Comment on Inequality
I've reposted below an excellent letter printed in the WSJ in response to an article on the president's policies to address inequality. The political agenda here is a sham and the financial policies fueling the sham are the real culprit.
Your editorial "The Inequality President" (July 25) points out the unquestionably large and growing income divide in America. While the president shares in the responsibility, it is sadly far more the doing of the Federal Reserve than the administration. The subsidization of the largest commercial banks through Fed-repressed rates on savings has been characterized as the biggest wealth transfer in U.S. history. What provides cheap financing for banks, provides dismal returns for savers. In so doing, savers are subsidizing the banks. But this is just the beginning of the Fed's half-witted contribution to growing income inequality.
Ben Bernanke is on record promoting Fed policies designed to encourage investment in "risk assets." He argues that near-zero interest rates on safe assets (money-market funds, CDs and savings deposits) are designed to encourage greater investment in risk assets. But endless studies have shown that the holders of these risky assets (stocks, high-yield bonds) are disproportionately the wealthy. The problem is, as evidenced by your study of median income, the wealth effect isn't trickling down as the Fed assumed it would.
This is also the enigma of the Fed's program of quantitative easing. The Fed doesn't buy U.S. Treasurys or mortgage securities from the "open market," but rather directly from the largest commercial banks, or "primary dealers," who are required to sell these obligations to the Fed. With abysmally weak loan demand, the banks choose to redeploy the proceeds of these sales into stocks and high-yield bonds. This Fed subsidy has been much of the fuel driving stock prices skyward, the swift recovery of bank profits and the growing levels of income inequality that you report.
Richard L. DeProspo
Westlake Village, Calif.