Neoliberalism, Income Distribution and the Causes of the Crisis

The financial crisis that began in summer 2007 has since turned into the worst economic crisis since the Great Depression. Its immediate causes are to be found in the malfunctioning of the financial sector: securitisation of mortgages allowed for the rapid growth of credit and lowered credit standards as banks believed they had passed on credit risk; this fuelled a property bubble; statistical models, which turned out to be based on short time samples, were promised to reduce risk by constructing ingenious portfolios; well-paid rating agencies decorated the new assets with triple A ratings; banks shifted credit off their balance sheets into structured investment vehicles; finally, capital inflows from Asian countries that wanted to accumulate reserves provided ample liquidity for this process. Obviously, the financial system needs to be fundamentally overhauled. While these mechanisms were indeed important, this chapter argues, they are only half the picture. The focus on the flaws in the financial system may hide other causes of the crisis. The polarisation in income distribution, in particular, tends to get glossed over as a potential cause of the crisis. This is not to deny the importance of financial factors. The crisis erupted as a financial crisis for very good reasons. The underlying accumulation regime had financial expansion as one of its key building blocks.