Sunday, August 10, 2014

Making Bubbles and Income Inequality - According to Two Central Bankers

  •  Last week, during a CNBC interview, Dennis Lockhart, President & CEO of the Federal Reserve Bank of Atlanta responding to a question about increasing income inequality in the U.S. and economic gains flowing to the 1% said -  “as a monetary policy maker, monetary policy can deal with the expansion of the pie, but can’t do much about the distribution of the pie…I’m concerned as a citizen that the trends that we have seen now literally over decades have seen income more concentrated in the top 10% of income earners and even within the 10%, income concentrated in the top 1%.  To the extent, those trends continue, and they could affect the economy by weakening the consumer… I am concerned.  But it is not something as a policy maker that I can easily address.”   
  • Separately, in a July 16 speech at the University of Southern CaliforniaRichard W. Fisher, President and CEO of Federal Reserve Bank of Dallas said, “I believe we are experiencing financial excess that is of our own making” and “the money we have printed has not been as properly circulated as we had hoped. Too much of it has gone toward corrupting or, more appropriately stated, corrosive speculation.”  Fisher also quoted a New York Times article by Neil Irwin that said, “Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals.”

MY TAKE
  • Regarding Lockhart – His comments reinforce the view that the actions by the Federal Reserve address the needs of the financial sector and Wall Street, rather than Main Street and the broader U.S. population.
  • Regarding Fisher – Justifiably, he continues to believe that the Federal Reserve's actions have been too aggressive and may have moved beyond the point of diminishing returns.
  • Regarding market bubbles – valuations many be extended, but investor demand for positive returns could drive markets higher.  However, signs of a weakening consumer or increased global conflicts could result in continued market volatility.

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