Left-wing low interest rate fantasy worsens inequality



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Unlike many on the American left, I have always been skeptical that ultra-low interest rates make it easier for the poor. Keeping rates too low for too long encourages speculation and debt bubbles. When they do erupt, they always hurt low-income people the most, as we saw during the 2008 financial crisis.

And yet, for years progressives have argued that loose monetary policy and low interest rates are necessary to promote employment, especially at the lower end of the socio-economic ladder.

This is not the case. While the easy money may have helped put some pressure on wages in low-end service jobs, unemployment has continued to fall in recent years even as the Federal Reserve has started to raise rates. from ultra low to still low levels.

During this time, university research has shown that the tendency of low rates to fuel market bubbles is one of the main reasons for inequality, as they enrich the wealthy with assets, without fueling consumption and demand. In the United States, the richest 10 percent of the population owns 84 percent of the shares. There are only a limited number of houses, cars and jeans that these people can buy.

Most people live off their paychecks. And despite a slight increase in wages over the past six months, inflation-adjusted earnings are still below where they were in 2019, says Karen petrou, Managing Partner of Federal Financial Analytics.

“This is Kool-Aid: that ultra low rates promote employment,” she said. “But they don’t.” Most people work to make money, and while central bankers can create asset inflation, they cannot create good, middle-class jobs. Only companies, helped by the right incentive policies, can do this. Wall Street is not Main Street.

Still, the fantasy of low rates creating real growth somehow dies hard. Evidenced by the new gradual push to get rid of Fed Chairman Jay Powell, who last week expressed concerns that inflation is more persistent than previously thought. This could, of course, indicate the need for a faster reduction in central bank bond purchases and / or faster interest rate hikes.

Financial markets never want to hear that, of course. But neither does the political left. Elizabeth Warren, the Massachusetts senator, called Powell a “dangerous man” for his efforts to roll back some financial regulations after the 2008 crisis. Another Democrat, Senate Banking Committee Chairman Sherrod Brown, pointed out to rightly the very uneven nature of the recovery, but also criticized Powell for saying the full employment test had been “nearly met”, and said “the Fed cannot back down every time workers get a whole little bit of power to demand higher wages ”.

Graph showing the real rate of return.  Effective Federal Funds Rate - Inflation, Percent 2010-20

On the one hand, I am sensitive to this feeling. I remember interviewing a labor activist and Fed adviser once who complained that central bankers always pull the punch bowl just as ordinary people arrive at the party. Fair enough. With stock prices still near record highs and US home prices rising nearly 20% a year, it’s no wonder small investors are in desperate need of their piece of the pie. Income growth won’t buy you a house.

And yet the risk is greatest just as the punch bowl is about to be pulled. I am concerned about the rise in business speculation on apps like Robinhood. I’m also concerned that investors with less liquid assets are the ones taking some of the biggest risks. Consider a recent Harris poll showing that 15% of Latin Americans and 25% of African Americans report purchasing non-fungible tokens, compared to just 8% of white Americans.

It sounds too much like the phenomenon of low-income homeowners being sold off risky mortgages as 2008 approaches. Yet who can blame people for wanting a sip of the oomph when savings rates are zero and inflation is 5%?

The real problem here is that it’s too late to normalize monetary policy and create a more balanced economy that’s not just about riding asset bubbles. The perversions of our system were underscored last week by trade scandals that forced two Fed governors to resign.

But just cleaning up the ethics policy of the Fed or making sure we don’t loosen banking regulations (two laudable goals) isn’t going to get the US economy where it needs to be. We all need to give up the idea that low rates alone will create good jobs and income growth. We should accelerate the deceleration and move slowly but surely in the normalization of monetary policy.

Many will oppose this, especially as we enter what could be a long, cold winter in which rising fuel prices will hit low-income people hard. Yet, as Petrou points out, many of them are already paying double-digit credit card rates. A slight hike in the federal funds rate will not be a critical factor, she says, especially since in the United States these rates are passed on primarily to consumers through real estate refinancing, which is mostly done by those who have high credit scores.

Meanwhile, a low but positive real interest rate would allow small savers to start building up a nest egg. This is a laudable goal, whatever your policy.

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