By Ryan McMaken *
The Federal Reserve says inequality is a problem. At the same time, the Fed also claims to have nothing to do with it.
Last September, for example, Jerome Powell lamented the ârelative income stagnationâ for low-income people in the United States, but then said the Fed âdoesn’t have the toolsâ to solve this problem. Instead, Powell, being the chairman of this ostensibly “independent” and “apolitical” central bank, called on the federal government to engage in fiscal policy efforts for income redistribution.
Powell, of course, is wrong, and he probably knows he is wrong. Either way, if the Fed were genuinely concerned about wealth and income inequality, the Fed would stop doing what it has been doing for the past decade. It would end its ultra-low interest rate policy and its quantitative easing.
These policies have been at the center of the post-Great Recession economy, in which wealthy owners of stocks and real estate are becoming increasingly fabulously wealthy, even as ordinary people face stagnant employment. , low economic growth and an increase in the cost of living. This only accelerated during the economic crises of 2020, when the Fed’s endless efforts to prop up the stock market pushed up financial markets – and with them the portfolios of the rich – even as unemployment hit rock bottom. record levels. Even Jim Cramer could see what was going on and said that the Fed’s policies were part of “one of the greatest wealth transfers in history.”
How the Fed transfers wealth to the financial sector and the state – at everyone’s expense – has long been the domain of criticism from Austrian central banking schools. That is, we have long noted in these pages how financial repression and so-called easy money fueled vast wealth for Wall Street, while leaving the middle classes and low-income Americans behind. .
But you don’t have to trust Austrian critics to get a glimpse of the damage done by modern monetary policy.
In his new book, Driving Inequality: The Fed and America’s Future of Wealth, Karen Petrou examines in detail how the Fed’s policies over the past decade, particularly quantitative easing (QE) and ultra-low interest rates, have benefited the rich while leaving most ordinary people out.
Petrou is one of the most interesting and informative analysts examining the financial services industry. As the head of Federal Financial Analytics Inc., she has researched the banking industry for over thirty years, but in recent years she has focused more on exposing and examining the unhealthy and destructive effects of Fed policy.
Petrou has a different approach from the Austrians. She seems to have come to her conclusions by observing the trends and outcomes produced by the Fed’s policy, and then working backwards within a theoretical framework. The data seems to have prompted her to wonder why things have turned out so badly after more than a decade of âunconventionalâ Fed policies. When it comes to identifying the problem, she came to the right conclusions.
In any case, Petrou’s book is important because it is the work of a Wall Street insider who no longer swallows the Fed’s propaganda line that the Fed’s interest rate manipulation – like Powell says – “supports the economy through a wide range of people”.
Reality is something different. As Petrou notes, the âperverse effectâ of the Fed’s policy has been to create âacute inequalities and the resulting risks to growth and financial stabilityâ.
The mythical “wealth effect”
How did it happen?
Since the 2008 financial crisis and the Great Recession, the Federal Reserve has increasingly stepped up its efforts to increase liquidity and lower interest rates. This is done as part of an effort to support the financial sector. It is assumed that a robust financial sector will grease the wheels of the economy as a whole, and that the wealth of the financial sector will somehow trickle down to the rest of the economy via a ‘knockdown effect’. theoretical wealth.
Concretely, to do this, the Fed engages in quantitative easing, in which it buys government bonds and financial assets. These assets are placed in the Fed’s wallet in exchange for dollars, which then flow into the financial sector. This pushes up the prices of financial assets while lowering yields and interest rates. It also increases the money supply.
Since the onset of the Great Recession, the Fed has added more than $ 8 trillion in assets to its portfolio, meaning trillions of dollars have poured into banks and non-bank financial institutions.
As Petrou notes, the effect of this policy has been extremely beneficial to the wealthy. Because so much money has been pumped into the financial sector, stock prices have skyrocketed and the prices of other assets, especially real estate, have soared.
Petrou shows that if we look at the data, however, we see that this economic windfall hasn’t done much for those who don’t already have strong stock portfolios and real estate assets. That is, the bottom half of the United States in terms of wealth and income. In fact, from 2001 to 2016, the median wealth of Americans in the lowest 80 percent of earners fell.
According to Petrou’s analysis, as stock and house prices have climbed, the economic outlook for many ordinary people has remained stable, or worse. She notes that from 2010 to 2020, job growth was not impressive and that during this period, “the Fed’s intervention only led to the slowest economic recovery in modern memory “. She writes:
U.S. economic growth was lackluster at best before COVID, and the âfullâ employment the Fed used to boast about was actually less impressive when labor participation rates and other factors are carefully taken into account.
On the eve of the 2020 financial collapse, the United States’ economic recovery could only be described as âfragileâ and disappointing to anyone outside of the top income and wealth quintiles.
It cannot be shown that the surge in stock prices has benefited those who do not own a lot of stocks. In addition, since the Great Recession, house prices have been largely stable among low-cost homes. in the Central American markets. The benefits of inflation in housing asset prices are felt much more in expensive coastal cities, where the wealthy own more expensive real estate.
How ultra low interest rates punish ordinary savers
In addition to asset price inflation, there is the problem of the race for returns, fueled by ultra-low interest rates. This doesn’t just leave low and moderate income families behind as asset price inflation does. Ultra low interest rates in fact to punish ordinary and conservative savers who lack the wealth or sophistication to reap the rewards of chasing high risk returns in the markets.
Banks and hedge fund managers have access to many tools to take higher risk and seek out corners of the market where higher interest delivers better returns. So ultra-low interest rates still leave Wall Street with a variety of options. Most ordinary families do not have these options.
Ultra-low interest rates have fundamentally gutted the ability of everyone except the rich to establish themselves economically; instead, they lead investors to raise the prices of stocks and other assets to earn their returnâ¦ but average Americans own little, if at all, stocks or investment instruments. Instead, they save what they can in bank accounts. The latter’s rates have been so low for so long that these thrifty, cautious households have actually pulled out for every dollar saved. Pension funds are just as hard hit, which means not only that average Americans cannot save for the future, but also that the instruments they rely on for additional security are unlikely to meet their needs. .
Additionally, as banks and other lending institutions sought higher yields, they lost interest in lending to ordinary people:
Therefore [of QE], the Fed’s ultra-low rates led to the hunt for yield that propelled financial markets ever higher even as regulated financial institutions shifted their business models from taking deposits and granting loans to middle households to a bet on stocks and the provision of loans and other services to wealthy households, financial markets and giant corporations. The ultra-low rates did not trickle down to low, moderate and even middle income households.
This is not, however, due solely to the interest rate policy. Petrou also explains how banking regulations after the Great Recession further distanced banks from lending to small businesses and ordinary borrowers. Federal regulations have further fueled a strengthening of mega-banks, which are better able to meet regulatory standards. Community banks, on the other hand, which serve small markets and small borrowers, are increasingly disappearing. Consequently, wealth continues to be centralized on Wall Street.
Petrou presents all of this information using evidence from countless quantitative studies from a variety of sources, including the Bank for International Settlements and even some banks that are members of the Federal Reserve System. Hundreds of footnotes allow the reader to trace these reports back to their sources and see for themselves what happened: The Fed’s policies have done wonders for billionaires and money managers. hedge funds. The data suggests that others have clearly done less well.
Petrou’s book certainly has its flaws. The book’s monetary policy discussion doesn’t begin until Chapter 5, nearly sixty pages long. Before that, the reader must dwell on too long a discussion of the evils of inequality. Petrou’s discussion of digital currency seems out of place and his conclusions are not very convincing. And the last quarter of the book is a long list of regulations and recommended changes that are little more than tinkering with monetary policy. That is to say, this book is far too timid in calling for real restraint on the power of the Fed.
But as a resource for quantifying the results of the Fed’s unconventional monetary policy, this book is indeed valuable. There is a well-documented and well-detailed hundred-page core in this book that shows in a dozen different ways what should be considered undeniable at this point: The Fed is a force of impoverishment, economic stagnation and d ‘inequality.
* About the Author: Ryan McMaken is Editor-in-Chief at the Mises Institute. Send him your article submissions for the Betting Thread and Power and Market, but read the article guidelines first.
Source: This article was published by the MISES Institute