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IPFS News Link • General Opinion

Were The Bank Bailouts The Result Of Rising Wealth Concentration?

• by Yves Smith

Now admittedly, the continued rise in wealth inequality is an effect of sustained low central bank interest rates, which goosed asset prices generally and particularly favored speculative plays as investors reached for returns. A great deal of commentary has correctly focused on the effects of deflating these asset bubbles and how the rollback of paper wealth can be particularly harmful to financial firms that wrongfooted the correction.

But the reduction in wealth also produces a system wide reduction in liquidity (mind you, we've always thought liquidity is not the virtue that investment touts make it out to be; the world got by just fine in the stone ages with less that instantaneous trading times and higher transaction costs). The effect in a regime, where for better or worse, there are (or have been) lots of big fish with tons of cash who are accustomed to moving it quickly would wind up looking like an emerging market, where US interest rate moves wind up producing huge and destabilizing waves of hot money moving in and out. It appears not to have occurred to the authorities that we were restructuring our financial system so as to make it possible to generate banana-republic levels of upheaval.

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