Who Pays for Economic Crises?
By Diego Alcalá Economic crises are financial earthquakes that shake the foundations of our material lives. Their effects, however, are not distributed equally.
By Diego Alcalá · Thu Oct 01 2026 · Investing
By Diego Alcalá
Economic crises are financial earthquakes that shake the foundations of our material lives. Their effects, however, are not distributed equally. Some participants emerge relatively unscathed, or even stronger, while others carry the consequences for years. Wealth is always changing hands. Expanding the money supply is not the same thing as producing wealth. The unequal distribution of a crisis's costs is not accidental: it reflects the economic and political power structures within our societies.
The decisions behind a crisis
Economic crises rarely arise spontaneously. Textbooks may describe them as inevitable consequences of economic cycles or external shocks, but the reality is more complicated. Most modern crises emerge from a combination of human decisions, misaligned incentives and regulatory failures. That is the problem: despite what we know, crises keep happening, and seem likely to keep happening.
Consider the financial crisis of 2008. It is often described as a perfect storm, yet at its core were concrete decisions: banks created highly risky financial products, rating agencies gave them favourable ratings, regulators looked the other way, and an incentive system rewarded short-term results without accounting for systemic risks. That hardly sounds accidental or inevitable, does it?
Banks and financial institutions have a particular role in this process. Operating with high leverage, using relatively little of their own capital and large amounts of borrowed money, can generate extraordinary profits in good times. It also magnifies losses when conditions deteriorate. What concerns me is that some institutions operate with an implicit expectation of a rescue if their bets fail. That creates moral hazard: profits remain private while losses are passed on to society.
It is fair to say that some participants play on a financial field tilted in their favour. That asymmetry contains the seeds of many crises.
How the cost moves from banks to households
When a crisis erupts, costs begin moving through the economy. Financial institutions at the centre of the problem pass the consequences along the chain. In my view, the resulting burden on people who had little involvement in finance reveals a regulatory failure built into the system.
There are several transmission channels. Banks restrict lending, affecting businesses that need financing to operate and grow. Those businesses respond by reducing investment, cutting jobs or lowering wages. Governments, under pressure to rescue institutions considered too big to fail, adopt what I regard as a false austerity that damages public services.
People who had the least involvement in creating the crisis end up bearing a disproportionate share of its cost. An ordinary household experiences this through unemployment, reduced purchasing power, the loss of a home or savings, and deteriorating public services. When that pattern repeats, it contributes to the erosion of the middle class.
The irony is that those responsible may recover relatively quickly, helped by government rescues or expansionary monetary policy, while working families can take years, or even decades, to regain their previous standard of living. That is why the feeling persists that different players face different rules.
The government's contradictory role
Governments occupy a paradoxical position during a crisis. They present themselves as rescuers preventing a complete collapse, yet their earlier policies and their responses can deepen existing problems or create new vulnerabilities.
Using public funds to rescue financial institutions sends a contradictory message. Governments promote the idea of free markets while intervening selectively to protect particular participants. Such rescues may sometimes be necessary to avoid greater damage. Nevertheless, they reinforce the perception of capitalism for the poor and socialism for the rich. My purpose is not to convert anyone to a political ideology, but to examine the mechanisms at work.
Governments can also help create the conditions that precede a crisis. Excessive deregulation, inadequate financial supervision and policies that favour speculation over productive activity make instability more likely. In my original Mexican context, concern about the rule of law adds another dimension to that argument.
Governments are not neutral referees. They have interests and face pressures of their own. Power seeks to preserve itself, and decisions made during a crisis reflect the distribution of political and economic influence. That helps explain why the most powerful participants so often appear to benefit. Economist Joseph Stiglitz has described the underlying problem as a system that privatizes gains and socializes losses.
Why the middle class bears a heavier burden
Every segment of society feels a crisis, but the middle class is especially vulnerable because of its position within the economy.
Middle-class households depend heavily on functioning labour and financial markets. Most of their income comes from wages, unlike wealthier households that receive income from capital. Much of their wealth is also tied to assets such as homes and investments. A crisis can shake both foundations at once.
In 2008, families faced job losses alongside a collapse in housing values, often affecting their largest asset. Stock markets also fell initially, but their subsequent recovery, supported by expansionary monetary policies, benefited investors with diversified portfolios and the capacity to hold their investments.
Middle-class families may have neither the financial cushion of the wealthy nor access to some of the safety nets available to the most vulnerable. The familiar description is uncomfortable but revealing: too well off to receive help, yet not wealthy enough to be safe.
A crisis also transfers wealth
Crises continue to function as mechanisms for transferring wealth, frequently from the middle class upward. They can accelerate inequalities already developing in good times. They can also create opportunities for business innovation and for acquiring assets worth holding over the long term at discounted prices. That matters if we remember the idea that the purchase price helps determine the eventual gain.
The effects of an economic crisis are plainly unequal, and the allocation of its costs reflects existing power structures. The question is whether we will ever change those structures.
I raise this issue to broaden our understanding of crises, rather than blaming each one on a single president or political party. It is also an appeal to consider social class in a world that can become distracted by individual ambition.
What a cross-border investor should take from this
For a Canadian or another foreign investor considering the United States, the lesson is to look beyond an asset's quoted price. Ask how a crisis could move through the people and institutions on which that investment depends. Who provides the financing? Who supplies the income? Who can continue holding the asset if other participants must sell?
Crossing a border does not remove those relationships. A property or business sits within a network of lenders, customers, workers and public services. The same crisis can place each participant under a different kind of pressure. Understanding that network is an extension of the central question in this essay: who ultimately absorbs the loss?
This is not a prediction of the next crisis or a promise that distressed assets will be profitable. It is a way to examine where the costs could land before treating someone else's financial distress as an investment opportunity.
Are we building an economic system that is more resilient to crises, or merely preparing the ground for the next large transfer of wealth?
Adapted from Diego Alcalá's manuscript dated May 12, 2025. Read the Spanish version.
Educational and opinion content. This article does not constitute financial, legal, tax or investment advice.
Cover photograph: Migrant Mother, Dorothea Lange, 1936. Library of Congress, Prints and Photographs Division, FSA/OWI. Public domain. A historical photograph of the Great Depression, not a photograph of the 2008 crisis.