President Obama explains it all. He and many liberal economists explain the Great Recession like this: Rising income inequality and stagnant incomes for the bottom 99% pushed workers to borrow to maintain their standard of living.
As these households became increasingly indebted and their incomes went nowhere because the 1% were grabbing all the dough, they continued to borrow more from fraudster banksters to maintain their consumption levels.
This increased leverage for consumers and banks, and eventually a shock to the economy led to a financial crisis. The 2000s were just like the Roaring 1920s. Blame the rich.
Income inequality > too much borrowing > financial crisis and recession.
A simple theory. An elegant theory, really. But quite probably a wrong theory—or so economists Michael Bordo and Christopher Meissner contend in a new study (bold for emphasis):
Using data from a panel of 14 countries for over 120 years, we find strong evidence linking credit booms to banking crises, but no evidence that rising income concentration was a significant determinant of credit booms.
Narrative evidence on the US experience in the 1920s, and that of other countries in more recent decades, casts further doubt on the role of rising inequality. We do find significant evidence that rising real income and falling interest rates are important determinants of credit booms. … Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.
The negative and significant relationship of short-term interest rates and credit growth may also be consistent with the story of for example Taylor (2009) or Meltzer (2010) who attribute the U.S. housing boom to expansionary policy by the Federal Reserve in the early 2000s in an attempt to prevent perceived deflation.
Shorter version: A long period of economic moderation made people both richer and overconfident about the economy’s stability in the future. So they took too many risks. Oh, and the Fed may have left interest rates too low for too long.
So now we have this study. And we have an earlier blockbuster study from researchers at Cornell University that found median household income—properly measured—rose 36.7% from 1979-2007, not 3.2% like inequality alarmists (and White House faves) Thomas Piketty and Emmanuel Saez argue: