Has Anyone Been Held Accountable for the Subprime Mortgage Crisis?

In case we have forgotten about the Subprime Mortgage Crisis, Frontline replayed their documentary "Is Wall Street Untouchable?" tonight -- see the video above. It has now been almost five years since the start of the financial crisis in 2007 and the statue of limitations on civil fraud cases is about to run out. It appears right now that there will be no major Wall Street prosecutions, either criminal or civil.

Can anyone see a link between the lack of prosecutions and the obscene level of income inequality in the US?

Do We Really Need Income Inequality to Create Economic Growth?

Former CIA Analyst and targeting Officer Nada Bakos posted the video above on Twitter with the comment "Middle class are hardly distinguishable from the poor in US" (you can also read her blog here). The video makes the point, with a series of graphic presentations, that some inequality is one thing, but the amount of income inequality in the US is really obscene.

Over time, income inequality in the US was at its highest level right before two catastrophic historical episodes: the Great Depression and the current Subprime Mortgage Crisis (see my analysis of the data here). These events and the trends in income inequality might just be coincidentally related, but I doubt it! Minimally, none of this benefited the mass of people that had to suffer through it. Saying that people were better off in 1930 and 2007 than they were in 1873 because of economic growth is small comfort. Saying that obscene levels of income inequality are necessary for economic growth is a stretch. Saying that the US is moving toward Socialism is even a greater stretch (in a Socialist society, there would be equal distribution of income as pointed out by the video).

Income Inequality, Tax Cuts, Deficits and Unemployment Insurance

Al Kranken, D-MN, gave a little-noticed but insightful speech on the Senate floor in December (you can read the entire speech here or listen to the video above). His dot points were:

• One lesson of the last election was not to give tax breaks to millionaires
• Rising income inequality in the US is a very serious problem
• Republicans can't lecture anyone on deficits (compare the two Bush administrations to Clinton)
• "Small" business doesn't mean small business to Republicans
• Maintaining unemployment insurance, one of the most important automatic stabilizers in the economy, is more important than bailouts
• Giving tax breaks to billionaires is not making "tough choices"

What happened? Al Franken used to be funny on Saturday Night Live!

The Financial Crisis Could Reduce U.S. Income Inequality

The role of income inequality in the Financial Crisis of 2007-2010 will be analyzed and debated for many years in the future. The time series above plots the percent of income being received by the top 99-100% of income earners in the US (the data are from Emmanuel Saez, here, and are controversial--read both sides here). What is very interesting is that income inequality peaked right before the Great Depression and right before the Great Recession. The coincidence (?) suggests a number of hypothesis about income inequality and financial speculation (here).

In this post, I'm going to beg the obvious question "If there is too much income inequality in the U.S., how much income should the upper 1% of income earners be making?" One approach to answering this question is to assume that the earnings of the top 1%, like the earnings of every other worker, should be tied to growth in the U.S. economy. If the economy grows by 4%, however, how much of that 4% growth premium should be captured by the upper 1%? All of it? Some of it? None of it?
What turns out to be a better model and one that fits the data better is that, regardless of growth in the U.S. economy, the share of income to the upper 1% should remain at about 13%, about where it is right now in 2010 after the Financial Crisis. Interestingly, from 1950 to about 1990, the upper 1% weren't getting their share! Something changed after 1990 (a nice topic for analysis and speculation) and that innovation, whatever it was, created a huge inequality bubble--a bubble that was popped by the Subprime Mortgage Crisis.
For the future, the model predicts that we will return to the level of income inequality that marked the U.S. economy from WWI to the 1990s. What new innovation might come along to create the next inequality bubble? We can't know the future but the model predicts that without shocks, the income of the top 1% would stabilized around 13%--something I probably won't see in my lifetime.