We Wanted Safer Banks. We Got More Inequality.
How regulations after the financial crisis, along with a heavy-handed Fed, have hurt the middle class.
bloomberg.com
excerpt...
JN: If you were in charge, how would you solve this?
KP: I have two ideas, and they are both hard. On monetary policy, I really think the Fed needs to step back. It has been essentially running the market, and allocating credit, since 2008. And they don’t mean to be. They really don’t. But they are.
JN: What does it mean to step back?
KP: I think it would mean to taper their portfolio far more quickly than they are. If the economy is in a real recovery, why does the Fed still need to hold $4.5 trillion of the funds that should be out working in the economy and keep interest rates below zero in real terms?
JN: How would it help income inequality?
KP: It would normalize markets. People would hold a lot more money in lower-risk assets as opposed to stock equities, which would start to generate more productive economic activity over time instead of just fueling more speculative betting.
JN: And your second idea?
KP: The Fed needs to let interest rates normalize. Right now, what the Fed calls the neutral rate — the rate that drives their thinking — is about 2 percent. The previous neutral rate had been 5 percent. Think about that on an inflation-adjusted return. Back in the day when Treasury bills were 5 percent or higher, if I had my savings in that, I could make money in low-risk assets. If you have monetary policy where the rate is 2, that combined with the 2 percent inflation, and you will have a permanently impoverished middle class. My main call in my book is that the Fed needs to think about that.
JN: Anything else?
KP: There is one other thing. When the Fed looks at their data, they think everything is great. Unemployment is low, profits are up, and so on. But the median net worth today is $97,000. In 2004, it was $102,000 — which is actually $140,000 in purchasing power today. Look at the difference! I would argue for an inclusive monetary policy that factors in the real world of higher income people not buying stuff, lower income people with huge debt burden, no middle class, and so on. And with 60 percent of American financial assets outside the banking system, a monetary policy system predicated on banks being the means through which the economy is stimulated, well, it just doesn’t work anymore. So that is what I think. |
