Confirmed: QE feeds Matthew Effect

Breaking Old News – QE really does feed Matthew effect!  Following bankers’ earlier observations we now have official mainstream confirmation that  “softer monetary policy increases inequality.” Not just in the US.  A fresh study by A.L. Anderson etal  provides “… new evidence on the distributional effects of monetary policy based on detailed administrative household-level data. The authors show that the gains from lower policy rates exhibit a steep income gradient, with the increases in income, wealth, and consumption modest at the bottom of the income distribution and highest at the top.”

And that’s just the unequal injuries of QE.  Still waiting to be counted are the additional iniquitous insults piled on by the plague.

There has been some  Branko Milanović  type  mainstream mutterings about wars and plagues being the only great levellers.  Presumably to make sure we got the message of total capitalist hopelessness. Alone In Poverty Forever.

But as M. van Bavel etal show , Milanović musings have to be filed under premature mainstream generalisations, based on failing to appropriately dis-aggreagte one’s aggregates – (so no news there either).

Best follow the money…

… (rather than the economists) and check out (banker) Karen Petrou’s previously posted publication below

or dig deeper into  INEQUALITY on GM’s portal page.


Karen Petrou’s  Engine of Inequality: The Fed and the Future of Wealth in America   This new book by Karen Petrou can be read as a superbly illuminating treatise on how the Matthew Effect has been working overdrive in the  QE forever epoch. “The Fed didn’t want to make us more unequal,” says Karen Petrou, “but it did after 2010. And the reason is simple: Inequality is powered by an engine. The richer you are, the richer you get. The poorer you are, the poorer you get. And the fuel of that engine is money. And I think when we think about economic inequality, and we leave out the policies that drive the money, then therefore monetary policy and therefore the Fed, we’re missing a really critical part of the inequality problem.”   

the author   –  Karen Petrou on twitter   –    Karen Petrou articles on muckrack

Dubbed by American Banker as the sharpest mind analyzing banking policy today maybe ever, KAREN PETROU is one of the most influential experts on financial policy and regulation in the world. She is cofounder and Managing Partner of Federal Financial Analytics, a consulting firm that provides analysis and advisory services on legislative, regulatory, and public-policy issues. Known for nonpartisan analysis, Petrou has testified before many U.S. government agencies. She is frequently interviewed for expert commentary and her work has been featured in the Financial Times, Wall Street Journal, American Banker, and Marketplace.  –  

The first book to reveal how the Federal Reserve holds the key to making us more economically equal, written by an author with unparalleled expertise in the real world of financial policy. Following the 2008 financial crisis, the Federal Reserve’s monetary policy placed much greater focus on stabilizing the market than on helping struggling Americans. As a result, the richest Americans got a lot richer while the middle class shrank and economic and wealth inequality skyrocketed. In Engine of Inequality, Karen Petrou offers pragmatic solutions for creating more inclusive monetary policy and equality-enhancing financial regulation as quickly and painlessly as possible. Karen Petrou is a leading financial-policy analyst and consultant with unrivaled knowledge of what drives the decisions of federal officials and how big banks respond to financial policy in the real world. Instead of proposing legislation that would never pass Congress, the author provides an insider’s look at politically plausible, high-impact financial policy fixes that will radically shift the equality balance. Offering an innovative, powerful, and highly practical solution for immediately turning around the enormous nationwide problem of economic inequality, this groundbreaking book: Presents practical ways America can and should tackle economic inequality with fast-acting results Provides revealing examples of exactly how bad economic inequality in America has become no matter how hard we all work Demonstrates that increasing inequality is disastrous for long-term economic growth, political action, and even personal happiness. Explains why your bank’s interest rates are still only a fraction of what they were even though the rich are getting richer than ever, faster than ever. Reveals the dangers of FinTech and BigTech companies taking over banking. Shows how Facebook wants to control even the dollars in your wallet. Discusses who shares the blame for our economic inequality, including the Fed, regulators, Congress, and even economists Engine of Inequality: The Fed and the Future of Wealth in America should be required reading for leaders, policymakers, regulators, media professionals, and all Americans wanting to ensure that the nation’s financial policy will be a force for promoting economic equality.            (source: Wiley blurb)

publisher’s info (inside flap) Economic inequality in America is a problem that is not going away. Even before the COVID-19 crisis wrought havoc on the economy, the disparity between the rich and the poor was at levels not seen since World War II. Moonshot proposals to curb inequality in America include progressive tax reform aimed at the one-percenters, mass cancellation of student loans, and an overhaul of public education. While these may all be formidable weapons to fight inequality, they have little chance of clearing the necessary political hurdles in Washington. Without bipartisan consensus, are we doomed to watch idly as the yawning gap between the rich and poor grows dangerously out of control? As one of the most insightful policy observers in the world, Karen Petrou argues we’re looking for solutions in all the wrong places. In Engine of Inequality, she persuasively takes dead aim at the Federal Reserve as a crucial but unrecognized source of economic inequality and offers meaningful policy proposals that don’t require an act of Congress. Since the 2008 financial crisis, inequality has been rapidly increasing in no small part because of policies enacted by the Federal Reserve. Monetary and regulatory policy may seem far afield from economic inequality … but like it or not, the Fed’s policies have a profound impact on the balance of equality. Petrou boldly suggests the Fed must pull its head out of the sand. She details the hard data showing how the Fed’s post-crisis policies have unintentionally exacerbated the problem: reliance on aggregate data like Gross Domestic Product (GDP) obscures the economic reality of American families, trickle-down programs that rescue financial markets only benefit the rich, ultra-low interest rates impede meaningful savings by the middle class and others. Engine of Inequality unveils several pragmatic actions that the Federal Reserve can and should take immediately to reverse its adverse influence on economic inequality and use its power to move the money into a force for shared prosperity.


publisher’s info  –  income inequality engine of inequality, federal reserve, economic inequality, wealth inequality


book sample – read chapter one here


reviews

critical praise back cover “Karen Petrou, one of the world’s deepest financial thinkers, puts her finger on the proximate cause of the pre- and post-Covid enormous increase in the stock market and associated growth in extreme U.S. wealth inequality. It’s the Federal Reserve’s ongoing No-Cost Lender of First Resort Policy. Her book is a tour de force―brilliant, fundamental, elucidating, and engaging. It’s also a sad story about well-meaning policy boomeranging badly on the middle class.” ―Laurence Kotlikoff, Professor of Economics at Boston University, President of Economic Security Planning, and a New York Times bestselling author “This book is highly critical of Fed policy and will receive a lot of attention, especially if Fed policy doesn’t work in the coming years.” Henry Kaufman, President, Henry Kaufman & Company “Petrou’s book uncovers a hidden engine of our skyrocketing inequality: financial policy. In accessible and engaging prose, Petrou takes us through the inner workings of monetary policy at the Fed and financial regulations, how they’ve made inequality worse, and how they could instead be retooled to take us to a more equitable future. A novel look at the problem of inequality and bold ideas to help resolve it. A must-read.” ―Emmanuel Saez, Director of the Center for Equitable Growth at the University of California at Berkeley reviews amazon Biblio   3/3 2021  5/5 stars   Inequality in the last decade  “If you want to go any deeper into understanding why the income inequality has accelerated in the past decade, Engine of Inequality by Karen Petrou is a good way to begin. The main topic of the book is the link between financial policy and unequal economy and how to break it. …”   more here

Jeff Lippincott    4/3/2021   3/5       “I didn’t like the title much. It makes it sound like there is just one engine. There are many more than one. And this problem basically permeates the entire book. What the author says is accurate certainly. But does it really cover the topic at hand in full? No. …”       more here
 

presentations and interviews

The Cato Institute  George Selgin interviews Karen Petrou


Inequality.org  1/3/2021   Financial Policy’s Hidden Role in Economic Inequality — and How to Fix It   A new book calls for the establishment of ‘Equality Banks’ and other monetary and regulatory changes to narrow our economic divide.    by Karen Petrou … “Post-crisis financial regulation hasn’t done equality any good. Banks are much safer due to lots of new rules, but these new rules cost them money and many responded by turning into wealth-management and investment-banking behemoths. The Fed’s models didn’t predict this, but banks follow the money, not the model. As private-sector firms backed by short-tempered investors, banks had little choice but to revise their business strategies to reflect the earnings reality of a new regulatory construct. And when they exited key sectors, unregulated nonbanks stepped in. This kept the economy’s lights on, but the lack of regulation put vulnerable households at greater risk and laid the groundwork for 2020’s crash. However, there are solutions readily at hand that would quickly make financial policy a force for equitable good. First, the Fed must understand that the way it judges employment, price stability, and prosperity relies on aggregates and averages that obscure the reality for most American families. Relying on different data may seem like a pedestrian solution, but bad data means bad policy with unintended consequences. The Fed doesn’t want to make America less equal, but it did so in part because it mistook the mean for the median. The reason that the Fed can’t quickly raise rates or reduce its huge portfolio underscores why it should: financial markets are now so dependent on the Fed — rather than economic fundamentals — that any monetary-policy change badly rattles the financial system. Forward guidance needs to alert financial markets to a gradual, measured shift to a more normal system in which the Federal Reserve supports the market instead of being the market. How to change financial regulation? Deregulation isn’t right — all that means is renewed risk. Instead, we need regulation that is both even-handed and equitable.” ….                           read whole article here       or here 


Interviews with Karen Petrou

marketplace.org      Did the Federal Reserve make economic inequality worse?   By David Brancaccio and Daniel Shin In the post-2008 financial crisis economy, the Federal Reserve has received plenty of criticism for its quantitative easing approach, cited as one factor behind widening economic inequality in the U.S. Previous central bank chairs, past and present, have defended their policies and said their main goals do not necessarily include inequality reduction. Karen Petrou, co-founder of Federal Financial Analytics, believes that the central bank not only contributed to the growing inequality among Americans, but also that it has the ability to reverse that inequality through targeted policies that stay within its mandates of maximum employment, price stability and long-term moderate interest rates. Petrou’s new book, “Engine of Inequality: The Fed and the Future of Wealth in America,” explores those ideas. “Marketplace Morning Report” host David Brancaccio spoke to Petrou about her new book and what the Fed can realistically do right now to reverse the momentum of inequality. Below is an edited transcript of their conversation. David Brancaccio: When I think of the shrinking middle class in America and widening inequality, I think of globalization, I think of the decline of unionization, I think about robots and artificial intelligence taking our jobs. You blame, in part, the Federal Reserve? Karen Petrou: I do. I know that the Fed didn’t want to make us more unequal, but it did after 2010. And the reason is simple: Inequality is powered by an engine. The richer you are, the richer you get. The poorer you are, the poorer you get. And the fuel of that engine is money. And I think when we think about economic inequality, and we leave out the policies that drive the money, then therefore monetary policy and therefore the Fed, we’re missing a really critical part of the inequality problem. And one that’s a lot easier to fix than robots or globalization, unionization, some of the really big, important issues you also mentioned. Brancaccio: Well, what happened after 2008, the last financial crisis? Interest rates came way down, superlow, stayed down. The other thing is, as part of that, the Fed bought up lots of generally safe assets like bonds and has this huge hoard of them. But low interest rates, I thought, that’s great, it keeps my credit card down, I can borrow for a car more easily. Petrou: You can and I can, but a lot of Americans are already deep in debt because one of the things that’s happened in recent years, despite the Fed’s mandate for “price stability,” is that the cost of being middle, even upper-middle, class, and lower- or moderate-income, has gone way up. So all but the top 10% of Americans already have more debt than assets. We don’t need more debt, we need more employment and economic growth. And we critically need savings. That’s the engine of wealth accumulation. And right now, if you put your money into your savings account, you lose money because rates are negative in real terms, and they have been pretty much ever since 2008. Saving is a losing game. Investing is a winner’s game, but most Americans aren’t in the stock market. The top 1% of Americans have over half of our stock. “You can’t lose investing. But you still lose a lot saving.” Brancaccio: I mean, that’s something that the book really tries to emphasize. It’s that, you know, the stock market is one thing, but what happens in the stock market doesn’t necessarily trickle down. We don’t say “trickle down” anymore, by the way. It is a euphemism. We call it the “wealth effect.” You see that as not working? Petrou: Oh, it’s working. The wealth effect is working great. If you’re in the top 1% or the top 10%, your wealth has skyrocketed. American wealth has grown faster than ever before since 2010. And our inequality, measured in terms of wealth, is not only wider than ever, but it grew faster than ever because the Fed not only powered up the markets with ultralow rates and its huge portfolio, it saved markets. Every time markets wobbled a little bit, the Fed stepped in. So you can’t lose investing. But you still lose a lot saving. That is, I think, both unequal and very risky, as we saw last March, when the markets blew up. Brancaccio: And the wider culture often overstates the percentage of Americans who have a direct stake in the stock market, but we also forget that so many people have a very important stake in vehicles for savings, even though — like you can’t get a passbook savings account at a bank essentially because those don’t pay anything. But still, when interest rates are low, that directly hurts a large segment of the population? Petrou: Absolutely. Many Americans, I’m sure many listeners, have 401(k)s. But those are a relatively small percentage of their assets compared to the importance of savings, and the 401(k) is a retirement plan. What about saving for a down payment? What about saving for a child’s education? The cost of health care and an unexpected expense? I mean, 40% of Americans can’t handle a tire blowout. And we saw that. Look at what happened to the economy last March. Even wealthier Americans have no savings and therefore no safety net. When the government shut down in 2018, over 60% of government workers couldn’t pay their mortgages or rent [because of] missing two paychecks, and they earn on average $85,000 a year. We need savings. “Rates are negative in real terms, and they have been pretty much ever since 2008. Saving is a losing game. Investing is a winner’s game, but most Americans aren’t in the stock market.” Brancaccio: I don’t mean to be deliberately obtuse, but let me just ask it this way. Let’s say I could sock away $1,000 in savings for an emergency, and interest rates were much higher, 4%? I mean, all right, over a year, what would I get, an extra $40? Does that really make a difference? Petrou: No. In the book, I have several examples of showing what happens if you save and how if you put, say, $2,000 a year away for 20 years, even at very low inflation rates now, you’d have much less money after 20 years than you had put away — in nominal terms, $2,000 a year. Versus investing the same amount of money, you’d have 17%, 20%, 30% return on those assets. If you look at the equations in the book, you can really see what happens to most Americans and why a very few people are getting very rich. Brancaccio: Let’s be really clear on that. In other words, I remember the example in the book, you put away $2,000 a year for something big in 20 years, maybe it’s an education or something. At these superlow interest rates, you end up — factoring in for inflation — with less money than you actually saved? Petrou: That’s right. And if current Fed policy powered robust economic growth and people got more jobs with better pay, that might not be an unreasonable trade-off. But it hasn’t worked out that way. After 2010, we had the weakest economic recovery since the Second World War. And middle-class wages in 2019 were the same in real terms as they were in 2001. You really have to look not at the aggregate, the averages or the nominal numbers, what you see in your savings account, but what the real numbers are, what the real savings, real income, real growth are, and those have been slow, weak and inequitable. Inequality and monetary policy Brancaccio: You know, the new treasury secretary who used to be our central banker, the head of the Fed, Janet Yellen, doesn’t think this is true. She doesn’t think that Fed policy has hurt inequality, she doesn’t see this kind of collateral damage. I mean, you do link to a speech that Janet Yellen made in 2017, and she does acknowledge that things have been skewed toward the top of the income distribution. But then, continuing with a quote, “These unwelcome developments unfortunately reflect structural changes that lie substantially beyond the reach of monetary policy,” which is what the Fed controls. In other words, that’s her Fed-speak for, “It’s not the Fed’s fault that income inequality widened like this.” Petrou: She does not want this to be the case. No one at the Fed wants it to be the case. But I hope my book shows that, unintentional though it was, it is in part the Fed’s fault because money is the fuel of economic inequality, the inequality engine. Every time the Fed steps into the market, the markets go up. The markets run by the Fed’s clock, and the people who profit from the markets are the wealthy. And one of the really hard things in the book we look at is that African Americans in this country are worse off now than they were before the civil rights era even began, and the sharpest decrease in African American income and wealth, especially wealth, happened after 2010. We really have to look at what happened then. No, globalization didn’t change, unionization — nothing changed as fast and as dramatically as monetary and regulatory policy after 2010. And economic inequality shows the impact of those changes. I don’t think that that’s arguable, the data are just too clear. Brancaccio: So if you’re right, that policy is a real problem here in widening the gap between rich and poor in destructive ways. Perhaps you think policy could be a remedy? Petrou: Oh, yes. My goal with this book, “Engine of Inequality,” was to try not only to show how it worked, but also how to put it into reverse. And one of the reasons financial policy is such an important cause of economic inequality is its real role as part of the solution. It’s an easier piece of the inequality problem to change because you don’t largely need Congress. You need the Fed to see its inadvertent impact and then to reverse it. That can happen, I think that should happen. I hope the book helps people see how to make it happen. Brancaccio: What are some possible remedies? I mean, conservatives listening to this will say something they’ve said for a long time, which was, let’s get those interest rates back up. And let’s have the Fed restore its balance sheet, get rid of some of the hoard of assets that it has had on hand for over a decade now. Petrou: I don’t think that’s just conservatives. Progressives, as well as populist conservatives and liberals, see that low interest rates, which are [the] proverbial remedy of theoretically liberal economic policy that’s supposed to help workers, hasn’t worked. I think this would be a liberal-conservative debate if liberals could show that ultralow interest rates generated sustainable income growth in real, inflation-adjusted, terms and improved the ability of lower-, moderate- and middle-income people to accumulate at least a little bit of wealth. And you can’t see that, there are no data to support that. Interest rates and job creation Brancaccio: Right. But if the push is to “normalize interest rates,” that means up, and immediately people are gonna think that’s gonna make it harder to create jobs. Petrou: Well, with interest rates going up, I don’t think we’ll see the binge of market debt. The high-flying equity markets are the result, in part — if you’re wealthy, if you’re an institutional investor, a life insurance company, a pension fund, what are you going to do? You didn’t put your money in a savings account. You put your money in the market, and everyone is doing what’s called “yield chasing.” And is that building factories, creating jobs? No, it’s creating high-risk markets and very high corporate salaries. But it’s not generating growth. Normalized interest rates, I think, would lead to a normal balance of capital investment as well as savings. And that’s where we’re going to get jobs. Brancaccio: But really, put this on the central bankers? I mean, they have this dual mandate, they talk about it all the time. There’s only two things they’re supposed to do well, which is make sure that inflation doesn’t go crazy — I mean worry about price stability — and also come up with policies that keep the labor market healthy, provide enough jobs. Two things. Petrou: No, the Fed talks about two things, but if you read the law, it has a three-pronged mandate. That law says that the Fed is responsible for maximum employment, as the Fed says, but if you read the law, that is supposed to mean productivity and growth, not just one blip on a particular number. And [Chair] Jay Powell just said that he doesn’t even think the numbers the Fed has been citing since 2010 are right. We need a better understanding of maximum employment, which is full employment. So that’s No. 1 in the Fed’s charter. It did not do that, and I hope it does. Price stability, again, if you read the law carefully, price stability means not just the Fed’s chosen measure. It means the ability of households to sustain their consumption, to support their lives without debt. And all but the top 10% have not been able to do that. American indebtedness, particularly for lower-income households, is way off the charts because of the cost. The cost of education is up 600% since 1980. Child care, health care, all those costs are sky-high. And then the third part of the Fed’s mandate, which I spend a lot of time on in the book, the statute says, “moderate interest rates.” The Fed has ignored that because its view is that if it gets maximum employment and price stability, that implies moderate interest rates. But we know now after a decade of ultralow interest rates, that that’s not true. We have a three-pronged mandate, and I think the Fed needs to go back and read it with more care. “Nothing changed as fast and as dramatically as monetary and regulatory policy after 2010. And economic inequality shows the impact of those changes.” Brancaccio: You know, you point out this third prong for the central bankers that interest rates should be moderate. And we should really think about the word “moderate.” It doesn’t mean interest rates too high. But it also doesn’t mean interest rates so low they’re near zero, right? Petrou: That’s right. Moderate, if you read the statute, means rates at which if I say I get a real return, rates at which banks are encouraged to lend, not just recycle the Fed’s big portfolio right back into the Fed. And it means rates that one can afford, whether it’s for a mortgage or a car loan. Not too low, not too high, except calibrated to support sustainable growth, not market speculation. What the Fed thinks Brancaccio: Karen, why don’t policymakers at the Fed see it the way that you do? I mean, they don’t wake up in the morning hellbent on widening economic inequality in America. Is it something about the data they get? Petrou: Of course. You’re right. No, I know the members of the board, several of them very well. And I don’t think any one of them has anything but the best intentions. This is the result, I think, of bad data; data based on America the way it used to be. I am the same age about as most of the members of the Fed. We went to school at a lot of the same places at the same time. And then there was a robust middle class. When I graduated from college in 1975, each of us earned a share of gross domestic product proportionate to our labors. America had rich people and poor people, but there was an equal return for how hard we worked, no matter how rich or poor we were. In 2019, the last year for those data, the top 1% got over 300% of its share, compared to what it would have received equitably in 1975. I think the Fed is looking at America as it was and trying the policies that used to work. But inequality is so pervasive and so wide now, in part because of the inadvertent effect of its policies, that those policies do a great deal of damage. We need to fix and follow the money and see what’s happened, not the old models. Reduced bank lending at low interest rates Brancaccio: Part of the idea here with these superlow interest rates is making borrowing easier so that a person with a small business could get a loan. Or a household that needed something crucial, like a way to pay for some health care, could get a loan for that. That hasn’t tended to happen? Petrou: No, it hasn’t. And the reason is the combination of monetary and regulatory policy. My book is about the financial policy impact of the post-2010 rules and standards, because they work together. And banks have come under a lot of high, costly capital requirements since 2010. And they’ve made banks much, much safer, which was a good thing in March of 2010, but they have made it unprofitable. Banks lose money when they make loans at these low interest rates. Their cost of capital is actually higher than the interest rate they can get on making a loan. So banks actually have significantly reduced lending, particularly to consumers. And there are data in the book that demonstrate this very, very clearly. Now, sure, there’s a vibrant mortgage market, but that’s through the government. Banks act as originators, but they’re not lenders. The banks are not lending to grow the economy. They can’t because they’d lose money, and they’re still in business to make a profit. On deregulation Brancaccio: So what should we do? Deregulate? I mean, this is the kind of philosophy that led us to the last financial collapse. Petrou: Oh no, my book is very strongly against deregulation. We had the 2008 crisis and we saw in 2010 the value of rules. The banks stood firm, it was the nonbanks that collapsed because they didn’t have the capital resources. That’s why we need a combined change in monetary policy to bring rates, interest rates, up to moderate rates, so that banks can make money making loans under tough rules. We do need to change, though, some of the rules. There are inadvertent rules, particularly the cost of lending to lower-income people. We’ve got this thing built into the capital requirements that assumes that if somebody is poor, they’re a bad credit. That’s just not true. So that’s not deregulation, it’s revised, equity-focused regulation. And I think we can and should make those changes very fast. That won’t weaken the banking system — especially if we expand those rules to some of the key nonbanks — but it will increase credit and do so very quickly. Brancaccio: OK, don’t lose that last point, too, right? A lot of this financial activity, a lot of this credit goes out through something that doesn’t identify itself as a bank. And so this burgeoning part of financial services has to be reckoned with if you’re changing regulation. Petrou: I think that’s exactly right. We talk a lot about democratizing banking, and that led to the subprime crisis. Now, we talk a lot about financial inclusion. And my book is all about real sustainable financial inclusion. But when you get financial products from Facebook, I’m not so sure that that’s financial inclusion without some real fangs built into it. We need to be careful.


barrons.com/    How the Fed Found Itself at the Heart of America’s Inequality Crisis  By Matt Peterson  March 3, 2021 

Karen Petrou has for decades played the quiet role of consultant and adviser to banks, central banks, and large investors, helping them slash through the confusion of constantly evolving monetary and regulatory policy. It’s a job that prioritizes dispassionate analysis over advocacy. Today, that changes, with the publication of her new book, Engine of Inequality: The Fed and the Future of Wealth in America. 

“This book is taking that sword and beating it into a plowshare,” Petrou told me. The book, Petrou’s first, charges that the Federal Reserve is at the heart of an inequality crisis that has hollowed out the middle class. She believes the Fed has misunderstood and misdiagnosed the country’s economic malaise. Its interventions to stave off calamity have, ironically, made America more prone to financial crises like 2008 and the one that was narrowly averted in 2020. Low interest rates and other elements of the Fed’s unconventional monetary policy have failed to spur middle-class growth, even as markets roared, leaving the country more unequal than ever.

Petrou believes the problems start with analytical errors. “It may seem geeky to talk about statistical mistakes, but bad data make bad policy,” she says. The Fed itself seems to agree at times. Last week, Lael Brainard, a Fed governor who was on the Biden administration’s shortlist for Treasury secretary, gave a speech in which she acknowledged that the Fed had relied too much on a single measure of unemployment that masked major problems in the labor market. That kind of admission is exactly what Petrou wants to see, though she’d rather it came a decade earlier.

I called Petrou last week to walk through her arguments, and reached out to the Fed for comment. A spokeswoman pointed to a recent press conference by Fed Chair Jay Powell at which he discussed the Fed’s role in addressing inequality. “We want an economy where everybody can take part,” he said.

This transcript of my conversation with Petrou has been condensed and edited for clarity.

Barron’s: You write that the Federal Reserve is aiming policy at a middle class that no longer exists and that therefore policy is fizzling. What has happened to the middle class?

Karen Petrou: The middle class is hollowed out. The idea of what being in that middle means—which is financial comfort, family security, and a better life for one’s children—that’s gone. All but the top 10% in this country have more debt than they have assets. We have a scenario in this country, where, for example, in 2018, when the Fed thought the economy was in a “good place,” a quarter of people in the middle class skipped medical treatments they couldn’t afford. That’s just not what middle class was supposed to mean.

Why does that matter for monetary policy?

Monetary policy, both conventional and the post-2008 unconventional policy, is premised on two things that don’t exist anymore: one, banks as the sole driver of how money moves through the private sector and, two, a middle class that when interest rates drop takes out more debt to buy something like a car or a house that then fuels employment and promotes economic growth. Instead, leaving the question of what the banks do aside for the moment, when the middle class is already way over its head in debt, and can’t afford a new car or is not eligible for mortgage refinancing because their credit scores are too low, those traditional signals of that theoretically resilient middle where there’s a strong “marginal propensity to consume” don’t work.

Why hasn’t the Fed come to grips with this reality?

It’s not that the Fed wants to make America less equal. It does genuinely want to make economic growth resilient and shared. But it hasn’t because all of its decision data points are averages or aggregates. Often they’re based on measures that once might have told us, for example, about price stability, but now don’t reflect the real economy for the majority of Americans. A good example is unemployment. Jay Powell and now Lael Brainard have made speeches saying we didn’t measure unemployment right. That nominal record-low unemployment that made us feel so good? Actually unemployment was higher than we thought.

So when they talked about maximum employment after 2010, all through that “good place” up until the pandemic hit, they were looking at a very misleading measurement of employment. The same thing is true for debt. Debt levels are affordable and sustainable when you look at it on an average. When you break it down and you look at most American households, you realize that we’re living hand to mouth.

The most compelling proof of that is the fact that in 2018—again, in the “good place”—when the federal government briefly shut down, federal employees who on average make $85,000-plus a year, almost two-thirds of them couldn’t pay their rent or the mortgage after missing a paycheck. People live on the edge. And the Fed’s data do not reflect that.

You mentioned Lael Brainard’s speech about unemployment. She said more or less that the headline unemployment figure misses a lot of misery. Do you agree with her prescription for the problem, which is to leave accommodative monetary policy in place for a long time?

I would agree with that, if it had worked. If you look at the Fed’s ultra-accommodative policy, starting from 2010, when the worst of the great financial crisis wore off, to March of 2020, we had the weakest economic recovery since the Second World War. We had exactly the disproportionate employment she points to. The amount of debt most Americans took out rose still higher. Financial markets zoomed. But none of that turned into capital investment or growth. Economic inequality, even with unprecedented amounts of accommodative policy, stymied the Fed. More of it is going to make inequality still worse.

Why are low interest rates not stimulating growth for the middle class?

Rates have been essentially below zero in real terms for most of the last decade. People can’t save. Companies will take on tremendous amounts of debt, because it’s cheap. But because the economy is so weak, they don’t turn the money in that debt into plants and equipment. They’ve turned it instead into capital distributions, dividends, and share buybacks. The Fed’s huge portfolio has driven markets up to very high levels because it’s taken the safe assets out of the system. And it’s also put a safety net under the markets.

The taper tantrum really wasn’t much. But it spooked the Fed when they stepped in. In 2018, they tinkered with rates just a little bit. The market said, “Hey, you’re taking the punch bowl away.” And the Fed said, “Oh, never mind. Here’s some more.”

Look how fragile the financial system was in March of 2020. Of course, the Fed could not have foreseen a pandemic, but the banking system was resilient. The rest of it was incredibly precarious.

And to be clear, you blame 10 years of Fed policy for some of that precarity?

It’s a combination of monetary and regulatory policy. I do not call for deregulation. I think the stability of the banking system wrought by high-capital rules that banks complained bitterly about made banks the bulwark of the financial system. But they aren’t lending a lot to households or startup small businesses, the real engines of growth. They’re starved for credit because banks cannot make money at ultra-low rates when you take their cost of capital into account, even when they’re not paying depositors for anything. We have increasing numbers of banking deserts because the banking system is turning into a business basically focused on trading and wealth management because that’s profitable. That and putting trillions of excess reserves right back at the Fed.

You don’t believe the Fed should simply have done nothing, particularly in 2008, right?

No. You have to differentiate between crisis intervention and then 12 more years. If the economy was in such a good place, why did we need such incredible accommodative policy? That’s the heart of the contradiction of what the Fed said versus what it did from 2010 to 2020.

What kind of policies would you like to see change?

One of the major mistakes the Fed made was viewing regulatory and monetary policy as silos. In the Federal Reserve, they are different parts of the building. They are different people. The two sides barely talk, and the board thinks about them very differently, but they’re actually tremendously intertwined because, for example, when you have rules that raise the cost of bank lending at ultra-low interest rates, then banks will not lend and non-banks will step in. That changes the financial system, which then changes its risks.

Monetary policy fixes need to first include better data to understand America as it is, not the way it was when a lot of the folks at the Fed and I went to graduate school. I think the Fed has to understand how the mechanics of the financial system—marginal propensity to consume, borrowing costs, and how that feeds into purchasing power—have all become really different.

The Fed is beginning to do that. But it’s got a long way to go because the next thing it has to do is to set policy with an eye toward that distributional reality, not just write a lot of papers about it. The Fed has to recognize that monetary policy has an impact on equality. It’s not good enough to just say, whoops, over to fiscal policy. How much people save, how much companies invest—economic inequality is about money, and nothing drives money more directly than the policy set by the Federal Reserve.

Comments

Edward Troup

Its a pretty simple concept. It takes money to make money. During the crisis, while the lower classes were just trying to survive, the middle class was playing it safe and maintaining their place, the upper classes were investing like crazy because they had the “spare” money. With low interest rates, companies were borrowing for dividends and buy backs, and the upper classes were getting great returns. The most the middle class got was good returns on their IRAs and 401Ks, and houses if they’d bought one early on. The upper classes also have the accountants to make sure they pay the lowest possible tax rates; the US tax system is full of holes…its a scandal.

Paul O’Leary Wow. I cannot tell you how long I have been waiting to read such an article. 

John Reilly The Fed is quite aware that the resulting asset inflation from endless “policy accomodation” primarily benefits those whose wealth is based on financial assets. That is why past and current chairpersons have said there has to be concomitant fiscal policy. It is the absence of the fiscal component that entrenches inequality. Tax financial wealth like real property or income or sales and the inequality is mitigated. A job for Congress…not the Fed.

Douglas Rife

The Fed’s ultra-accommodative policy, starting from 2010, was due to fiscal austerity. Ben Bernanke famously pointed to “fiscal drag” to justify this policy. The Obama stimulus package was too small, mostly because it was not passed using reconciliation and needed to accommodate GOP opposition to a larger package in the Senate. Secondly and crucially fiscal austerity became the rule after the GOP took control of the House in 2010. And there was also fiscal austerity in many of the states during this period of slow recovery from the recession. Once the Fed reached zero on the federal funds rate, fiscal stimulus became necessary for a strong sustainable recovery. But instead of stimulus we got fiscal austerity because of a wrongheaded obsession over the national debt. 

Mike Staples The Fed can remove a punch bowl, but not the water dish. The author offers good analysis, but no solutions. Is that because we are beyond repair and all that can be given are pre-mortems ?

Richard Schultz Who gets to pick the board? The rich.

Bard Diggins The Fed needs to focus on stopping climate change and racism too.


INEQUALITY – articles updates  10/2021


voxeu.org   12/10/2021  Redistributive effects of a monetary easing across generations: It’s not only what you own, but when you own – Marcin Bielecki, Michał Brzoza-Brzezina, Marcin Kolasa 

By boosting labor incomes and asset prices, a monetary easing is often believed to benefit the vast majority of households. This column argues that this intuition is misleading, because the effect of asset price changes for households depends not just on asset holdings, but on their maturity structure, which is largely driven by life-cycle motives. A typical monetary policy easing redistributes welfare from older to younger generations. Moreover, the resulting asset price appreciation is harmful for households that accumulate housing and save for retirement. 


https://voxeu.org/ 18/8/2021  Monetary policy and inequality  Ethan Ilzetzki

By most measures, income inequality has increased in the UK in the past several decades. The July 2021 CfM survey asked the members of its UK panel to evaluate the impact of central banks on inequality and whether the Bank of England should consider income and wealth distribution in its monetary policy decisions. The majority the panel thinks monetary policy has only a small impact on wealth and income inequality. A larger majority of nearly 90% of the panel believes that inequality should play a minimal role or no role in the Bank of England’s monetary policy decisions.


omfif. org  19/8/2021   Beware rolling back fiscal and monetary stimulus  by Urjit Patel 

Beware rolling back fiscal and monetary stimulus


bis.org  pdf    29/6/2021   The distributional footprint of monetary policy     Claudio Borio 

The long-term rise in economic inequality since the 1980s is largely due to structural factors, well outside the reach of monetary policy, and is best addressed by fiscal and structural policies.  Monetary policy can most effectively contribute to a more equitable society by fulfilling its mandate, which addresses two key factors causing inequality at shorter horizons. This requires keeping inflation low and limiting the incidence and duration of macroeconomic and financial instability, which disproportionately hurt the poor.  Central banks can also help mitigate economic inequality wearing their “non-monetary hats”, notably as prudential

authorities, promoters of financial development and inclusion, and guardians of payment systems.


Rehab Anyone? Ann Pettifor on going cold turkey as Lords poke into QE


Wie die Welt QE-süchtig wurde. Ann Pettifor zur Illusion des marktkonformen Entzugs.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s