“This harmful cycle concentrated national wealth among those who already owned assets”: Bessent.

By Wolf Richter for WOLF STREET.

Secretary of the Treasury Scott Bessent came out today with an essay in the WSJ that blasted the Fed for its “extraordinary” and “nonstandard” monetary policies since 2008, such as QE; its “pursuit of the Wealth Effect”; its interventions that became a “de facto backstop for asset owners,” thereby concentrating “national wealth among those who already owned assets.” He blasted the Fed as bank regulator, citing the SVB collapse. He skewered the Fed for having caused home prices to soar, while “younger and less affluent households, shut out of ownership and hit hardest by inflation, missed out on appreciation.

“By failing to deliver on its inflation mandate, the Fed allowed class and generational disparities to widen,” he wrote. And much more.

It is refreshing – and 17 years overdue – to see a Secretary of the Treasury, or any sitting government official, lambaste the Fed for its QE and asset-holder-bailout tools that kicked off in 2008, and it’s even more refreshing to see him list some of the horrendous effects the Fed’s tools and policies have had.

Here are some salient quotes from Bessent’s essay:

“The ‘extraordinary’ monetary-policy tools [QE and ZIRP] unleashed after the 2008 financial crisis have similarly transformed the Federal Reserve’s policy regime, with unpredictable consequences.”

“Successive interventions during and after the financial crisis of 2008 created what amounted to a de facto backstop for asset owners.

“This harmful cycle concentrated national wealth among those who already owned assets.”

OH, I so agree, and have said so many times. I have a special page for the Wealth Effect, citing among other notables, Yellen’s article on the benefits of the Wealth Effect, that she wrote in 2005 when she was still president of the San Francisco Fed, titled, “Housing Bubbles and Monetary Policy.”

And my page cites Fed Chair Bernanke’s 2010 editorial in the Washington Post, where he explained to the astonished American people that the Fed was using QE and ZIRP to create this wealth effect, whose explicit purpose was to make the wealthy even wealthier so that they feel more confident and spend a little more. The Wealth Effect was a central-bank horror story but it occurred in real life.

There is nothing more toxic on society, as far as central-bank policies is concerned, than the pursuit of the Wealth Effect. And it’s bipartisan: Yellen was appointed by a Democrat and Bernanke by a Republican.

And it is so refreshing to see a Secretary of the Treasury keelhauling the Fed for having made the Wealth Effect part of its policy.

And Bessent hammers on the effects of the Fed’s policies:

“Within the corporate sector, large firms thrived by locking in cheap debt, while smaller firms reliant on floating-rate loans were squeezed as rates rose.

“Homeowners saw their property values soar, largely insulated by fixed-rate mortgages. Meanwhile, younger and less affluent households, shut out of ownership and hit hardest by inflation, missed out on appreciation.”

“By failing to deliver on its inflation mandate, the Fed allowed class and generational disparities to widen. Its pursuit of a wealth effect to stimulate growth backfired.”

Oh, I so agree. Back in January 2022, I called this the Most Reckless Fed Ever, for having whipped inflation into a frenzy with ZIRP and mega-QE even as inflation had spiked to 7% and was heading higher.

So Bessent continues, quoting from a book: “‘Unprecedented inequality is clear proof that the wealth effect is all too effective for the wealthy, but an accelerant to economic hardship for everyone else,’ financial analyst Karen Petrou wrote in her book ‘Engine of Inequality’ (2021).”

“By extending its remit into areas traditionally reserved for fiscal authorities, the Fed has blurred the lines between monetary and fiscal policy.”

“The central bank’s balance-sheet policies directly influence which sectors receive capital, intervening in what should be the domain of markets and elected officials.”

“Entanglement with Treasury debt management creates the perception that monetary policy is being used to accommodate fiscal needs.”  

“Expanded powers have fostered a culture in Washington that relies on the Fed to bail out the government after poor fiscal choices. Instead of accountability, presidents and Congress have expected intervention when their policies falter. This ‘only game in town’ dynamic has created perverse incentives for irresponsibility.”

Oh, I so agree. All-out interest rate repression through massive waves of QE have caused money to be essentially free, and when money is free, price no longer matters, and debt no longer matters either. And so now, the US is saddled with $37.4 trillion in federal government debt, up from $8.9 trillion in 2007, before QE and ZRIP started.

And Bessent continues:

“The 2023 failure of Silicon Valley Bank illustrates the dangers of combining supervision and monetary policy. The Fed now regulates, lends to and sets the profitability calculus for the banks it oversees, an unavoidable conflict that blurs accountability and jeopardizes independence.

“A more coherent framework would restore specialization: empowering the Federal Deposit Insurance Corp. [FDIC] and Office of the Comptroller of the Currency [OCC] to lead bank supervision, while leaving the Fed to macro surveillance, lender-of-last-resort liquidity and monetary policy.”

Oh, I so agree, and said so in an article at the time because it was painfully obvious even to me: The Fed Should Be Fired as Bank Regulator. Powell’s Discussion of Silicon Valley Bank & Regulatory Failure Shows Why. Bessent goes on:

“Heavy intervention has produced severe distributional outcomes [who gets rich, who pays for it], undermined credibility and threatened independence.”

“Looking ahead, the Fed must scale back the distortions it causes in the economy. Unconventional policies such as quantitative easing [QE] should be used only in true emergencies, in coordination with the rest of the federal government.”

This essay is an indictment of QE and of the Wealth Effect whose pursuit was powered by QE.

But somewhere along the line, after inflation had begun to rage and home prices were exploding, the Fed had a come-to-Jesus moment about QE, and then started unwinding it, and has continued to unwind it for over three years, by another $39 billion in August, having brought its balance sheet down by $2.36 trillion so far. I discussed the Fed’s latest balance sheet yesterday here.

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