During the 2012 presidential campaign, neither President Barack Obama nor Republican nominee Mitt Romney mentioned the Federal Reserve, its low interest rates and the policy of quantitative easing. Perhaps the two men didn’t address the topic because they wanted to keep the issue quiet, it was rather boring for the average voter or it’s the culprit of the economic collapse.
Heck, the president may not want to even acknowledge that the Fed exists because last week’s boom in the stock market, which reached record highs, the stability of commodity prices and the status quo insisting that bond prices are quite stable, especially in developed nations, are attributed to the White House’s initiatives.
When the Occupy movement made headlines one of the key themes was the gap between the rich and the poor. The protesters put the blame on Wall Street, capitalism and (mostly) the Republican Party. However, what a lot of these demonstrators as well as many other Americans avoid is that the central banks are the key factor when it comes to wealth redistribution.
First, central banks around the world print as much money as they please and the freshly created wealth gets transferred to the upper-class in many forms. In this case, the Fed Chair Ben Bernanke’s quantitative easing, an indefinite measure that will see the acquisition of mortgage-backed securities and Treasury Securities worth more than $1 trillion in 2013, is alleged to be the perpetrator of the wealth gap.
Income inequality benefits those who are primarily involved in the financial sector and homeowners, but it huts homebuyers and everyone else. When Bernanke first announced the third round of QE, he made the case that the policy would affect stock values and then lead to more consumption and investment decisions, such as skyscrapers, bridges and expansions.
As the Dow Jones soared above 14,000 last week, a lot of individuals would conclude that QE seems to be working. Not quite so because of a few factors: the stock market isn’t really an indicator of the overall economy, the inflationary aspects aid the few and hurt the rest through tax hikes and future inflation and home prices are artificially overvalued.
Furthermore, since the Great Recession, financial institutions have not lent out as much as was first projected. The purpose of QE was for the banks to give out loans to businesses and consumers, but now due to heightened criteria, they put the money into trading accounts and bonds and equities are purchased. Essentially, QE has only increased the values (artificially) of varying financial markets.
Thus, that is once again another problem of QE because one of its purposes was to encourage investors into building those skyscrapers and bridges, but due to the uncertainty of the economy these people have still put their money into mortgage-backed securities, government debt and even commodities.
By having a large number of investors in commodities, this usually drives up the cost of everyday grocery store items, like meat, bread and orange juice – another element that hurts the poor but doesn’t really matter to the one percent.
Last summer, Canadian economist William White, a staunch critic of former Fed Chairman Alan Greenspan and his actions during the 1990s and early 2000s, published a paper that questioned if global central banks, in particular the Fed, are actually creating income inequality.
“Ultra-easy monetary policies have a wide variety of undesirable medium term effects – the unintended consequences,” stated White. “While each medium term effect on its own might be questioned, considered all together they support strongly the proposition that aggressive monetary easing in economic downturns is not ‘a free lunch.’”
As millions of Americans call for wealth redistributionist policies by the federal government, many libertarians and critics of the Fed are urging those same people to take a look at the Fed and realize that capitalism isn’t at fault for the income inequality.
Thomas Pascoe of the London Telegraph published an article titled “The gap between the rich and poor will continue to grow until we give up on QE.” This report also highlights how the Fed distorts financial markets and hurts the poor and helps the rich.
When talking about the Fed initiating a wealth gap, Pascoe writes:
“None of this is written in the socialist perspective, implying that the problems of the poor can only be solved by confiscation from the rich, or that any advantage gained by one section of society is a cost to another. Nor is it written in the point of view, prevalent on the internet, which insists that such machinations constitute a deliberate robbery of the poor by shadowy figures hell bent on a new feudalism.”
Although some experts will argue that the institutions of higher taxes, excessive regulations and government intervention are attributing to the transfer of wealth, putting part of the blame on the Fed may prove more prudent than harmful.
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