The Two Main Channels Through Which The Fed Causes Wealth Inequality

The Fed likes to do things in a cute way, calling the ways in which they affect things “channels”.  Too cute by half I would say, much like the SCOTUS with its thresholds and tests, but that is a discussion for another day.  It is now indisputable in my opinion that the Fed is one of the main causes of the much discussed wealth inequality plaguing the US.  Recently I saw an article about how the top 100 CEOs have as much in retirement savings as something like 50 million regular American households.  Pretty horrifying.

The main reasons this is happening are twofold.  First there is the simple fact that QE has caused nearly all inflation to manifest in asset prices.  A small and well to do segment of the population owns most of these assets, like stocks, so they reap the benefits.  The Fed justifies this to itself by claiming the “wealth effect channel”.  The idea is the wealthy, made even wealthier by QE, will spend more of their windfall profits on stuff made by ordinary peons and so the whole country will get wealthier.  The wealth effect channel.  Except that most people agree that the wealth effect is tiny if it exists at all.  It certainly does not justify the distortions it causes in myriad ways by causing social disharmony and fubaring the most important aspect of capitalism which is price discovery and the signals those send to capital to choose its outlets wisely.

The second channel is the “make corporate executives fabulously wealthy by ZIRP allowing them to print money for themselves” channel.  The way this works is that corporations can borrow money for very close to no cost, the cost having been forcibly suppressed by the Fed, and they can recycle this money into share buybacks which increase the price of their shares, which of course causes their regular stock option grant strike prices to go into the money and be very very valuable.  They can do this over and over again as ZIRP now enters its eighth year.  So it is no wonder that top executives make multiples now in the hundreds of times what their non-option granted employees make.  This dynamic is just disgusting and directly a result of the Fed flooring rates at zero for years and years.

There might be a third “channel” which is quite simple.  The noted problem with any kind of inflation is that it helps those who are closest to the money inflation the most.  Well, in the case of creating trillions of excess reseves through QE, those who are closest to the money spigot are the Primary Dealers and those who control them.  These people are literally paid by the Fed to buy and sell Treasuries and MBS.  No idea how much they make but it is certainly unbelievably substantial.  The Fed pays these banks between 5 and 10 billion dollars a year just in interest on excess reserves at 25 bips, to say nothing on the markups they surely command on the bonds they buy from Treasury and then turn around and sell right back to the Fed.

The unseemliness of this outrageous transfer of wealth to those who need it the least while Main Street remains stuck in squalor and penury with the Feds and their Bureaucrats with their boots on the necks of real business people can really only be fixed in one way.  That is to cut the Fed off at the knees by either ending it altogether or at the very least cutting it way way back to its only valid functions as lender of last resort and a way to have a solid clearing function.  Setting the price of overnight money and worse, engaging in fiscal policy through QE should be seen for what it is, an anachronism straight out of the 1930s.

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