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How egalitarian policy fueled the crisis
...This does not strike me as a story about how income inequality caused the financial crisis. Rather, this is a story about how policies intended to reduce inequality had the unintended consequence of precipitating America's worst economic slump since the Depression. It's very important that we're straight on what the story is, since different stories may have very different implications for policy. If the story is that the level of inequality itself—and not our ideas about or political reactions to it—indirectly caused the crisis, then we may think that narrowing the gap is a matter of urgent necessity. But if the story is that an ill-conceived political attempt to reduce inequality—and not the fact of inequality itself—led to apocalyptic economic devastation, then we may well conclude that it is better to refrain from equalising initiatives unless we are quite certain they will not backfire. At any rate, this is the lesson I would draw from the story Mr Rajan is telling. Now, this call for prudent restraint may not turn out to be very limiting. The upshot may be no more than the recognition that government intervention in credit markets is a particularly stupid way to try reduce inequality. Whatever the upshot turns out to be, the idea that we must be alert to the unintended consequences of policies meant to reduce inequality is rather different, and rather more helpful, than the idea that inequality as such threatens the stability of the economy.