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Blaming the Fed

You really don’t want to trash the Fed’s efforts without seriously doing your homework.

I’ve received some angry mail over a recent New York Times column by William D. Cohan attacking Janet Yellen, the chairwoman of the Federal Reserve Board, for supposedly feeding income inequality through quantitative easing. Mr. Cohan and my correspondents take this connection between easy money and inequality as an established fact, and accuse anyone who supports the Fed’s policy, while also decrying inequality, as a hypocrite, if not a lackey of Wall Street.

All this presumes, however, that Mr. Cohan knows whereof he speaks. Actually, his biggest complaint about easy money is mostly a red herring, and the overall story about Q.E. and inequality is not at all clear.

Let’s start with the complaint that forms the heart of many attacks on Q.E.: the harm done to people trying to live off the interest income from their savings. There’s no question that such people exist, and that in general low interest rates on deposits hurt people who don’t own other financial assets. But how big a story is this?

Let’s turn to the Survey of Consumer Finances, which has information on dividend and interest income by wealth class. The data shows that the bottom three-quarters of the wealth distribution basically has no investment income. The people in the 75-90 range do have some, but even in 2007, when interest rates were relatively high, it represented only 1.9 percent of their total income. By 2010, when rates were much lower, this was down to 1.6 percent; maybe it fell a bit more after Q.E., although Q.E. didn’t have much impact on deposit rates. The point, however, is that the overall impact on middle-income Americans was, necessarily, small. You can’t lose a lot of interest income if there wasn’t much to begin with.

There’s a somewhat different issue involving pensions. As the Bank of England pointed out in a study that a lot of Fed-haters have cited – but fewer, I suspect, have actually read – easy money has offsetting effects on pension funds: It raises the value of their assets, but reduces the rate of return going forward. These effects are roughly a wash if a pension scheme is fully funded, but hurt if it’s underfunded, which many are. So the Bank of England has concluded that easy money has somewhat hurt pensions – but also suggests that the effect is modest.

So where does the impression that Q.E. has involved a massive redistribution to the rich come from? A lot of it, I suspect, comes from the fact that equity prices have surged since 2010, while housing has not – and since middle-class families have a lot of their wealth tied up in their homes, this seems highly unequalizing.

It’s not at all obvious why easy money would have left housing behind. In fact, one of the dirty little secrets of monetary policy is that it normally works through housing, with little direct impact on business investment. So why was this time different? Surely the answer is that housing had an immense bubble in the mid-2000s, so it wasn’t going to come roaring back.

Meanwhile, stocks took a huge beating in 2008-9, but this was the result of financial disruption and panic, and stocks would probably have made a strong comeback even without Q.E.

Meanwhile, for most people neither interest rates nor asset prices are a key to their financial health – instead, it’s all about wages. And new research just posted online by the Center for Economic Policy Research finds that “the empirical evidence points toward monetary policy actions affecting inequality in the direction opposite to the one suggested by [former Representative] Ron Paul and the Austrian economists.”

Which brings me back to the reason most of us favor Q.E. No, Ms. Yellen and I aren’t secretly on the Goldman Sachs payroll, nor do I (or, I suspect, Ms. Yellen) believe that unconventional monetary policy can produce miracles. The main response to a depressed economy should have been fiscal, and the case for a large infrastructure program remains overwhelming.

But given the political realities, that’s not going to happen. The Fed is the only game in town. And you really don’t want to trash the Fed’s efforts without seriously doing your homework.