Have the citizens of the US and the UK been ripped off by their central banks? SocGen’s Albert Edwards thinks they might have been. Ben Bernanke has spent a lot of time over the last year making it clear that he does not consider the Federal Reserve to be responsible for the financial crisis still engulfing the world. I imagine Mervyn King feels the same about the Bank of England.
But it isn’t really true. The main factor behind the ever increasing bubbles has been cheap money: the central banks kept interest rates too low for too long.
Few people who don’t work for the Fed or the Bank of England bother to dispute this anymore. However the question we still don’t really know the answer to is why they did it? Were they negligent? Were they incompetent? Or were they just too spineless to be prepared to put up rates and let the economy take a little pain in the short term in order to avoid a huge credit bust and its consequences later?
I’ve always assumed the answer was the latter (spinelessness). But Edwards has an alternative thesis. He thinks that the central banks might have deliberately – knowingly – inflated the housing bubbles in the UK and the US in a effort to distract the attention of the middle classes from the huge rise in inequality going on around them.
Over the last decade, the bulk of real income growth has gone to the already rich while the average worker has seen their income stagnate, at best, in real terms. Over 20% of US income now goes to 1% of the population. One in eight Americans now gets food stamps. That’s shocking in itself but it also isn’t good for economies: the rich don’t need more money so they tend not to spend it when they get it – that means that grossly unequal economies tend to have under-consumption problems.
But rising house prices were, for a time, the perfect solution to both these issues. They made the middle classes feel as rich as the really rich, and, via mortgage equity withdrawal, they give them the ability to spend as though their incomes were rising. “Deliberate unspoken collusion”? Or a happy side effect that stifled potential complaints and meant central bankers were able to keep keeping rates low and hope for the best?
We won’t ever know. But, as Edwards points out, what we do know is that high income inequality rarely goes hand in hand with stability. So this decade, “in the absence of a sustained housing boom, labour will fight back to take its proper (normal) share of the national cake.” That will “squeeze profits on a secular basis.” More seriously however “with social 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.”