Engine of Inequality: The Fed and the Future of Wealth in America

Engine of Inequality: The Fed and the Future of Wealth in America by Karen Petrou, Wiley 

There is no easy or honest way to avoid inequality while discussing economics in the United States. The three richest men in America hold as much financial wealth as the bottom half of the country’s population combined, and the top one percent owns more than half of all US stock. I don’t cite these numbers to rail against the rich, and we didn’t end up in this situation overnight—rising inequality and wage stagnation for low and middle income earners have been issues in our country for 40 years. But Karen Petrou’s excellent new book explains how it has been exacerbated and accelerated by the financial policies that were set in place to save the financial system from collapse after the crisis of 2007 and 2008. Left firmly entrenched even after they succeeded in rescuing the economy, Petrou shows how those policies have acted as an inequality engine ever since and created a tale of two economies, two realities, that have been brought into even starker contrast by the COVID-19 pandemic. It has led to a situation where we are forced to ask, as Petrou does…  

How could it have been that, the day in April 2020 that the US announced then-record COVID deaths, the S&P 500 finished its best week since 1974? … [O]ne need look no further than the Fed, which that day also stepped in with trillions to backstop even the riskiest investments. 

I am no hater of the Federal Reserve. I found Roger Lowenstein’s book about its creation, America’s Bank, downright inspirational, even a model for what we need more of in our own times. But when the pandemic hit, most Americans were hit hard. And, unlike the stock market, most were unable to quickly recover—let alone reach new heights. Unlike the banking system, which had been buttressed by trillions of dollars in investment from the Federal Reserve, their policies did not act as a backstop for most American workers and small businesses as the Fed intended. As Petrou writes: 

If more Americans had had more savings with which to buffer the shock of sudden unemployment and had the American financial system been more equitable, then COVID’s economic cost would still have been dear, but not disastrous. But as the US headed into the pandemic, it was the most unequal of all advanced economies, becoming far more unequal after 2010. […] The powerful link between financial policy and our far more unequal economy is the topic of this book; breaking it is the goal. 

It is a goal that seems achievable as laid out by Karen Petrou. Petrou is a financial policy analyst, but she is not just any policy analyst; she is the co-founder and Managing Partner of Federal Financial Analytics, a perch from which she advises some of the world’s largest corporations, major financial institutions, and central banks. American Banker has called her “the sharpest mind analyzing banking policy today—maybe ever.” So when she speaks, people usually listen. Unfortunately, they don’t always act. As she writes in the book’s Introduction: 

In 2016, I told a group of central bankers that income inequality is the battlefield casualty of post-crisis reform, urging them to clean up their own mess, not count on changes to taxation, spending, technology, or other policies somehow to do it for them. The central bankers were receptive, but none acted.  

The pandemic has only made matters worse, and more urgent. The problems seem intractable, over our heads, and above most of our paygrades, partisan political positioning and posturing as entrenched and bitter as ever. Our Senator from Wisconsin, Ron Johnson, has called the proposed $1.9 trillion stimulus bill “abusive”—an “obscene amount of money.” But the Federal Reserve’s portfolio of assets in the banking system, if I’m reading the data correctly, currently sits around $7.5 trillion. That investment has been made under the theory that the banking system will loan the money out to households, to small businesses, and into other job-creating activity that benefits the real economy. But in our era of shareholder capitalism and dogmatic, short-term profit maximization, it has been funneled mostly into stock buybacks and paying dividends that have left the rich richer and left the rest of us—quite literally as Winter storms battered the South recently—out in the cold. So the Fed’s policies and bailouts have, in that way, increased income inequality. Perhaps the $1.9 trillion on the table now—a more direct investment in American workers—wouldn’t be needed had the Fed’s previous investments in the banking system been lent out, in Petrou’s words, “as the Fed’s economic theories expected.” I am not trying to use those words to put any new ones she hasn’t written or uttered in Petrou’s mouth here. I am not sure what she thinks of the American Rescue Plan. But from where I’m sitting on the West Side of Milwaukee (admittedly not as lofty a perch from which to view things), it seems that if we can invest $7.5 trillion into the institutions that were most responsible for bringing our economy to the brink of collapse in 2007 and 2008 (which seems like a risky investment to me), then we can surely afford to invest $1.9 trillion to help fight the pandemic and the devestation it has caused, to invest in the workers who have kept our economy afloat during the pandemic, and to help the families, communities, and small businesses who have lost so much. It would certainly help the majority of Americans who never really recovered from the financial crisis before the pandemic hit, who were, in fact, left worse off—a reality the book makes clear:  

America is clearly unequal no matter how one measures income or wealth and became far more unequal far faster after the financial crisis. After 2008, middle-class wealth collapsed, but the wealth of the top 10 percent grew 19 percent in the following decade, resulting in the largest wealth-share increase—6 percentage points—since the Second World War. At the same time, middle-income family wealth was still below its 2008 level, and lower-income families lost 16 percent of their pre-crisis wealth (not much to start with, of course). 

Petrou doesn’t believe there was any ill intent on the part of the Fed here. Quite the contrary, as she told NPR’s David Brancaccio recently “I know the members of the board, several of them very well. And I don’t think any one of them has anything but the best intentions. This is the result, I think, of bad data; data based on America the way it used to be.” Or, as she puts it in the book, “the Fed measures America as it was decades ago, not as it is now.” What her book aims to do is correct that perception, to convince policy-makers that trickle-down policies and rescue packages aimed at already wealthy institutions and individuals don’t work, and that focusing on building growth from the ground up can. 

Because the financialization of our economy has left markets obsessed with short-term profits at the expense of long-term investment, stability, and growth, the Fed pouring money into big banks is bound to be but a short-term fix. Instead, Petrou lays out “fast-acting, politically plausible, and high-impact financial-policy fixes.” Those fixes range from monetary policies such as reestablishing interest rates at a level she calls a “living return” and removing the “Too Big To Fail” safety net from beneath financial markets, to creating new institutions like postal banking and equality banks, and even establishing a new digital money system under Fed control. Why under Fed control, you might ask? Because it is safer there than under the purview of powerful, for-profit, private interests: 

We are used to thinking about money as the bills in our wallets or the numbers in our bank accounts, but a quiet revolution redefining money is well under way. If it proceeds without appropriate controls, then the inequality engine’s fuel will go still faster and in even larger amounts to those who need it least.   

Or, as she puts it in simpler terms:  

Much of this book lambasts the Fed, but I still trust it more with my money than Facebook.  

In that, and everything else, Karen Petrou takes the often enigmatic world of financial policy and makes it easily understandable. The only enemy in the book is the immoral and unsustainable levels of inequality that exist today. In turning from analysis to advocacy, she shows us how the fight against it can be won much more quickly—on terms we should all be able to agree on—than we might imagine. She knows some of her proposals may seem a little radical at first, but so did the establishment of the central bank itself just over 100 years ago. While far from perfect, it like our constitution and system of self-government still contains our best tools for tackling the problems that we face, and Petrou knows how to use them. I hope people not only read the book, and listen, but use it as a plan to finally act on one of our most persistent and pressing issues—that of inequality.