“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 $2.36 trillion so far. I discussed the Fed’s latest balance sheet yesterday here.
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“There is nothing more toxic on society, as far as central-bank policies is concerned, than the pursuit of the Wealth Effect. ”
This is why Mandami is getting traction in NYC.
There are those who are trying to make ends meet…
next to those lighting 25$ cigars with lit hundred dollar bills
Loose money. Cantillion Effect.
Is the attitude not this….The Fed will make stocks go up.
They are down today? Don’t worry…..the fix is in. Tomorow will be up.
Hey, but didn’t Bernanke get a Nobel prize?
Almost beginning to like Bessent. He must have been reading my comments on the Fed since 2008!
The greatest theft of real wealth in American history.
[:-)
“The changes Bessent is suggesting can’t be done without legislation. Katz said he thought it was very unlikely that Congress would act accordingly”
“very unlikely that Congress would act accordingly”
Just copy and paste that for almost everything about congress lol
In terms of monetary policies, nonsense. The Fed can focus on its classic monetary policies to achieve its mandate just fine. You don’t need Congress to not use QE and to not pursue the Wealth Effect.
In terms of bank regulation, moving regulatory oversight from the Fed back exclusively to the FDIC and the OCC, that would require Congress.
In the United Kingdom, the House of Lords endorsed the report: “Quantitative easing: a Dangerous Addiction?” A .pdf of this can be found on the web. A parallel of this report for our country looks like Congress would need to become involved, maybe the Congressional Budget Office. Currency manipulations have been the end of regimes and civilizations for thousands if years; even reaching biblical proportions in Jesus with the money changers working in a currency debasement environment.
FED has a dual mandate, inflation & employment. As I remember it, in the years just before COVID hit. The FED claimed that while both inflation and employment metrics were good, there was still relatively high unemployment among minority groups. These groups were catching up to “white” employment levels but still needed more time, so they kept interest rates low. This was the stated reason for holding down interest rates longer than many claimed necessary. I suspect that in the long run it will be determined that they did more harm than good.
The Fed’s legal mandate has three parts. They omit the part about moderate long term interest rates, but you can read it in the law itself (it’s very short).
Forgetting the need not moderate long term rates is how we got into this QE/ZIRP mess that Bessent dissected so effectively.
Bessent lists “moderate long-term rates” in his essay as one of the three. And he says those three are the only mandates the Fed has. And it needs to stay away from other stuff.
Of course you do.
🥱
Dismissive, yet nothing to add? Please elaborate on why someone shouldn’t agree so readers can assess the quality of your thinking.
Oh I so agree!!! Lol awesome 🐺
Wolf, possible typo? Billion in 2007?
“And so now, the US is saddled with $37.4 trillion in federal government debt, up from $8.9 billion in 2007…”
Thanks. Yes $8.9 billion was still a lot of money in 2007, but not that much!
Wolf,
Thank you for always keeping us very well informed.
I believe that is biggest issue we have now in Democracies.
Most of the times, if I don’t read news, I am uninformed and if I do then I am misinformed.
You keep it REAL.
Oh, I so agree with everything too. But does Scott bessent think his boss is Ron Paul or Donald Trump???
Physics has Rules.
Mathematics has Rules.
Money has Rules. Two of them. These Rules have been violated and abused. They seem to be being followed, somewhat, by the Fed these days. But a 50 basis-point drop in the Fed Funds rate, which may happen soon, will be pushing us down the slope of breaking them again.
As I bicycled past the Minneapolis Fed building at noon today, I wondered, what is about to happen? (No. No sighting of Neel.) And yes, the Mississippi River of debt was just to my east; running very deep as I rode north.
Rule Number 1) Money must have value. Capital can not be borrowed at no cost.
Rule Number 2) Future money must have more value than near-term money. Interest rates on a 20 year or 30 year Treasury Bond MUST be much higher than a 3 month or 6 month Treasury Bill. And yes, a Treasury Note should be in between these.
Market forces play a role in setting interest rates, of course. But The Fed needs to obey the Rules and maintain equilibrium.
Yes, there must be a time value of money.
If Bessent doesn’t flip flop on this I’ll be shocked.
For the government, emergency can mean anything.
@Wolf so what’s his angle? Everything he said is true, but why now? What the political incentive in coming out and saying this?
Also he’s not saying this unless this a narrative that Trump also wants put out there. Maybe I watched too much House of Cards a few years ago, but it feels strategic…
At least two of the top three Fed Chair candidates — Waller and Warsh — have a history of having come out against QE (Warsh) and slowing QT (Waller). Both want to sell the MBS and run down the balance sheet further, and replace long-term securities with T-bills. The narrative is that QE just to drive up asset prices is dead.
They may cut short term rates and continue QT, and shift to short-term T-bills.
That’s nice.
Is his next op Ed going to blast Congress for their profligate spending? Or their refusal to deal with entitlements and balance the budget?
I’ll wait.
The Fed encouraged and enabled Congress’s profligate spending — that’s what he said. Without free money, it wouldn’t have happened.
How would monetary policy change if inflation were not only measured in terms of consumer prices or personal consumption expenditure, but was broadened to include increases in asset prices as well?
Does not appear to demand resumption of the $50B monthly Treasury debt held on the balance sheet though.
Debt rolloff…. I meant to say
1. QT was $39 billion in August.
2. He didn’t get into ANY dollar-type specifics.
Yeah, I do wonder what prompted this. Maybe Bessent is listening to outreach people working for the GOP who are finding that a lot of people who don’t have houses or other assets are unhappy?
Everything he says is true but I’m skeptical that he actually cares.
Let’s not forget the Yellen Put, Powell Put, and the (stock market) plunge protection team, which gave all the players in the casino free downside risk protection during QE. I think the Powell Put is still in place, if ever another severe downturn occurs.
Thank goodness for the wealth effect and rich people — they saved the economy after the 2008 financial crisis! /s
All that asset inflation is the least we could do to thank them! /s
Wolf,
I love the article.
36 trillion dollar question. What next? How we fix it and who is going to fix it?
Fixing it will take a long time, strong economic growth, moderate but higher than 2% inflation, a very edgy bond market that scares the bejesus out of Congress at least twice a week, and a pissed-off voting public.
OK, no sarc. I’m puzzled. If I read it right, he’s saying the Fed recklessly fed inflation with over stimulus. But doesn’t his boss want the Fed to stimulate again with lower rates? Is Bessent calling for the Fed to tighten?
Re-read the article. You didn’t understand a thing. You missed everything. Willfully.
I know what you wrote, but somehow I read “Housing Babbles and Monetary Policy.”