Bernanke Is Underwriting The Wealthy: Part 2

by: John M. Mason

On February 24, 2013, I posted a piece called "Bernanke is Underwriting the Wealthy".

Confirming evidence has just been published on Bloomberg.

Matthew C. Klein, the author of the piece, writes:

"…there is no academic consensus about the distributional impact of monetary policy as it is currently conducted. Researchers at the International Monetary Fund studied the impact of "monetary policy shocks" in the U.S. since 1980. They found that 'a contractionary monetary policy shock raises the observed inequality across households.' This was true even when the early 1980s were removed.

On the other hand, when the Bank of England studied the impact of its recent asset-purchase programs, it admitted that the bulk of the benefits went to wealthier households. Markus Brunnermeier and Yuliy Sannikov, two economists at Princeton, have argued that asset purchases work precisely because they redistribute wealth to banks and other holders of long-duration instruments.

Amir Sufi, an economist at the University of Chicago, has argued that the wave of foreclosures during the downturn has limited the benefits of lower mortgage rates and higher house prices over the past two years to a relatively small group of well-off Americans. Finally, Adam Posen, a former monetary policymaker at the Bank of England and now the president of the Peterson Institute of International Economics, argued in the Financial Times earlier this week that monetary policy always has 'distributive effects.' According to him, central bankers should 'confront this reality rather than run from it.'"

In my post cited above, I support the idea that the "wealthy" can take advantage of governmental policies. For example, I point to where Henry Kravis and George Roberts and KKR took advantage of liquidity events created by monetary policy and made exceptional returns on them. I also wrote about how George Soros made lots of money off of situations created by governmental policy. I examine how people have taken advantage of the credit inflation of the past fifty years and made lots of money. I cite the words of Charles (Chuck) Prince when he says: "As long as the music is playing, you've got to keep dancing."

My argument: smart, wealthy people can "go with the flow" and take advantage of what the Federal Reserve is doing. I write, "In most cases it is the less wealthy individuals that are the last movers."

Does Mr. Bernanke get this? Mr. Klein reports, "Today, Federal Reserve Chairman Ben Bernanke was twice asked by members of the House Financial Services Committee whether the central bank's policies have been responsible. Both times, Bernanke denied that the Fed was favoring Wall Street over Main Street."

The conclusion Mr. Klein reaches: "If monetary policymakers want to avoid this sort of criticism in the future, they should find new ways to affect the economy that don't rely on interactions with the financial system."

And, the greater the action, the greater the effects on inequality.

Remember: Don't fight the Fed!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.