It’s All About Assets

I think people have this idea in their minds about what wealth inequality means. I have come to believe that they think, what it means, is that these super rich people have bank accounts stuffed with cash. That these people have millions and billions just floating around for quick and easy spending. While yes, it’s very possible that is true for some, for the majority of wealthy people, it is a different form of wealth. It’s paper wealth.

Wealthy people tend to be investors and shareholders. It’s where most of their wealth comes from – the perceived value of the shares they own in something. If you could somehow view the world through a lens where asset holdings could *not* be counted, wealth inequality would be subdued. The richest have a lot of shares in things, the poorest have no shares in anything.

Of course, this post is not making any crazy statement about assets, whether they are good or bad. More-so, this post is meant to highlight that financial markets have been the outsized wealth creator for the last 10+ years. And the issue at hand, the proverbial elephant in the room, is that the stock market has enjoyed preferential treatment from Government organizations while others who have no exposure or access to markets, quite frankly, have received none.

Our Fed Officials Should Visit The Bronx More

The Federal Reserve is a lovely entity that saved us from the abysses in 2009. And I have championed them for many years reading books from Geithner and Mishkin to Bernanke and Volcker. However, in my time studying them and watching their rescue missions, I have been unable to ignore their advantageous treatment of certain demographics. They have backstopped the exotic world of finance over, and over, and over. They have been there each step of the way for more than a decade. Yo bro, you need liquidity? We got you. What’s up dog, you need some low margin to buy stocks? Rate cuts coming.

I often joke the Federal Reserve should take their asses to the Bronx and spend a day at PS 178. They should learn what these kids come from and how their families generally have no liquidity whatsoever. After that they should get an Amtrak, not an Acela, and go to North Philly. I write this because I think it’s very possible our Federal Reserve officials have spent too much time roaming in Wall Street circles. Private dinners, meetings, and exclusive events in Wall Street and DC towers will close your mind.

Liquidity Demographics

Our current Federal Reserve Chairman, Jerome Powell, was a partner at the private equity firm Carlyle before he was nominated. Ben Bernanke, the Fed Chairman from the Financial Crisis, is now an advisor to the market makers of Citadel. Tim Geithner is currently a President at Warburg Pincus. These former hard-working Government officials in control of who gets liquidity and when sure sound devoted to solving problems on behalf of society…

I often think about what the Federal Reserve actually does for a lower income people who have no access to financial markets and no assets. Maybe they live near a pay-day lender or know a loan shark. People who are day-to-day, cash only, or checking accounts have not once been bailed out or been given any assistance 10+ years into this economic expansion. Actually, to some degree, they have lost. Because their checking accounts and cash under a mattress now earn LESS than they ever did. They don’t keep up with the inflation rate and the Fed keeps cutting rates at every chance they get.

On the other hand, those who hold most of their wealth in financial markets, are supported with each moment of risk. When rates are low, when liquidity is high, when the Fed is always there, the investor class benefits from rising asset prices. But if you have no assets, you don’t benefit at all. That’s the problem – the Federal Reserve’s response to financial markets disproportionately benefits one class of people more than all others. It made sense at one point in time, I don’t believe the same policies make much sense any more.

So How Do You Fix It?

I should be clear, I do not want markets to go down. I have no problem with the assets you hold whether they are stocks, bonds, real estate or anything else. I think it’s great. Free markets, free trade, and free choices are essential to living well and creating great things. But, what I do stand against is unfairness. More importantly, I think you have to fight for the underdog when you can. And the underdog right now is getting destroyed out there.

So how do you make it fair? Our policy makers, especially at the Fed, could benefit from creativity. More outside the box thinking. Perhaps the Fed could start a program that specifically targets community banks in low-income areas. Perhaps the Fed could work with them, give them unique liquidity preferences, and encourage them to get out there with this new fire power and support.

Or maybe they could give a bigger savings rate to those with less than $25k in savings or checking accounts. Maybe these people can, somehow, be given a rate higher than the Fed funds rate so they can actually earn interest higher than the inflation rate. I mean, does anyone realize that poor people who have to hold cash are actually losing money each day? The Fed wants 2% inflation, but checking and savings account rates are less than that. That means if you hold cash, even if you need to because of your circumstances, your cash is melting each day because of an inflation rate greater than your savings rate.

Traditional methods of cutting rates and supporting markets with asset purchases has proven to work, but today, they are exhaustive measures with very little impact on the people who we really need to be helping and an outsized impact on the people who, at the end of the day, don’t really need much more.

That Is All For Now

It’s funny to watch my philosophical beliefs change over time.

Several years ago, I was in complete support of the Fed. I thought they saved markets, and more. Today, my tone has slightly soured.

But in a free market and country, that is a beautiful thing and it’s how change is made. Being critical of something, taking feedback and sharing your thoughts is how people build and create things that solve problems.