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Albert Edwards, Societe Generale’s in-house uber-bear, has a doozy of a new note today stirring the Fed, income inequality and the housing bubble into one big cake of Class Bitterness.
His general thesis is that the banking sector is unfairly getting too much of the blame for income inequality and general economic misery of recent years. Instead, he writes, the Fed deserves most of the blame, for blowing up a big housing bubble that papered over rising income inequality.
When that bubble burst, everybody got soaked, but particularly the middle class, which suddenly did not have artificially inflated home values to make it feel rich any more.
That has naturally made people feel angry, and Edwards wonders when more of that anger is going to be directed at the Fed (emphasis is all his) — and in maybe more social unrest than we’ve seen so far:
Our US economists make the very interesting point that peaks of income skewness – 1929 and 2007 – tell us there is something fundamentally unsustainable about excessively 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 country will face an under-consumption problem.
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 underconsumption ending in outright deflation. In addition, the middle classes also need to be thrown a sop to disguise the fact they are not benefiting at all from economic growth. This is where central banks have 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 the housing market, created a sense of increasing wealth regardless of income. Remortgaging homes over a long period of declining interest rates provided a convenient source of funds via equity withdrawal to finance increased consumption”
Now you might argue central banks had no alternative in the face of under-consumption. Or you might 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 spending power 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 their supporting role.
Going forward, in the absence of a sustained housing boom, labour will fight back 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' of August 1997, “When the fruits of society's labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down.”
In Japan, low levels of inequality and inherent social cohesion prevented a social breakdown in this post-bubble debacle. 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.
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Alan Greenspan and his policies of lowering interest rates to nothing began the real estate bubble and the collapse of our economy. Bernanke has been continuing to bail out the banks and help his friends on wall street buy keeping interest rates new zero. This punishes the conservative savings of the country, while rewarding the very people and institutions that got us into trouble in the first place. Until there is adequate income from CD’s and bonds, there has not been, nor will there be, any recovery. We can barely tread water and only keep our heads above the water with stimulus packages. Can we not replace Bernanke with somebody with common sense and some intelligence, or reduce the Fed’s powers so that they quit harming the economy?
Amerykańskie banki pożyczają pieniądze z FED ZA DARMO I KUPUJĄ EURO OBLIGACJE ! Dziś wszystkie banki z USA są zagrożone bankructwem I ZNOWU TRZEBA JE RATOWAĆ .
Haven’t the French learned anything in 200 years? Their ‘revolution’ was one of brutal class warfare, where the mobs chopped off the heads of the rich, and wound up with Napoleon and poverty for the masses. Class warfare benefits no one except corrupt politicians using dupes who envy others’ success.
Changes in the fabric of a society are major factors in any trend. There have been many changes in the US that have affected income variance, including the exponential rise of single parents versus married couples as the head of households, and the aging population living off pensions. Volumes of economic wisdom are available, but it requires taking the time to actually study to fully comprehend all the forces at work in the economy.
Do U really think the GOP and the RICH understand that this inequality cannot continue the same way it has for the last 30yrs???? I doubt it. They have their head in the sand and just the idea that wealth and more wealth is ever going 2 stop flowing their way doesn’t enter their thought process. Greed has no SHAME for these people and if buying a political party can see that this wealth bubble continues then they have a willing partner in the GOP party. MY OPINION. They do have the money and power 2 spread their lies and keep enough of the VOTERS 2 believing them so maybe they are right. I hope NOT though. With all the wealth that has been handed 2 them by the Bush Tax Cuts no jobs have been created by this class of citizens. Hard 2 understand how the vast majority of those that bow down 2 their GOP leaders can fail 2 see that they are being lead down a path that spellls doom for them and more riches for the RICH. Stupid is as Stupid does is alive and well in America. U Figure It Out.
Greenspan,s constantly lowering interest rates was the root cause. If you pay little interest your balance doesn,t increase much. He ignored that large group of people who lived off their interest. He stated often “the markets will correct themselves” An stupid belief at best. The markets will take all the money if they can, without considering the consequences.
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