ChainWhat it assumes · how to break it
Start
The government and central bank rescue failing banks, as the UK did by buying large shareholdings in RBS and Lloyds in 2008.
1
As a result, bondholders, depositors and bank staff are protected from the full losses that the banks' decisions caused.
moral hazard
moral hazard
Assumes: Those who took the risks are protected.
But: Shareholders in RBS and Lloyds lost most of the value of their shares, so owners did bear heavy losses.
2
At the same time, the cost falls on taxpayers through higher borrowing, and later on users of public services through fiscal consolidation.
fiscal consolidation (austerity)
fiscal consolidation (austerity)
Best link to attack
Assumes: The cuts fall most heavily on lower-income households.
Assumes: The cuts fall most heavily on lower-income households.
But: Tax rises on higher earners, such as the 50% income tax rate introduced in 2010, can share the burden more progressively.
3
In addition, the low interest rates and QE that accompany the rescue raise asset prices, benefiting wealthier households who own shares and property.
wealth inequality · asset prices
wealth inequality · asset prices
Assumes: Wealthier households hold most financial assets.
But: Low rates also protect jobs and cut mortgage payments, which helps lower-income workers and borrowers.
4
Therefore, inequality may widen, because the gains are concentrated among asset owners while the costs fall on taxpayers and public service users.
income inequality · wealth inequality
income inequality · wealth inequality
Assumes: The gains and costs are distributed as described.
But: Benefits and progressive taxes can offset part of the effect on income inequality.
End
Inequality may widen as the costs of the rescue fall on taxpayers and service users while asset owners gain.
Evaluation chain
- E1However, the effect on inequality depends on who bears the cost of the later fiscal consolidation.
- E2If the government raises taxes on higher earners and protects benefits for the poorest, the burden falls more on the better-off.
- E3As a result, income inequality may change little, even though wealth inequality rises through higher asset prices.
- E4So a bailout may widen inequality less than critics claim, especially compared with letting banks fail, which would have raised unemployment among lower-income households.
Can you say this chain from memory?
Members can hide the links, test themselves and track which chains they have mastered.
Practise this chainMembers can hide the links, test themselves and track which chains they have mastered.
Questions this answers
- Assess the impact of bank bailouts on the distribution of income and wealth.
- Evaluate whether bank rescues are fair to taxpayers.
- Discuss who gains and who loses from government rescues of the banking system.
Diagram
Lorenz curve moving further from the line of equality. No standard diagram shows the fiscal channel; use evidence on austerity measures after 2010.
Reverse and related
Letting banks fail → shareholders and bondholders bear losses, but a deeper recession raises unemployment among lower-income households.