Central Banks Robbing Middle Classes

8/8/2019 Central Banks Robbing Middle Classes

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(ZeroHedge) Mr Bernankes in-house Fed economists have found that the Fed wasnt

responsible for the boom which subsequently turned into the biggest bust since the 1930s.

Are those the same Fed staffers whose research led Mr Bernanke to assert in Oct. 2005 that

there was no housing bubble to go bust? The reasons for the US and the UK central

banks inflating the bubble range from incompetence and negligence to just plain

spinelessness. Let me propose an alternative thesis. Did the US and UK central bankscollude with the politicians to steal their nations income growth from the middle classes

and hand it to the very rich?

by Albert Edwards, Societe Generale

Ben Bernanke?s recent speech at the American Economic Association made me feel sick. Like

Alan Greenspan, he is still in denial. The pigmies that populate the political and monetary elitesprefer to genuflect to the court of public opinion in a pathetic attempt to deflect blame from their

own gross and unforgivable incompetence.

The US and UK have seen a huge rise in inequality over the last two decades, as growth innational income has been diverted almost exclusively to the top income earners (see chartbelow). The middle classes have seen median real incomes stagnate over that period and, as a

consequence, corporate margins and profits have boomed.

Some recent reading has got me thinking as to whether the US and UK central banks were

actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it

has been amazing how little political backlash there has been against the stagnation of

ordinary people?s earnings in the US and UK. Did central banks, in creating housing

bubbles, help distract middle class attention from this re-distributive policy by allowing

them to keep consuming via equity extraction? The emergence of extreme inequality might

never otherwise have been tolerated by the electorate (see chart below). And now thebubbles have burst, along with central banks? credibility, what now?

After reading Ben Bernanke?s speech, once again denying culpability for the bubble, I really

didn?t know whether to laugh or cry (remember that Ben Bernanke, like Tim Geithner, was a keymember of the Greenspan Fed). I feel like Peter Finch in the film Network, sticking my head out


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of the window and shouting Im as mad as hell and Im not going to take it anymore! Althoughcriticism of the Fed (and the Bank of England) has now become louder and more widespread, I

feel my longstanding derision for their actions during the so-called ?good years? puts me in astronger position than some to offer further comment.

Opening my 2002-2005 file of old weeklies I did not have to go any further than the firstparagraph of the top copy (end of December 2005). As far as Alan Greenspans tenure at theFed is concerned, we have spared few words of derision. We have made plain our views that the

supposed US prosperity that has accompanied his tenure has been based on a grotesquemountain of debt. We have likened the economy to a Ponzi scheme which will ultimately

collapse. He has allowed the funding of strong economic activity by mortgaging the USs futureagainst one bubble (equity) and then another (housing), which is now beginning to implode.

These are almost consensus thoughts now, but not then.

The pigmies that populate the political and monetary elites prefer to genuflect to the court ofpublic opinion. Blaming the banks is simply a pathetic attempt to deflect the public fury from

their own gross and unforgivable incompetence. We have stated before that banks are not theprimary cause of the bust. Just as in Japan, a decade earlier, bank problems are a symptom of the

bust. It is the monetary and regulatory authorities that are responsible for this mess. And it is notjust obvious in retrospect. It was perfectly obvious from the beginning.

I was shocked by a recent survey of Wall Street and business economists, published in the WallStreet Journal (see Bernanke View Doubted 14 Jan? link). Asked whether they agreed or

disagreed with the proposition excessively easy Fed policy in the first half of the decade helpedcause a bubble in house prices, some 42, or 74% agreed with the proposition. So unbelievably

there are still 12 economists surveyed who did not agree! Even more incredible, a majority ofacademic economists did not agree with the proposition. Maybe they have sympathy for a fellow

academic or maybe they actually believe the preposterous proposition that the western centralbanks were not in control of the bubbles which were primarily due to tidal waves of surplus

savings washing across from Asia.

John Taylor shows this to be nonsense. There was no global savings glut (see chart below)


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John Taylor is well known for his famous ?Taylor Rule? for the appropriate level of interest ratesand he has been very vocal in his criticism of Fed laxity in the aftermath of the Nasdaq crash in

his paper ?The Financial Crisis and Policy Responses: An Empirical Analysis of What WentWrong, Nov. 2008 and elsewhere link. His thesis is simple. Lax monetary policy caused the

boom in housing upon which euphoric credit excesses were built. The subsequent bust was an

inevitable mirror image of the boom. This simply would not have occurred had the Fed (and theBank of England) acted earlier to tighten policy as shown in the Taylor?s counterfactual profiles(see charts below).

More recently, the San Francisco Fed published a paper this month showing that those countries

which saw the steepest run-up in house prices over the last decade also saw the largest rise inhousehold sector leverage (see charts below and link). Of course the causality runs both ways.

Loose monetary policy generates higher borrowing which pushes up house prices. Subsequentlythis prompts other households to borrow against the rising value of their houses to finance

consumption via net equity extraction.

Generally most commentators have fallen for the populist line that the banks are to blame. Veryrarely does a leading commentator pin the blame where it deserves to be ? on the central banks.

Hence, I was very interested to read the Financial Times Insight column on Tuesday from thedeep-thinking columnist, John Plender (interestingly his title in the print edition was Blame the

central bankers more than the private bankers was changed to Remove the punchbowl beforethe party gets rowdy in the web edition link).

Plender?s point is classic Minsky. An unusually long period of economic stability, also known as

The Great Moderation, engineered by Central Bank laxity inevitably created the conditions forthe subsequent bust. Central banks clearly bear much responsibility for past excessive credit

expansion. The Feds gradualist and transparent approach to raising rates in middecade also


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ensured that bankers were never shocked into a recognition that unprecedented shrinkage ofbank equity was phenomenally dangerous. Despite the popular perception that financial

innovation caused so much of the damage in the crisis, the rise in bank leverage was a far moreimportant factor. His point that it takes guts to remove the punch-bowl when the party is in full

swing is spot on. The Fed and the Bank of England were both gutless and spineless. Their love

affair with The Great Moderation meant they simply were not prepared to tolerate a little morepain now to avoid a Minsky credit bust and massive unemployment later.

But what is the relationship, if any, between this extreme central bank laxity in the US and UKand these countries being at the forefront for the extraordinary rise in inequality over the last few

decades (see cover chart)? And does it matter?

I was reading some typically thought-provoking comments from Marc Faber in his Gloom, Boomand Doom report about current extremes of inequality. It reminded me that our own excellent US

economists Steven Gallagher and Aneta Markowska had also written on this. To be sure, the risein inequality has been staggering in the US in recent years (see charts below).

It is well worth visiting the website of Emmanuel Saez of the University of California who has

written extensively on this subject and now has updated his charts up until the end of 2008 (dataavailable in Excel Format ? link). The New York Times reported on the recently released Census

Bureau data and showed not only that median income had declined over the last 10 years in

real terms, but that this is the first full decade that real median household income has

failed to rise in the US - link. What is also so interesting from Professor Saez?s cross-sectionalresearch is how inequality has clearly risen fastest in the Anglosaxon, freemarket economies of

the US and the UK (also note that France, with much higher levels of equality, saw much moresubdued growth in household leverage).

Our US economists make the very interesting point (similar to Marc Faber) that peaks of income

skewness ? 1929 and 2007 ? tell us there is something fundamentally unsustainable aboutexcessively uneven income distribution. With a relatively low marginal propensity to consume

among the rich, when they receive the vast bulk of income growth, as they have, then the countrywill face an under-consumption problem (see 9 SeptemberThe Economic News ?- link. Marc

Faber also cites John Hobson?s work on this same topic from the 1930s).

Hence, while governments preside over economic policies which make the very rich even

richer, national consumption needs to be boosted in some way to avoid underconsumptionending in outright deflation. In addition, the middle classes also need to be thrown a sop to


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disguise the fact they are not benefiting at all from economic growth. This is where central bankshave played their pernicious part.

I recalled seeing another article from John Plender on this topic back in April 2008. His

explanation for why there had been so little backlash from the stagnation of ordinary people?s

income at a time when the rich did so well was simple: ?Rising asset prices, especially in thehousing market, created a sense of increasing wealth regardless of income. Remortgaging homesover a long period of declining interest rates provided a convenient source of funds via equity

withdrawal to finance increased consumptionlink.

Now you might argue central banks had no alternative in the face of under-consumption. Or youmight conclude there was a deliberate, unspoken collusion among policymakers to ?rob? the

middle classes of their rightful share of income growth by throwing them illusionary spendingpower based on asset price inflation. We will never know.

But it is clear in my mind that ordinary working people would not have tolerated these

extreme redistributive policies had not the UK and US central banks played theirsupporting role. Going forward, in the absence of a sustained housing boom, labour will fightback to take its proper (normal) share of the national cake, squeezing profits on a secular basis.

For as Bill Gross pointed out back in PIMCO?s investment outlook ?Enough is Enough ofAugust 1997, ?When the fruits of societys labor become maldistributed, when the rich get

richer and the middle and lower classes struggle to keep their heads above water as is clearlythe case today, then the system ultimately breaks down.-link. In Japan, low levels of inequality

and inherent social cohesion prevented a social breakdown in this post-bubble debacle. Withsocial inequality currently so very high in the US and the UK, it doesn?t take much to conclude

that extreme inequality could strain the fabric of society far closer to breaking point.

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Central Banks Robbing Middle Classes