stock; it's of course due to how much you own. The percentages showing that the rich benefit most from rising financial markets of course reflect the fact that stock ownership is best measured by the value of the shares each person owns, not by the number of people who own them.
As a result, Fed asset purchases stoked stock-market rises that dramatically increased the wealth of those able to invest in the stock market. From 2007 to 2019, the S&P index for stocks rose 77 percent; that is, an investor with $10,000 in the market at the start of the crisis would have $17,700 to show for it after these twelve years. As shown below, small savers who were not also stock-market investors were worse off than ever before. Wealth inequality was thus even worse than it was before 2008, and the Fed is to blame for at least part of it.
Even worse, the Fed's portfolio also increased income inequality. Looking out for themselves and working hard to comply with tough post-crisis rules, banks didn't just take the money and lend it out as the Fed's economic theories expected. More loans would have likely led to more jobs. Instead, banks took the money and then allocated it not to suit the Fed's monetary-policy theories, but rather to maximize profitability. Fearful of losing money if they made the growth-boosting loans predicted in Fed models, banks used the cash to buttress their reserves as higher capital requirements kicked in. Capital requirements demand that shareholder equity stand behind bank lending, making the cost of lending higher because investors have lots of places to put their funds to use if stock prices at banks fail to suit them. Whatever capital banks had to spare thus went into dividends or stock repurchases that made investors richer or, if market conditions didn't allow, then to backing “excess reserves” – that is, into deposits at the Federal Reserve instead of into loans to hard-pressed households trying to refinance their mortgages, put kids through school, or just make ends meet.
Of course, banks also lend to corporations. One might thus have thought – the Fed surely did – that banks wary of consumers would still lend to companies that then built plants and bought more equipment, stimulating the recovery as conventional thinking dictates. However, companies that got loans didn't boost economic growth; nonfinancial companies maximize profits at least as assiduously as banks. As a result, there was a giant spree of stock buybacks and other capital distributions that made shareholders richer, but kept the overall US economy in first gear. That's better than reverse, of course, but still nowhere near good enough to enhance equality.
To make matters even worse, wealth gains at the top 1 and 10 percent came largely at the expense of what we once quaintly called the middle class. Homes are supposed to be the bedrock of middle-class wealth, but they in fact do far less for wealth than owning stocks and bonds. As we'll see, house-price appreciation and equity free of debt is principally a rich household's reward.40
And the Fed did more than stoke stock-market booms by stripping the financial market of trillions of dollars of assets once held by private investors. It also drove real (inflation-adjusted) interest rates below zero. Interest rates close to and sometimes even below zero on either a real or nominal (i.e., the rate on the posted sign) basis reverse the normal relationship between debtors and creditors. When rates fall below zero, the depositor pays the bank for the privilege of holding his or her money. Conversely, a borrower will actually owe less than he or she borrowed when paying back a loan with a negative interest rate.
When the Fed began to raise rates in 2015, these were still at or below real positive territory, with interest rates ever since hovering at just about a sliver above or below inflation. Rich investors can borrow cheaply at rates such as these and then invest in rising markets to make their returns still greater (if also riskier due to all this leverage). Average households don't play in the complex “carry-trade” or high-leverage arenas that benefit from ultra-low rates. They also often lack access to mutual funds or other investment vehicles that beat the Fed's low rates.
Instead, these households put whatever money they may have – and as we've seen it's not much – in the bank. Interest rates of 0.25 percent – not counting fees for bounced checks and other costs – made money in the bank a losing proposition for anyone without $10,000 or so to put aside.
A simple example shows why. Assume a parent saving for a child's education puts $2,000 a year in a savings account paying a 5 percent compound rate of interest for 20 years. At the end of 20 thrifty years, he or she has $69,438 to show for this in nominal terms. After accounting for 2 percent annual inflation, he or she has $49,598. As a result, $40,000 has earned an additional $9,598, or 24 percent. Now take that same $2,000 for the same 20 years – $40,000 – and the same 2 percent inflation. But instead of a 5 percent interest rate, the parent earns only the half of one percent interest rate paid on small savings since the financial crisis. Instead of $69,438, this parent has only $42,168. After accounting for inflation, that is only $30,120, almost 25 percent less.
Clearly, the Fed's long-term, low rates quashed the chances that an average household can save for a financial cushion against adversity, to fund a mortgage down payment, or to secure their retirement. A generation ago, it took only three years for a young family to fund a mortgage down payment. Before COVID set younger households still farther back, it took at least nineteen years, due in part to very low interest rates.41
After 2008, the Fed expected that low interest rates would make low-cost loans available to lower-income households, but Fed policy instead made the rich a lot richer and left everyone else still farther behind. One study estimated a total loss across the US economy of $2.4 trillion in savings accounts due to the very low interest rates that prevailed from 2008 through mid-2017.42 The longer there are low rates, the farther most families fall behind.
Had the Fed “normalized” rates – that is, brought them closer to a rate with a sizeable positive edge over inflation – the dynamics of high-risk markets and hard-pressed families would have begun to correct to a more stable, equitable economy before COVID hit in 2020. Further, if rates had been higher, the Fed would have had more tools with which to confront renewed crisis. Since they weren't, it didn't, and the Fed threw still more trillions into the financial market, leading to record gains even as US unemployment ravaged one in four working households.43 Monetary policy after 2008 directly contributed to post-crisis inequality; post-COVID policy made the inequality engine hurtle over average Americans in a race to save financial markets.
Regulatory Wreckage
Financial policy subsumes more than monetary policy. It also includes all of the tough new rules bank regulators imposed since the crisis. It makes a lot of sense to make banks safer. But the inexorable nature of profit-maximization means that, when rules make lending to lower-income families unprofitable, banks don't make loans to lower-income families. Only higher-income Americans with stellar credit histories need apply.
Post-crisis rules may well have made US banks safer, but they have also changed the bank business model to one focused on wealth management, corporate and commercial real-estate lending, and other activities with little equality impact. Given the depth of the great financial crisis in 2008 and how close we then came to another Great Depression, it's easy to say that banks deserve every rule they got. But no matter how justified all of this regulatory retribution, quashing the capacity of banks to take deposits, make loans, and to operate the overall financial system leaves America with two choices: do without banks and the economic growth that depends on them, or rely instead on nonbanks, including giant technology companies such as Facebook and Amazon.
These tech giants are quickly filling the vacuum left behind by departing banks. They do a great job handling our demand for next-day sneakers and getting us messages from the boy next door in what seems like a nanosecond, but this doesn't necessarily mean that tech companies should be allowed to use the huge troves of personal data amassed in these businesses to provide equality-essential financial services. In the absence of safety-and-soundness