The Unintended Consequences of Post-Financial-Crisis Fed Policy

It’s been nearly ten years since the global financial crisis began, and I’m reading more reflections on this event and the way we responded to it. With the benefit of hindsight, it becomes easier to see where even the best intentions may have not yielded optimal results.

This interview by Bloomberg columnist Joe Nocera (All the Devils Are Here) with Karen Shaw Petrou, perhaps the leading expert on U.S. financial services regulation, makes the provocative point that U.S. monetary policy post the financial crisis may well have exacerbated income inequality. How? By imposing capital requirements that make it less attractive for banks to lend to middle class customers, or to make relatively riskier loans to small businesses. Although unintended, Petrou says, financial regulation “has concentrated more and more money in fewer and fewer hands.”

In a Distinguished Speakers Lecture earlier this year to the Federal Reserve Bank of New York, Petrou made a number of other related points:

• “Both wealth and income equality have gotten dramatically worse since 2010.”
• This is because financial assets (disproportionately owned by the top1%) have appreciated more than, say, housing and other assets owned by middle-class Americans.
• The savings accounts of middle-Americans “have been particularly hard hit by ultra-low rates.”
• Financial stability and economic equality are intertwined.