Can the Fed Can Fight Wealth Inequality?

-edited

Minneapolis Fed President Neel Kashkari hired an Obama economic advisor to help the Fed fight income inequality.

Minneapolis Fed President Neel Kashkari says the Fed Can Fight Inequality. Then in a move guaranteed to fail, Kashkari Hires an Obama Economic Advisior as His Guide.

Neel Kashkari, the outspoken dove at the Minneapolis Fed, says monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials.

When Kashkari, a year into his job, launched an in-house effort in 2017 to examine widening disparities in the economy, he was expecting to generate research that might inform lawmakers’ decisions, rather than the Fed’s.

“We had historically said: distributional outcomes, monetary policy has no role to play,” he said in an October interview. “That was kind of the standard view at the Fed, and I came in assuming that. I now think that’s wrong.”

Kashkari’s project has taken an unexpected turn over the last two years, morphing into something more ambitious. It has the potential to transform an intensely political debate about inequality into a scientific endeavor that the Fed’s 21st-century technocrats could take up.

This year, he finally found someone to lead it: Abigail Wozniak, a Notre Dame economics professor, became the first head of the Minneapolis Fed’s Opportunity and Inclusive Growth Institute. Wozniak was a member of President Barack Obama’s Council of Economic Advisers.

One of its priorities has been to build a network of experts on income and wealth distribution, the same way the Fed brings in specialists in financial markets or growth.

Fed a Key Driver of Income Inequality

Kashkari is correct in a perverse sort of way given that Fed is a key driver of income inequality:

  1. By bailing out banks and financial institutions when they get in trouble
  2. By keeping interest rates too low too long
  3. By promoting economic bubbles
  4. By promoting inflation

So yes, the Fed could help if it simply stopped doing those things. It would be better still if there was no Fed at all, so the main thing the Fed could do would be to promote a sound currency then disband itself.

There is No Economic Benefit to Inflation

The BIS did a historical study and found routine deflation was not any problem at all.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Challenge to Keynesians

And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.

Irony Abounds

Kashkari came to the right conclusion but instead of disbanding the Fed or changing any of the above four points, he hires and Obama economic clown as his guide.

Note that Kashkari is the biggest dove on the Fed. He would vote for 2, 3, and 4 at every chance.

Yet, inflation benefits those with first access to money (banks, wealthy, asset holders, and corrupt politicians). The poor only participate in bubbles after there is nothing left to gain.

Curiously, my answer is the same as Kashkari's. Yes, the Fed can help. And the first thing Kashkari could do to help is simple enough, resign.

Addendum

A reader criticized the title "income inequality". He thought distorted the picture.

He is correct but in the opposite sense as he intended. Wealth inequality (via asset bubbles) is imore of the issue.

I change the title to "wealth inequality". The title of the linked-to article simply says "inequality". It's both income and wealth actually.

Income inequality is via stock options and pay bonuses for blowing bubbles. Wealth comes from cashing out stock options and holding assets accumulated during bubble phases.

Mike "Mish" Shedlock

Comments (45)
No. 1-25
Sechel
Sechel

How many opposing goals can the Fed be given. Sure income inequality is a problem , but can the fed really deal with income inequality, low inflation, growth, prevent against bubbles , act as a regulator, etc. Note I realize the irony as the Fed does none of these particularly well to be charitable

FromBrussels
FromBrussels

YEAH SURE ! Let s confiscate Gates' Warren's, Bezos ' and other destiny defined lucky bastards' trillions .....but even that would only be a drop in the 600 trillion social ocean, so take my miserable 'fortune' too, bail out my fckn bank(s) with a bail in, that will do the job within the context of a utterly insane, central banksters created, cheap debt driven financial system at the end of its fckn wits !

caradoc-again
caradoc-again

Arsonists expected to put out fires.

Tony Bennett
Tony Bennett

"Neel Kashkari, the outspoken dove at the Minneapolis Fed, says monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials."

No.

Federal Reserve purpose regarding monetary policy as stated in Federal Reserve Act:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

ANYTHING else is mission creep unless given mandate by Congress.

Bam_Man
Bam_Man

Crazy eyes on that guy.

Tony Bennett
Tony Bennett

Inequality?

Kashkari was Hank Paulson's point man on TARP.

If he has a purpose, it is … To Serve Man.

LB412
LB412

I know Neel... this is a shocking change of direction.

Maximus_Minimus
Maximus_Minimus

Wasn't this guy plucked from obscurity to head the TARP, and then promoted to the FED? Probably senses the wind in the presidential candidates' campaigns. In case he places his bets right, he will be in the running for the top job, if not he looses nothing.

thimk
thimk

resign , this guy is just getting started. He got a taste of politics in 2014 run at governor of Caly. Now he is economist shopping for someone to fit his narrative. I mean that's what you do don't ya , hire analysts/pundits that support your spin? He will be out purveying Universal Basic Income. I can give him my GPS coordinates for a drone drop of a stack of hundreds. here is an interesting article from a Caly newspaper back in 2014 .

Casual_Observer
Casual_Observer

Unless you have a system that trains and employs the underemployed and unemployed, there will be income inequality. I'm not surprised the Fed would get into non-monetary policy. At some point everyone has to acknowledge the elephant in the room. The Fed is part of government and not the independent institution it claims to be and the banking system is effectively federalized.

Casual_Observer
Casual_Observer

By the way, disbanding the Fed would only make income inequality worse not better. We had economic panics before the Fed and depressions without a central bank. No one can show that any system is better or worse than another. Human behavior is what drives systems. Human behavior doesn't change irrespective of what the money system is.

Mish
Mish

Editor

actually the headline would make more sense as wealth rather than income and the answer even more emphatically as I commented

Mish
Mish

Editor

Addendum

A reader criticized the title "income inequality". He thought distorted the picture. He is correct but in the opposite sense as he intended. Wealth inequality (via asset bubbles) is imore of the issue.

I change the title to "wealth inequality". The quoted article title simply says "inequality". It's both income and wealth actually.

Income inequality is via stock options and pay bonuses for blowing bubbles. Wealth comes from cashing out stock options and holding assets accumulated during bubble phases.

magoomba
magoomba

Perhaps 2 currencies? One that can only be earned by actual productive work, and cannot be devalued. And one that floats for the 'investors' to play their games with.

Blurtman
Blurtman

If the homeless had loaded up on assets as Yellen had advised when she was about to embark on her low interest rate crusade, they'd have higher quality tents.

SMF
SMF

One way not to solve a problem is by getting the government involved in trying to find a solution.

Or better stated, if you base your power on helping the poor, you will lose that power when they move up in income level. Hence, it isn't in their self-interest to actually help the poor.

Tengen
Tengen

Sure, the Fed COULD fight inequality by normalizing rates and letting TBTF banks fail, but we all know they're never going to do that. Instead, the Fed will continue to widen inequality whenever possible.

On a side note, Kashkari went to an elite private high school 15 minutes from where I grew up. I went to private school too but his was WAY more expensive, about $15K/year back in the early '90s. He then went into the Ivies, of course. Neel wouldn't know an average person if he tripped over one and it's a safe assumption he cares little about the regular Americans. His bellyaching about inequality is optics, nothing more.

Bill_Butlicker
Bill_Butlicker

The Fed already helped "fix" asset prices (and wealth), only a fool would want them to keep "helping".

Kashkari is just a run of the mill bureaucrat looking out for himself, and screw everyone else.

Mish meanwhile continues to allow extreme left professional commenters to post, while banning conservatives. Maybe he should move to Berkley instead of Utah!!!

RonJ
RonJ

"Neel Kashkari, the outspoken dove at the Minneapolis Fed, says monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials."

Isn't the FED already redistributing to the wealthy? After all, CEO's are borrowing lots of money to buy back stock after getting the board to lavish stock options on them, so they can pocket the money.

Webej
Webej

So counterfeiting does benefit selectively?

Who would have imagined?

Brutus' Admirer
Brutus' Admirer

Thanks, Mish, for highlighting the ludicrous irony of a big inflater (causer of inequality) being concerned about inequality. Because of the Fed artificially manipulating negative real interest rates for the last decade, those of us holding CDs and short-term bonds have had almost 1%/year of our savings confiscated for the benefit of big banks and big borrowers like the govt and corporations buying back their stock. Cumulatively 10% of the value taken from relatively poorer savers!

MickLinux
MickLinux

Mish, the headline still is broken: "can the can" should be "Can the"

AWC
AWC

I am confident that in the long run the Fed will, in fact, come very close to achieving Wealth Equality. All holders of Dollar Denominated assets will end up Equally Poor when the funnybuck finally evaporates into the ether along with myriad fiatskies that have preceded it down through history.

Wingateman
Wingateman

Mish, there's so much confusion and bs around the causes and fixes for economic inequality. first, there will always be some. however its generally better when its less rather than more. second, there are capitalist economies where its less i would think. ray dalio is out there bitching about the eventual societal armageddon we will get from inequality but proposes no solutions in his interviews.

it seems to me that owners of capital and their managerial staff has taken more of the spoils here than ever before. so the providers of labor have smaller share of gross revenue as compensation ratios are at the low end of a 40 year range. i saw some big hedgie speak at a fireside chat that corp profits are 12-13% of revenue today vs 6% for most of post ww2. he thinks we need to reign in corp profit margins. says we have 6mm employees of publicly traded cos living below poverty level. i remember post recession walmart employees were largest single group of food stamp recipients. here we taxpayers subsidize walmart workers so they can buy billions of dollars of shares.?

in addition to smaller pie for all workers vs cash flows for shareholders. it appears that managements have taken much larger slices of the pie vs average worker bees. thats from the 30x's salary difference 40 years ago to the 300x's difference today.

there has been a war between owners of capital and providers of labor and the worker bees have been slaughtered on a relative basis, creating massive fortunes for owners of capital and their managements. this war on the wealthy concept is total bs.

i am noodling some ideas re fixes.

first, the average worker doesnt really want the feds taking wealth from bezos or dimon. what they want is really bigger paychecks in the form of 500 basis points of gdp in the form of compensation or $1 trillion annually. they want raise as amazon or jpmorgan employees. with limits to exec comp at some ratio thats fairer than 500x's. how we get there i dont know, but most other countries have much higher comp ratios and lower profits and they survive. japan and germany are 2. maybe we tax super high comp or corp buybacks at high rates to disincent.

secondly we need to get out of the debt morass w a global coordinated debt jubilee. we do this for all economies where the central banks fund government debt repurcahses at/above par in tranches as shares of gdp. so all nations participate. naturally we use this free lunch to fix structural problems. here they would be so called entitlements. we could index SS and medicare to life expectancy. go after stupid health care expenses etc. that would be the price for wiping out $20 trillion of US govt debt. then interest rates would be free to float again too.

we have lots of problems here. we need to think differently about these issues and even benchmark other nations that have better process and results than we have here. from defining how much taxes we want to pay as a share of economy and then how best to spend that money for most benefits.

Herkie
Herkie

Saw this story at

Interesting graphic, and interesting implications. One of the things that strikes me is this concept that one can live at some sort of "comfortable" level via work given the wage levels described, but which assumes that life will placidly swan along with steady income and outgo at that comfortable level. It does not allow for the unforseen, a car accident, of which there are close to 6 million per year and a couple million of those cause serious and very expensive damage, or a house fire, 354,400 per year, or major illness, many millions per year, which can and does completely destroy the security assumed in the article. Ask me, the house I lived in in 2001 burned down leaving me with nothing, literally naked in the snow and Mid Hudson insurance denied any claim as I was only by their definition a "guest" in the house and the owner died in the fire. Prior to that I worked in New York City till the 11th of September 2001. And, in 2013 my car was hit by a careless driver in a rear end collision that my insurance company did everything they could do for years to not pay the damages, thank you State Farm. Or, the time Chase used a banking error that a third party made to steal my pay and my house and they got away with it. That time it was AllState which sent a premium payment through twice and overdrafted my account without me knowing about it because my bank WaMu was closed for more than a week for the shotgun marriage with Chase who held my mortgage.

So I look at the chart this article shows and contemplate how wonderful it would be if only all you have to worry about is having to work 80 hours per weel or as in the case of HI 91 hours per week to be comfortable. But, I have been comfortable several times in my life only to have that end overnight in circumstances utterly beyond my control and then you get to enjoy the stigma of poverty and abuse of homelessness. Been there, trust me it can happen to you too.