It was a powerful column, appearing last month in The Washington Post and ProPublica, an online news site that had participated in its preparation, and it wanted a rejoinder. Allan Sloan is the dean of American financial columnists; Cezary Podkul, a former investigative reporter for The Wall Street Journal now working on special projects of his own.
The Federal Reserve Board’s “quantitative easing” policies since 2009 had helped, stabilized the economy, promoted employment, kept home prices rising, and supported the stock market, wrote the pair. But the Fed’s bond-buying spree otherwise had done little to better the lives of those who possessed only income rather that wealth.
Moreover, because no matter how rich you are, you can only spend so much on housing, share prices since 2009 have steadily grown faster than had home equity – the value of all homes less their debt. A total market index, the Wilshire 5000, gained $22.4 trillion in value since the Fed’s most recent intervention, in response to the outbreak of the Covid-19 pandemic. In contrast, the nation’s total home equity rose only $1.3 trillion in the same period.
Since 89 percent of all stocks and mutual funds are owned by the top 10 percent of the wealth distribution, and 53 percent by the top one percent, the well-to-do and rich have done much better than everyone else, thanks to Fed policies. In contrast, for those nearing retirement in the bottom half of the nation’s income distribution, Social Security benefits represent something like 60 percent of net worth.
Spokespersons at the Fed, the Treasury Department, or the White House declined to discuss with the authors their conclusions about the impact of soaring stock prices on inequality. So they looked for discussion by policy makers involved – Fed chair Jerome Powell, former chairs Janet Yellen, Ben Bernanke – and didn’t find much. Bernanke had argued that whatever effects monetary policy had on inequality probably would be small compared to the ongoing effects of technology and globalization; Yellen defended low interest rates. Older savers were suffering, she acknowledged, but they had children and grandchildren.
As it happens, Agustín Carstens, General Manager of the Bank for International Settlements, last week tackled the problem head-on. He spoke at Markus Academy, an online symposium open to all comers, organized by Princeton University economist Markus Brunnermeier.
If the Federal Reserve System is hard to understand, the BIS, headquartered in Basel, Switzerland, is even harder to explain. A lending conduit for central banks around the world, the BIS was established, in 1930, by the League of Nations, to coordinate reparations payments mandated in the aftermath of World War I. It proved valuable enough as a light-touch coordinator of the global banking system to have been reinforced after 1945, despite having been pressed into service by the Nazis during the Second World War.
In a speech, Carstens laid out the logic of quantitative easing in the language of central banking. These days its task was generally considered to be two-fold: limiting business-cycle fluctuations and delivering low and stable inflation. It was widely recognized that recessions and high inflation damaged the interests of the poor and middle classes more than those of the well-to-do and the rich.
But a little-noted part of central bankers’ mission had evolved historically, he noted: managing financial stability, and restoring it when lost. Lost it had been, at least for a time, in the Great Financial Crisis of 2008. Central banks have done all they could since to restore it, he said.
Two factors in the present day especially complicate the task: inflation was low, and less responsive to policy than in the past; and financial factors were more volatile than before.
Technical change, institutional evolution, and globalization have been the primary forces driving the inequality that has been surging for decades. There was little that monetary policy could do to put on the brakes. That was a job for public policy, for fiscal policy in particular. “Monetary policy can do a lot to stabilize the economy, but it cannot do it alone.”
[G]overnment intervention to help repair balance sheets is critical to resolve the crisis and set the basis for a healthy recovery. However, in the process, central banks may be criticized for supporting Wall Street at the expense of Main Street. But this is a false dichotomy, as central banks target broader financial conditions as a channel to limit the impact of the crisis for the benefit of the entire economy.
Or, as Jason Furman put it, in plain language, more simply than Carstens, “I don’t want to have a lower stock market and higher unemployment.” The former chair of President Obama’s Council of Economic Advisers, now a Harvard professor, was the one authority willing to discuss trade-offs of the present situation with Sloan and Podkul.
To their credit, they gave Furman the last word.