Engine of Inequality

Chapter 6How Monetary Policy Made Most of Us Poorer

The degree of inequality we see today is primarily the result of deep structural changes in our economy that have taken place over many years, including globalization, technological progress, demographic trends, and institutional change in the labor market and elsewhere.… [T]he effects of monetary policy on inequality are almost certainly modest and transient.

– Ben Bernanke*

The Fed may feel all of this [its COVID rescue package] is essential to protect the financial system's plumbing and reduce systemic risk, but make no mistake that the Fed is protecting Wall Street first. The goal seems to be to lift asset prices … and hope that the wealth effect filters down to the rest of the economy.

– Wall Street Journal Editorial Board, 4/9/20†

What is this wealth effect and why might the Fed think it's good for all of us even though arch-capitalists like the Wall Street Journal's editorial board fervently disagree? Before the 2008 crisis and – despite that hard lesson – again in the run-up to the 2020 economic collapse, central bankers saw themselves as financial-market fixer-uppers, convinced that securing lucrative stock-and-bond trading would so profit financiers that wealth would trickle down to the rest of us. Economists call this the “wealth effect” and the Fed made sure that the wealthy indeed have happily felt the beneficial effect of its policies ever since Alan Greenspan adopted the wealth effect as a mantra in the ...