The Contribution of Wealth Concentration to the Subprime Crisis: a Quantitative Estimation

The crisis that broke out in mid-2007 was caused by the fact that the CDO market had grown to a size enough to wreak general havoc when it suddenly collapsed. Several authors have argued that economic inequality was important to the growth of this market. This paper attempts to strengthen this argument by concentrating attention on global wealth concentration. After summarizing recent evidence on the negative impact of investor demand on US bond yields in the pre-crisis period, new evidence regarding the specific contribution of high net worth individuals to this negative impact is presented. The paper then goes on to show how, after having helped to cause a yield problem in the major US debt markets, high net worth individuals (via hedge funds) continued to be a major source of the pressure on US banks to resolve this yield problem through the mass production of CDOs.

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