From Rana Faroohar,
Washington, too, is so deeply tied to the ambassadors of the capital markets—six of the 10 biggest individual political donors this year are hedge-fund barons—that even well-meaning politicians and regulators don’t see how deep the problems are.
I have blogged earlier about how the most corrosive effect of widening inequality may not be the inequality itself, but its effect in terms of how it enables capture of political decision making. The truism that "he who pays the piper calls the tune" is no different today than earlier.
The most telling example of this was the response in the US to the sub-prime mortgage crisis which left both financial institutions and homeowners fighting for survival. While the vast majority of the TARP was directed mainly at the financial institutions to save the TBTF institutions, the homeowners with negative equity were left with marginal assistance. It should not have been a surprising outcome given the grossly skewed participation in the discussions leading up to the finalization of TARP. The result,
A lack of real fiscal action on the part of politicians forced the Fed to pump $4.5 trillion in monetary stimulus into the economy after 2008. This shows just how broken the model is, since the central bank’s best efforts have resulted in record stock prices (which enrich mainly the wealthiest 10% of the population that owns more than 80% of all stocks) but also a lackluster 2% economy with almost no income growth.
It is in the political and social battleground that inequality wreaks its greatest damage. And it assumes even greater significance for India, which already has one of the highest and fastest rising net Gini index, since the antecedent social and other practices are likely to exacerbate the political capture problem.