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Via Kevin Drum, Steve Waldman has a smart post about the difference between asset and consumer price inflation, and how inequality contributes to asset bubbles. Essentially, the monetary policy constructed during the "Great Moderation" of the nineties and oughts created an untenable situation where the wealthy were able to invest, driving up asset prices into a bubble, and the middle class relied on credit to fund their purchases as wages stagnated. But ...
[I]n exchange for apparent stability, the central-bank-backstopped "great moderation" has rendered asset prices unreliable as guides to real investment. I think the United States has made terrible aggregate investment decisions over the last 30 years, and will continue to do so as long as a "ride the bubble then hide in banks" strategy pays off. Under the moderation dynamic, resource allocation is managed alternately by compromised capital markets and fiscal stimulators, neither of which make remotely good choices. Second, by relying on credit rather than wages to fund middle-class consumption, the moderation dynamic causes great harm in the form of stress from unwanted financial risk, loss of freedom to pursue nonremunerative activities, and unnecessary catastrophes for isolated families. Finally, maintaining the dynamic requires active use of policy instruments to sustain an inequitable distribution of wealth and income in a manner that I view as unjust. In "good times", central bankers actively suppress the median wage (while applauding increases in the mean wages driven by the upper tail). During the reset phase, policymakers bail out creditors. There is nothing "natural" or "efficient" about these choices.Inequality, for liberals, is often a justice concern. But it's also problematic for the economy at large. This isn't the first time income inequality has been posited as the cause of the crisis, but it is clear that because the Fed's monetary policy helped set up the conditions for this kind of economy, future Fed policy needs to take this into account -- and that means attempting to stop asset bubbles from forming, not just trying to clean them up when they burst.
-- Tim Fernholz
