Did America's record-high level of economic inequality in 2007 help cause the financial crisis of 2008?

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From tonight's Newshour. These are just selected excerpts from the program transcript. Click the link to view the entire piece.

http://www.pbs.org/newshour/bb/business/july-dec11/makingsense_08-17.html

PAUL SOLMAN: From the crash of '08 to this spring, Americans had -- uncharacteristically -- been paying down their debts. But borrowing is again on the rise, according to the Federal Reserve. Historically, though, high debt relative to income is a fairly recent development for Americans, which economist Frank Levy blames on the growing pressures of economic inequality.

FRANK LEVY, Massachusetts Institute of Technology: The part that's really changed in the last 20 years is debt, that people took out more and more debt to sustain consumption.

PAUL SOLMAN: Took our more debt because, he says, America is growing more unequal. Since the top one percent now commands more than one-third of all wealth, how's the bottom 99 percent supposed to keep up with the Joneses, if not the Kardashians? By borrowing.

FRANK LEVY: In the 1950s and 1960s, everybody's income was rising. Everybody had some claim on economic growth, so that people could buy a middle-class standard of living. If you go back to the '70s into the '80s, when things began to flatten out, people started dealing with that by putting a second earner into the labor force.

But that obviously has limits. And so, once that was pretty well exhausted, once you started getting into the '90s, then we're into the home equity loans and the credit card stuff and all the rest of that, trying to keep consumption growing like it had been before.

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DAVID KOTZ, University of Massachusetts, Amherst: The huge gap between the rich and everyone else is not just a moral or ethical problem. It is a major factor explaining the severe financial and economic crisis that broke out in 2008.

PAUL SOLMAN: Economist David Kotz:

DAVID KOTZ: If the economy's going to expand, while profits are going up very rapidly and wages are stagnating or falling, which has been the rule since 1980, then who's going to buy the increased output of the economy? It's possible only if households borrow to maintain their living standard.

That's why we have seen the huge growth in household debts in the economy. Millions of families unable to pay their bills from their declining income were forced to borrow against their home to keep the electric power on.

PAUL SOLMAN: Professor David Moss of the Harvard Business School agrees.

DAVID MOSS, Harvard Business School: As the crisis was in full swing in late 2008, November, December of 2008, I started to put together a graph, a simple chart on bank failures in the 19th and 20th century up to the present. And a really very striking pattern emerged.

PAUL SOLMAN: Striking, says moss, was the resemblance between his bank failure chart and a graph of U.S. income inequality over the last century.

DAVID MOSS: Sure enough, the match with bank failures was remarkably strong. Inequality peaked just before the financial crisis in 1929 to 1933. And then it peaks again in 2007, just before this recent financial crisis at almost exactly the same level. And that got me thinking more and more, maybe there is some connection.

Those at the high end are putting some of their money into lending to everyone else. And those down below, who are not seeing the kind of income growth they had gotten in before and don't have the kind of bargaining power to raise their incomes that they had before, they're doing the borrowing. That's creating a source of enormous instability. But, if that model is right, then there really could be a connection between inequality and financial crises.

PAUL SOLMAN: Now, not every economist buys the story that inequality led to the crisis.

RICHARD FREEMAN, Harvard University: I doubt that this was a major factor.

PAUL SOLMAN: Economist Richard Freeman:

RICHARD FREEMAN: Certainly, we know the debt level went up in this period of time, and we know that people's taking on housing and debt, consumer debt that they ultimately couldn't afford unless house prices kept going up, contributed to this.

The part that is hard is that, say, their incomes had risen by 10 percent. Maybe then they would have taken on even more debt.

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PAUL SOLMAN: Took our more debt because, he says, America is growing more unequal. Since the top one percent now commands more than one-third of all wealth, how's the bottom 99 percent supposed to keep up with the Joneses, if not the Kardashians? By borrowing.

Isn't the real problem not the inequality but the assumption that one must keep up with the Joneses?

DAVID KOTZ: If the economy's going to expand, while profits are going up very rapidly and wages are stagnating or falling, which has been the rule since 1980, then who's going to buy the increased output of the economy? It's possible only if households borrow to maintain their living standard.

So all those consumers were making all those individual decisions to borrow and consume, not because they wished to keep up with the Joneses but because they were worried about all the excess inventory?

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household debt has grown because of the ease of access to credit. Think of how easy it is today with the internet and 'instant' credit decisions whenever you need it, versus having to physically go down and borrow from a bank or deal with the actual credit card companies. People use credit not out of necessity, but because it's there and is easy to obtain, a lot of times well over what should be given. When someone is making $40,000/yr and has credit equal to or that exceeds their income, that's a bit of a problem.

The blame really needs to stop being passed here and Greenspan and Larry Summers need to be thrown into prison for the mess that THEY created.

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household debt has grown because of the ease of access to credit.

More importantly, if someone offers you a zero-percent interest loan, why not take it?

Even if you keep the money under the mattress, it's worth less when you pay it back.