Does wealth inequality spawn economic meltdown?

The Economist surveyed the economic data in the issue of March 17, 2012 (p.87).

What I take away from the article is when the average worker is experiencing long term stagnant buying power while the rich are getting richer the likelyhood of deficit spending by the government and some sort of meltdown in financial markets is high.  But why is not yet completely clear.

One theory with some evidence shows that part of the problem is expectation - the old "keeping up with the Jones" syndrome.  As relative income of workers begins to fall in comparison with wealthier folks, they begin to try to keep up with the life style they see in their town and in the media which they regard as the norm.  To do so they have to borrow money to purchase things through credit cards or refinancing a home.  If the inequality continues to grow, the growth of debt increases until it hits a crisis point.

Another theory is that government plays a role by trying to make it easier for folks to obtain credit.  Researchers analyzing congressional votes on bills that expanded the availability of credit found that congressmen who represented districts with more inequality in income were more inclined to vote to loosen mortgage rules.

Another group of economist looked at 22 OECD countries and found evidence when inequality increases, governments seeking to keep growth on track pick up spending to make up for the falling consumer buying power of average workers.   A common OECD mechanism is increasing spending on social safety nets.  I would make the case that here in the US in the last thirty years we have been more inclined to use military spending, which actually exacerbates the income inequality.

Finally another group of researchers caution against assuming there is always a link between income inequality and financial meltdown.  They say they find a strong relationship between credit booms and financial meltdowns, but don't find a link between income inequality and credit booms.  They note that credit booms more often accompany rising real wages by the average worker.   I haven't seen the original research but the Economist article gives no indication this study considers the fact not all credit booms lead to busts, or the possibility credit booms based on inequality from falling real incomes lead to deficit spending and eventually a meltdown, while credit booms based on rising real incomes (which usually occur in developing countries pulling themselves up out of poverty) can correct themselves without deficit spending and a meltdown.  In short the meltdown hinges on whether the people in the country perceive their lives to be improving, or are trying to maintain a life they have become accustomed to in the facing of falling purchasing power.