Courtesy of Todd Phillips*
This morning, the Federal Reserve announced it would begin open-ended quantitative easing, offering to buy “Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy.” This expands on its announcement last week that it’d buy up to $700 billion worth of the assets. Although QE is necessary in times of crisis to ensure that the financial system continues providing services to the non-financial economy, it has the side effect of increasing wealth inequality.
When the Fed commits to QE (or, presumably bonds under the new Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility announced today), the Federal Reserve Bank of New York’s Open Market Trading Desk purchases assets from Primary Dealers, 24 of the largest Wall Street firms including Goldman Sachs, Bank of America, and J.P. Morgan. This has two effects: Primary Dealers have additional cash and the secondary market price for Treasuries and agency securities increases due to higher demand.
Although these effects are necessary in times of crisis to ensure the “plumbing” of the financial system operates smoothly, the beneficiaries of the Fed’s QE are the “haves,” with the “have nots” only getting anything that “trickles down” to them. The Primary Dealers increase their profits by using this additional cash to lend or make markets, and the holders of Treasuries and agency securities have higher asset values, increasing their wealth. If you don’t own Treasuries or agency securities when the Fed begins QE, you don’t benefit. The only hope for the 45% of Americans who own no securities at all is that QE beneficiaries invest in jobs.
None of this is to say that the Fed shouldn’t do large-scale asset purchases when necessary. Without QE in the aftermath of the 2008 Financial Crisis, the “have nots” and many of the “haves” likely would have been much worse off, facing higher unemployment and lower, slower growth. Still, after the economy stabilized following the crisis, the wealthy lent to corporations, which used this borrowed money to buy back their stock and increase their share prices, further enriching the 10% of households who own 84% of the stocks. Not all of this can be blamed on QE and other monetary policy tools, but as David Wessel of Brookings summarized in 2015, “the real [non-financial] economy has done worse than the Fed had hoped and asset prices have done better than the Fed had expected.”
The responsibility of ensuring the Fed’s QE doesn’t result in greater wealth inequality falls on the elected branches of government to provide adequate fiscal policy. Following the Financial Crisis, not enough was done to support workers, instead allowing extreme wealth to concentrate at the top and the middle class to be squeezed.
Congress and the President must act decisively now. As the House, Senate, and President debate a stimulus package, they should enact policies that would provide significant benefits to low- and moderate-income families and would allow the wealth to “trickle up” through the system to work in tandem with the Fed’s “trickle down” efforts. For example, the largest share of any stimulus payments should go to those with the lowest incomes. Any stimulus should also shore up state unemployment insurance programs, boost SNAP benefits and repeal recent efforts to limit SNAP eligibility, and increase funding for and the reach of Medicaid health insurance. To the extent that specific industries require bailouts to rescue the broader economy, Congress should place restrictions on those funds ensuring that employees are not let go, prohibit management-enriching bonuses and manipulative stock buybacks, and even consider wiping out shareholders’ equity. All these actions, and more, would work to reduce wealth inequality at a time when it would otherwise be rising.
All in all, the Federal Reserve is right to act quickly and decisively with quantitative easing; the economy and all members of the public—from the richest to the poorest—would be worse without it. However, elected officials must enact legislation to counteract any wealth inequality the Fed’s efforts create.
*Todd Phillips is a government lawyer in Washington, DC. This post expresses the author’s personal views alone.