.

Semi-autonomous household expenditures as the causa causans of postwar US business cycles: the stability and instability of Luxemburg-type external markets

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Why did the Great Recession Fail to Produce a New New Deal in the USA?

“…Reducing the size of government, deregulating the economy, and failing to regulate newly evolving financial instruments flowing out of this ideology. Together, these three dynamics set the stage for the financial crises of 1929 and 2008 (Wisman 2013a(Wisman , 2014. The Great Depression and Great Recession were the consequences.…”

Efeito de Crise Econômica sobre Escolhas de Ativos para Investimentos Pessoais

“…A pesquisa ao redor de finanças pessoais não é necessariamente algo novo (Wisman, 2014). Acerca do comportamento financeiro em contexto de crises econômicas, Hoffmann, Post e Pennings (2013) encontraram resultados que sugerem que a percepção de risco não é uniforme entre os investidores durante crises.…”