By Karen Petrou
- Economic inequality and ultra-low interest rates create a vicious cycle in which rates drive down savings, financial intermediation becomes less profitable, unequal households have still more difficulty preserving income and accumulating wealth, banks drop equality-essential services, consumers are made still more unequal, and it all starts all over again.
- Breaking this cycle requires hard decisions about which retail-banking services genuinely enhance economic equality and quickly developing effective, measurable delivery channels to promote widespread adoption.
- There is no shortage of commitments from high-level federal officials supporting equitable finance; what’s missing are specific, near-term action steps.
- This post thus provides a step-by-step roadmap for quick public- and private-sector innovation, regulation, and inclusion.
Almost a decade to the day after the “Occupy Wall Street” movement crystalized the populist politics that now characterizes U.S. debate, the Acting Comptroller of the Currency announced that his agency’s top priority is reducing inequality. This echoes the Biden Administration’s emphasis on equality and racial equity, but all of these high-minded goals are more hortatory than clear directives. They are thus unlikely to advance equitable banking, exacerbating not just economic inequality, but also America’s discontent and resulting disfunction. Reducing economic inequality is clearly essential, with banks and other financial companies sure to face mandates or even public-finance competitors if vital needs are not quickly and equitably met.
Continue reading “Equality Banking: A Roadmap”
By Matthew Shaw and Karen Petrou
Every three years, the Federal Reserve releases a unique, illuminating data set, the Survey of Consumer Finances (SCF). The most recent report covering 2016 to 2019 comes at a time of acute political risk for the U.S. central bank due to growing demands for a third, “racial-equity” mandate and heightened recognition of the inequality impact of post-crisis monetary policy. Perhaps for this reason, the Fed’s qualitative release and much subsequent media coverage highlighted what the Fed described as meaningful reductions in both wealth and income inequality. Would it were so – percentages sometimes work in the Fed’s favor, but real dollars in people’s pockets, or the acute lack thereof, don’t.
Continue reading “The Dollars That Make a Difference: Results of the New Survey of Consumer Finances”
By Karen Petrou
On March 12, the Financial Times ran one of Martin Wolf’s insightful columns, this one focusing on a critical facet of post-crisis monetary policy – ultra-low interest rates – to see why so much monetary-policy firepower had had such minimal macroeconomic impact. Mr. Wolf suspects that the secular stagnation first framed by Lawrence Summers means that ultra-low real rates are here to stay due in part to economic inequality. However, what if ultra-low rates on their own exacerbate inequality and thus create a negative feedback loop with dangerous implications not only for long-term growth and financial stability, but also for inequality? Considerable evidence shows that ultra-low rates are inextricably intertwined with extra-high inequality. Fed thinking on the new neutral rate thus must prick the traditional neo-Keynesian bubble to ensure that Chairman Powell’s new normalization isn’t a path to still worse inequality. Continue reading “Ultra-Low Rates and Extra-High Inequality”
By Karen Petrou
As 2018 drew to a close, the Federal Reserve Board and the Financial Stability Oversight Council each pronounced financial-stability risk to be comfortingly “moderate,” much as Ben Bernanke and Hank Paulson did in August of 2008. It remains to be seen if market turmoil just days after is more than a bad blip, but there’s a still more worrisome financial-crisis risk lurking beneath volatile financial markets: U.S. economic inequality. Here, we show how current, acute inequality makes 2019 particularly perilous even if markets stabilize, President Trump eschews Twitter, the federal government begins anew, and all seems somehow otherwise right with the world. Continue reading “Economic Inequality, Financial Crises, and 2019”