Growing income equality may harm the economy

Jonathan Rauch has written an essay called Inequality and Its Perils:

Emerging research suggests that the growing gap between rich and poor harms the U.S. economy by creating instability and suppressing growth. 

The essay appears to argue three points:

• Rising inequality reduces demand within the economy. This is because the rich tend to spend a smaller proportion of their income than those on lower incomes.
• To make up for this lower demand, Governments and banks ease credit requirements, thus creating a credit splurge.
• All the income at the top needs somewhere to go. It tends to end up in the financial markets and other forms of investment with high liquidity. In the US the financial sector ended up making up around 40% of the total profits in the economy. To quote the essay: "Alas, when the recession struck, the financial sector’s gigantism and complexity helped turn what might have been a brush fire into a meltdown."

This all results in an unstable economy that far from being resilient to shocks actually amplifies them.