In order to appreciate the problems caused when too much wealth is concentrated in too few hands, we must first accept the concept that wealth is finite. It would be absurd to think otherwise, but this is something you probably were taught in Econ 101, or Civics class, or by some other such mechanism of indoctrination - that wealth can be created. If wealth is infinite, if it can be created from nothing, then wealth alone violates the laws of the physical universe. Let's dismiss that notion out of hand. In the global economy, wealth must be finite, or there is in fact no economy, or need for an economic system.
All wealth derives from natural resources, ultimately. In undeveloped or undiscovered natural resources there is what you might call latent or potential wealth. Natural resources are of course finite, and scarce to one extent or another, and they are the foundation of any economy. The capitalists and the indoctrinated will tell you that our economy is not a zero sum system, but that's just another way of saying that wealth is infinite, and we reject that absurdity.
Once we recognize that the wealth of an economic system is finite, it is axiomatic that wealth can be accumulated or appropriated, but not created from nothing. In an emerging economy, where natural resources are under development but not yet fully developed, latent wealth may lie untapped, but it exists and likely is owned by someone. If it is not, then owned wealth still has capacity for growth. The aggregate wealth of a mature economy, on the other hand, is clearly zero sum. One can increase ones own wealth only by the transfer of wealth, or money, from others. This raises the question of who owns undiscovered natural resources, a question I shall leave on the table for now. Discovered but undeveloped resources typically are owned, if not by a private individual or group, then by the state.
When too much wealth/money accumulates in too few hands, it means, in simple terms, that there's less to go around for the remainder of the people. Compounding this is the fact that money held by a few with vast fortunes tends not to circulate. It gets saved or invested, not spent. When money circulates poorly or not at all, the opportunities for others to increase their own wealth by acquiring portions of it are reduced or even eliminated. But what about those investments? Don't equity investments, for example, make it possible for companies to grow, and hire and pay employees? Generally speaking, yes, but what's happening right now is that companies are hoarding cash. They're sitting on hundreds of billions and not hiring. Why? Because they can - but that's a tale for another time.
Another problem that tends to arise when the wealthy invest, especially with windfall funds, is that they choose to invest in high-yield financial instruments, like the derivatives, e.g. collateralized debt obligations (CDO), in which we saw an enormous unregulated trading boom during the Bush administration. This boom was precipitated by the sudden increase in disposable income at the upper end of the income scale created by the Bush tax cuts in 2001 and 2003. High-yield investments are invariably accompanied by higher risk. In the high-risk CDO boom, such gambles were covered or hedged by other instruments, like credit default swaps (CDS).
The CDO/CDS investment pyramid during the Bush administration was based primarily on mortgage loans. The demand for high-yield CDOs fueled a corollary demand for mortgages upon which to base them. This demand was so strong that it quickly became possible to get a mortgage with little more than your signature. Lenders pushed mortgages with great fervor so they could sell them to upstream investment banks, which in turn packaged them, tranched them, got the rating agencies like Moodys (coming under intense scrutiny as I write this) to rate them AAA whether they deserved it or not (many if not most didn't), and sold them to investors looking for a rate of return they could not get from traditional investments like stocks. The rest you likely know all too well. The real bubble during the Bush administration was in mortgages, not real estate.
Billions of dollars chasing a high ROI - that's what happens when there's too much concentration of wealth. It's virtually the same scenario we saw in 1929, right after the highest marginal income tax rate was cut to 25% - a bonanza for the rich leads to highly speculative investing leads to market bubble and subsequent market crash, and as always, it's the little guy who gets hurt the most by the crash.
Next in this series - the case for a return to confiscatory marginal tax rates at the high end