The Tragic Consequences Of Jack Asset Monetary Policy

You have to own assets to make it in the New Economy. Pity the younger generations.

Check out the growing wealth disparity in the below chart, which is clearly the result of monetary policy.

The Fed's increasing reliance  on the asset price channel of the monetary transmission mechanism over the past decade has been to "jack up" or inflate assets, hoping the "wealth effect" stimulates aggregate demand.   Household net worth is now at a record level and the economy is purring.

The asset price channel of monetary policy relative importance has increased as households have been deleveraging after the GFC, rendering the credit channel of monetary policy almost completely ineffective, at least, until recently.

The result is asset bubbles everywhere.

Political Backlash

The political consequences are also far from benign.

Conservative savers who have kept their money in bank CDs, witnessed their interest income go to zero, while the highly levered and risk takers were bailed out.   Many, who have done all the right things —  worked hard, saved, paid their bills on time — feel they have been screwed in a big way.

We know of one person, who owned three houses on our street, and didn't pay his mortgages for over four years, yet still collected rent from his tenants.   The banks didn't foreclose because they worried that flooding the neighborhood market with homes would drive down the price of their collateral.   Not the case anymore, however.

He was only one of several hundred thousand deadbeat borrowers, who gamed the system, did all the wrong things and was rewarded.  The stand up borrower and citizen got screwed.