Acemoglu on Inequality and the Crash

By Clive Crook

This excellent podcast interview with MIT's Daron Acemoglu examines the role of income inequality in the crash. Raghuram Rajan famously argued in his book Fault Lines that rising inequality called forth a political response--notably, housing subsidies--which in turn inflated the housing bubble. Acemoglu argues instead that politics was the root cause of both the increase in inequality and the financial crisis. He puts the argument very clearly, both in the interview and in this set of slides from the Denver AEA meeting, where he and Rajan were on a panel together.

If you listen to the interview you should also read Rajan's response to Acemoglu's position. Acemoglu makes many good points, but I don't entirely buy his version. To my mind, the role of Fannie and Freddie, though certainly not the only thing going on, was much more important than he allows. More generally, depending on exactly how they are framed, these two broad explanations are not mutually exclusive. Both causal chains could perfectly well have been at work simultaneously. Why insist on choosing one over the other?  

This article available online at:

http://www.theatlantic.com/politics/archive/2011/02/acemoglu-on-inequality-and-the-crash/71746/