Fed Chair notices income inequality but pretends she is not responsible for it


By: Norm Singleton

Federal Reserve Chair Janet Yellen recently caused a stir when she gave a speech bemoaning the rise of income inequality. Yellen called for government to address this problem through government policies designed to improve education and encourage entrepreneurship and small business ownership. Sadly, but not surprisingly, Yellen’s idea of  improving education and encouraging entrepreneurship is more government spending on (failed) education programs, new regulations, and inheritance taxes.

As amazing as it is that, as a time when the failures of the welfare-regulatory state to promote economic opportunity should be obvious to everybody, Yellen calls for greater government involvement in the economy to deal with government that is not the most amazing thing about Yellen’s speech. That distinction goes to Yellen’s failure to acknowledge that the role of the Federal Reserve in creating income inequality. Nowhere in her speech does Yellen acknowledge that Federal Reserve polices such as QE 1,2,3,…etc. have benefited well-connected, well-off special interests at the expense of most Americans.  Even The Washington Post, a publication not known as a hotbed of libertarian populism and Austrian Economics, acknowledges the role the Fed plays in income inequality:

All of these issues are decidedly outside of the Fed’s purview. In fact, the Fed has been frequently criticized for exacerbating the country’s yawning disparity in wealth as its easy-money policies helped Wall Street rebound quickly from the financial crisis.

The Fed, however, has seemed more conflicted. This summer, former Fed governor Kevin Warsh called the central bank’s actions a form of “reverse Robin Hood” during an interview on CNBC. Meanwhile, St. Louis Fed President James Bullard said in a June speech that while efforts to pump money into the economy have boosted Wall Street, he would “stop short” of saying that has made inequality worse. Former Fed Chairman Ben S. Bernanke and Yellen have pointed to the central bank’s support for the housing market as evidence that its stimulus is finding its way to Main Street.

But even there, the central bank’s efforts may be falling short. In her speech Friday, Yellen pointed to Fed data showing that the bottom half of homeowners by wealth lost 61 percent of the equity in their homes between 2007 and 2013. The top 5 percent lost 20 percent. However, Yellen also noted that the ongoing recovery in the housing market this year has helped boost wealth for average and low-net worth households by nearly a third.

So Yellen’s evidence that the Fed is helping Americans is that the Fed’s polices are inflating home values….great cause creating a housing bubble worked out so well when the Fed did between 2001-2007.

Anyone wishing to understand how the Federal Reserve causes income inequality should study the Austrian School of Economics. I know most readers of this blog are familiar with the Austrian school, but for those who are not, or for those looking for a piece focusing on relationship between the Fed and income inequality, an excellent place to start is Frank Hollenbeck’s “How Central Banks Cause Income Inequality,” linked here with excerpt below:

This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.

The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.

Another good article is Jörg Guido Hülsmann’s “How Inflation Helps Keep the Rich Up and the Poor Down,” available here with an excerpt  below:

This excessive production of money and money titles is inflation by the Rothbardian definition, which we have adapted in the present study to the case of paper money. Inflation is an unjustifiable redistribution of income in favor of those who receive the new money and money titles first, and to the detriment of those who receive them last. In practice the redistribution always works out in favor of the fiat-money producers themselves (whom we misleadingly callcentral banks) and of their partners in the banking sector and at the stock exchange. And of course inflation works out to the advantage of governments and their closest allies in the business world. Inflation is the vehicle through which these individuals and groups enrich themselves, unjustifiably, at the expense of the citizenry at large. If there is any truth to the socialist caricature of capitalism — an economic system that exploits the poor to the benefit of the rich — then this caricature holds true for a capitalist system strangulated by inflation. The relentless influx of paper money makes the wealthy and powerful richer and more powerful than they would be if they depended exclusively on the voluntary support of their fellow citizens. And because it shields the political and economic establishment of the country from the competition emanating from the rest of society, inflation puts a brake on social mobility. The rich stay rich (longer) and the poor stay poor (longer) than they would in a free society.

Of course, no one has done more to make the Federal Reserve’s role in causing income inequality part of the national  debate than Campaign for Liberty Chairman Ron Paul. Dr. Paul consistently pointed out  how the Federal Reserve’s policies imposed an “inflation tax” on the American people and that this was the worst tax of all  because it is hidden and regressive.

In the past year, Dr. Paul  addressed the issue of the link between the Federal Reserve and income inequality here and here.