There is rising evidence that inequality can have an important bearing on the objectives central banks hold dear – the stability of the financial system and growth in the economy. Were inequality to jeopardise these public goods, it could make the everyday job of central banks somewhat harder. This means that, even if they cannot influence it, central banks have a strong vested interest in inequality issues too. In his book Fault Lines, Raghu Rajan – now Governor of the Reserve Bank of India – dug up the deep roots of America’s sub-prime crisis (Rajan (2010)). Many conventional crisis explanations have focussed on the combined effects of venal bankers, Byzantine risk models and somnambulating regulators. Rajan suggested these missed the deeper cause – rising US inequality. Facing this fault-line, US policymakers had chosen a policy of cheap and plentiful credit, expanded home-ownership and rising asset prices – a “let them eat credit” policy. Bank balance sheets grew to distribute this rapidly expanding credit cake, with banks taking their own healthy slice en route. Interestingly, this would not be the first time rising inequality has preceded crisis. The selfsame pattern preceded the financial crash of 1929 and the resulting Great Depression (Kumhoff and Ranciere (2010)). Between 1920 and 1928, the income share of the top 5% rose from little more than a quarter to more than a third. Household debt relative to GDP doubled. Inequalities widened and balance sheets fattened. And the upshot was the same: a huge economic contraction when the credit bubble popped.

There is a collective public policy interest in getting them right. References Alvaredo, F., Atkinson, A.B., Saez, E. and Piketty, T., “The world top incomes database”. Bank of England (2012), “The Distributional Effects of Asset Purchases”, July. Available at: http://www.bankofengland.co.uk/publications/Documents/news/2012/nr073.pdf. Bowles, S (2012), “The New Economics of Inequality and Redistribution”, Cambridge University Press. Cribb, J., Hood, A., Joyce, R. and Phillips, D. (2013), “Living standards, poverty and inequality in the UK: 2013”, IFS Report R81. Davies, R., Haldane, A., Nielsen, M. and Pezzini, S. (2014), “Measuring the costs of shorttermism”, Journal of Financial Stability, 12 (2014) 16–25. Economic Policy Institute (2012), “The State of Working America, 12th Edition”, Cornell University Press, November. Haldane, A. G. (2010), “Patience and Finance”, speech delivered at the Oxford China Business Forum, Beijing. Available at: http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2010/speech445.pdf. BIS central bankers’ speeches  5  Haldane, A. G. and Davies, R. (2011), “The short long”, speech to 29th Société Universitaire Européenne de Recherches Financières Colloquium: New Paradigms in Money and Finance?, May. Available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech495.pdf. Haldane, A. G. (2012), “A leaf being turned”, speech to Occupy Economics, “Socially useful banking”, October. Available at: http://www.bankofengland.co.uk/publications/Documents/ speeches/2012/speech616.pdf. Haldane, A. G. (2014), “Ambidexterity”, speech delivered at the American Economic Association Annual Meeting, Philadelphia on 3 January 2014. Available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech713.pdf. Honohan, P. (2005), “Banking sector crises and inequality”, World Bank Policy Research Working Paper 3659, July. Kay, J. (2012), “The Kay Review of UK Equity Markets and Long-Term Decision Making”, Department for Investment, Business and Skills, July.