If the Federal Reserve opts to create more money to buy bonds, it will be done in the name of the helpless, the millions of Americans who languish on the sidelines of the economy without a job.
At first glance, the aggressive policy of the Fed and other central banks in advanced economies is a constraint on the widening of income inequality, which some economists say is reaching epidemic proportions. But what if the opposite is true? What if super easy money is spreading the gulf between the 1 per cent and the rest of us?
Canadian economist William White can't help but wonder.
Mr. White, who made his name by challenging Alan Greenspan's decision to keep interest rates low amidst a housing bubble, has published a forceful new paper on why he thinks monetary policy in countries such as the United States and Canada has reached its limits. When Fed chairman Ben Bernanke says further unorthodox policy must be carefully weighed against what could go wrong, the risks presented by Mr. White are what the Fed chief is talking about.
Adopting the language of the Austrian school of economic thought, Mr. White says "ultra-easy monetary policies have a wide variety of undesirable medium term effects – the unintended consequences." Among these are "malinvestments" in the real economy, distorted financial markets, and a backdrop that allows politicians to avoid difficult budget decisions. "While each medium term effect on its own might be questioned, considered all together they support strongly the proposition that aggressive monetary easing in economic downturns is not 'a free lunch,'" Mr. White writes.
Also on Mr. White's list on unintended consequences is a regressive redistribution of wealth.
To illustrate his theory, Mr. White sets out three classes of people: Class 1 consists of entrepreneurs and financiers; Class 2 is made up of savers; and Class 3 pools the "less well off who essentially borrow from the others."
In boom times, with interest rates low, Class 1 makes lots and lots of money. It uses leverage to speculate, taking advantage of various government guarantees. Class 1 creates such economic momentum that the process continues even as interest rates start to rise. Its members exploit the shadow banking system, take advantage of having better access to information, and lean on their political contacts to ensure the financial system is structured in a way that suits their purposes.
Class 2 does fine in the boom, especially as interest rates rise. Class 3 suffers from higher borrowing costs, but to the extent that its members have borrowed to buy houses, the group benefits as asset prices rise.
That's the boom; now the bust.
Class 1 speculators take a hit, but stay ahead because they made so much money during the boom years. And as central banks cut interest rates sharply, Class 1's burden is eased materially. (Mr. White argues Class 1's political connections come in handy at this stage, as the richest lobby for government support.) Class 2 takes a substantial blow, as their savings earn very little interest. The debtors in Class 3 benefit from lowering interest rates. But, Mr. White argues, they "suffer the most because their net wealth is very low, their access to further credit disappears and they are the most liable to lose their jobs in the downturn."
Mr. White concedes that his portrayal of the central banks as protectors of the one per cent could be off the mark, but "it seems true enough to warrant further interdisciplinary research into the potential redistributive implications of ultra easy monetary policy," he writes.
Remember when Bank of Canada Governor Mark Carney said the Occupy movement had a point? That note of sympathy for the less privileged earned him an invitation to speak to the Canadian Auto Workers union last week. Wonder what Mr. Carney's new fans on the left would think about the argument that his policies actually are part of the problem?