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Inequality and the Global Crisis -- Evidence and Policies

  • By Raymond Torres, International Labour Organization
January 5, 2012

This presentation was part of the World Economic Roundtable.  A summary of the Roundtable session can be read here.

Inequality, Leverage and Crises

  • By Michael Kumhof, International Monetary Fund and Romain Ranciere, International Monetary Fund and Paris School of Economics
January 5, 2012

This presentation was part of the World Economic Roundtable.  A summary of the Roundtable session can be read here.

Inequality, Wages and Financial Crises

January 5, 2012

At the last World Economic Roundtable, Michael Kumhof, Deputy Division Chief of the Modeling Division of the International Monetary Fund, and Raymond Torres, Director of the International Institute for Labour Studies of the International Labour Organization, came to discuss the relationship between inequality and financial crises. 

Year of the Fist

  • By
  • Romesh Ratnesar,
  • New America Foundation
December 22, 2011 |

By historical measures, there’s really not all that much to be angry about. Since 1981, the proportion of the developing world living in extreme poverty has fallen from 50 percent to less than 20 percent, according to the United Nations. Infant mortality is down across the board; the number of girls in school is up. Terrorists and tyrants get their comeuppance with toe-tapping regularity. The chances of dying in war have never been lower. In 2011, the 7 billionth person was born into a world that’s richer, healthier, and safer than at any time in history.


Fannie and Freddie did not Cause the Financial Crisis

January 3, 2012
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I missed this on my way out of town, but I wanted to steer people to this article by Joe Nocera of the New York Times.

He writes about the workings of an ideologically-driven campaign to lay the entire financial crisis at the feet of Fannie Mae and Freddie Mac, the government-sponsored entities charged with boosting mortgage lending. Yes, mistakes and miscalculations were made by these GSEs and we certainly should be asking what we can do differently, but in my opinion Nocera’s diagnosis is spot on. The subprime mortgage market had already exploded before Fannie and Freddie began purchasing these loans in earnest. In fact, they were actually late to the game. Once on the field, they began buying up these loans not to promote low- and moderate –income homeownership but to chase market share. They exacerbated the problem but hardly caused it. They should have stayed on the sidelines.

It was the drive for market share—and not the requirement to meet affordable housing mandates—that moved Fannie and Freddie into the already exploding subprime market. Nocera paints the picture of a textbook operation to muddy the waters of understanding, with staring roles played by the Wall Street Journal editorial page and the American Enterprise Institute. He calls it “The Big Lie” and it depends on an echo chamber to advance the thesis that government rather than actors in the financial sector are to blame for the advent of the financial crisis and its aftermath.

What to do about Fannie and Freddie remains an open question. The Obama administration has sketched out a set of potential options but (for some reason) doesn’t believe they can advance a reasonable, bipartisan discussion on the Hill. That’s too bad because there are important issues to address, such as how to help aspiring families become responsible homeowners in the future get out from under the debilitating debt of mortgages that exceed the value of thier homes. I wholeheartedly agree with Nocera’s conclusion:

Three years after the financial crisis, the country would be well served by a real debate about the role of government in housing. Should the government be helping low- and moderate-income Americans own their own homes? If so, is there an acceptable level of risk? If not, how do we recast the American dream?

To have that debate, though, we need a clear understanding of what role the government’s affordable-housing goals did — and did not — play in the crisis. And that is impossible as long as the Big Lie holds sway.

Policy and Markets: How, Not If

December 15, 2011

--This is a column by Bruce Jentleson, Professor at Duke University, and Jay Pelosky, Principal of J2Z Advisory. It originally appeared on the Huffington Post.

The policy vs markets debate makes for good rhetoric but lousy results. It's not if government should play a role in the economy. It's how best to do it.

Less Money, More Impact

December 15, 2011

This week, renowned blogger Matthew Yglesias argued that moving away from a physical currency would make the US economy recession proof. He points out that a time-tested approach to ending recessions is cutting interest rates, since "when rates fall, business investment, homebuilding, and durable goods purchases all rise and next thing you know everybody’s back to work." The problem is that currently the US has interest rates are already near one percent, and any drop below zero would lead "people [to] just withdraw money and store it in shoeboxes." That is, unless taking cash out of the bank was not an option. In this case, argues Yglesias, a negative interest rate would incentivize those with money in the bank to invest, make purchases and spend the country out of recession as they have in times past.

Follow-Up: Beyond Our Means

December 14, 2011
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On December 13, 2011 the Asset Building Program hosted Professor Sheldon Garon, author of Beyond Our Means: Why America Spends While the World Saves. While economists often claim people save according to universally rational calculations — saving the most in their middle years as they plan for retirement and saving the least in welfare states — there are substantial differences in savings rates across high income countries. For example, Europeans save at relatively high rates despite generous welfare programs, while Americans save little, despite weaker social safety nets. The assumption that generous social benefits will provide a disincentive to save doesn’t hold up.

Top Incomes Decline, Wealth Inequality Persists

December 13, 2011
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There are many ways to measure inequality. You can compare those at the very top and to those in the middle or the very bottom. You can look at the overall distribution of resources among the total population. Or you can look at the degrees of concentration among segments of the population. Each of these measures tells you something different. But it’s more consequential in what you choose to measure.

Jason Deparle writes in the New York Times of new data that shows how income inequality declined during the recession. He sprinkles in some quotes from a professor of entrepreurship, Steven Kaplan, implying inequality is a thing of the past and we shouldn’t be worrying about it anyway since economic growth is the problem. Likely, there are some debates over the data Deparle is citing. Is it best to use Social Security data or tax returns? Should we include earnings with wages? 

Regardless, I don’t find it hard to believe incomes at the very, very top have come down off their pre-recession highs (although I would still like to see more data). But this does not mean inequality is lessening or a problem of the past. We need to look at both income and wealth. Just because it is harder to shine a light on wealth but doesn’t mean we should not look for its impact.

As I wrote previously, inequality in America is still ascendant but the dynamics have changed. The bursting of the housing and stock market bubbles momentarily stemmed the wealth inequality tide. Yet by 2010, stock market losses were largely recouped. This wasn’t the case for housing equity, which is the largest item on the family balance sheet.

The divergence between housing values and security prices will be the main driver of wealth inequality for the foreseeable future.

Without major changes to the housing market and policy efforts designed to help families de-leverage, such as large-scale loan modifications and principle reduction, wealth holding for the majority of American households will remain depressed. Wealth at the very top will be determined by a combination of executive pay, tax rates, and returns to capital. Interestingly, it seems like the recession has ended for those at the very top but continues for the majority.

How are Families Really Doing? Part 4: Income Inequality

December 9, 2011
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This is the fourth and final installment in a series of interviews with policy experts who participated in an event we hosted on November 22nd, "Poverty, Inequality, Mobility, Oh My," where we explored different ways of assessing how families are doing post-Great Recession and how applying these different approaches to the design of public policies might improve the conditions and opportunities of low-income families.

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