Treasury Secretary Yellen: 'I Think We're in a Good Fiscal Position'
(CNSNews.com) - President Joe Biden's big-government, big-spending plans should be paid for, because we need "fiscal space" to address emergencies, Treasury Secretary Janet Yellen told NBC's "Meet the Press" on Sunday.
"Well, first of all, we think the plans are extremely important and necessary to invest in our economy," Yellen said.
She noted that Biden wants to raise taxes on corporations and the wealthy to foot the bill.
"He has made clear that he believes that permanent increases in spending should be paid for, and I agree," Yellen said:
I think we're in a good fiscal position. Interest rates are historically low. They've been that way for a long time, and it's likely they'll stay that way into the future. But we do need fiscal space to be able to address emergencies like the one that we've been in with respect to the pandemic. We don't want to use up all of that fiscal space. And over the long run, deficits need to be contained to keep our federal finances on a sustainable basis.
So I believe that we should pay for these historic investments. There will be a big return. I expect productivity to rise and will be great returns from investing in research and development and enabling families to participate with paid leave and child care support in the workforce. So I think it's true that a stronger economy will generate more tax revenues, but I think the safest thing is to pay for them, and we're doing it in a way that's fair.
I should also mention that an important way of paying for this is increasing tax compliance. It's estimated that underpayment of taxes that are really due is costing us, the federal government, about $7 trillion over a decade. And there's an important proposal here to increase compliance to fund the IRS so that -- and this is a matter of fairness -- to increase and collect the tax revenue that's due under our tax code.
Yellen said the trillions of dollars of spending included in the American Jobs Plan and the American Families Plan is "spread out quite evenly over eight to ten years," so it shouldn't accelerate inflation:
"And the Federal Reserve has the tools to address inflation, should it arise. We will monitor that very carefully. We're proposing that the spending be paid for. And I don't believe that inflation will be an issue, but if it becomes an issue, we have tools to address it. These are historic investments that we need to make our economy productive and fair."
The cheap money provided by the Fed is enabling the orgy of speculation which has seen the transfer of trillions of dollars into the hands of the world’s richest individuals, while millions of people in the US and around the world confront a return to conditions not seen since the days of the 1930s Great Depression.
Wall Street margin debt surges to record high
Wall Street’s S&P 500 index reached a new record high on Thursday on the back of the decision by the Fed the previous day that its continuous boosting of financial markets, through the injection of more than $1.4 trillion a year in asset purchases, would continue for a “long time.”
The commitment came despite indications of increased US economic growth and rising inflation which, in times past, would have set the stage for a tightening of monetary policy. But such is a fear that even the hint of a move in that direction will spark a collapse of the speculative financial boom that Fed chair Jerome Powell took every opportunity at his press conference to rule it out.
The extent of the speculative mania, which goes way beyond anything seen in the past, is indicated by broad financial trends and specific events.
One of the most significant broad indicators is the escalation of margin lending in which investors borrow money from brokers to finance share purchases and trade in financial markets. The collateral for the loan is the financial asset purchased, with the broker able to demand more cash from the investor—a margin call—if its market value falls.
The perils of margin trading were revealed last month with the collapse of the previously little-known family investment firm Archegos Capital as a result of such a call. It had amassed some $50 billion in loans from some of the world’s major banks, most notably Credit Suisse, and its demise left the banks with a total loss of $10 billion.
But despite this warning sign, the escalation of margin debt is continuing. The Financial Industry Regulatory Authority, a supposed Wall Street watchdog operating under the supervision of the Securities and Exchange Commission, has reported that margin debt at the end of March was a record $822 billion.
This compares with the figure of $479 billion at the same time last year and more than double the peak of $400 billion in 2007 on the eve of the financial crisis of 2008.
Placing these numbers in context, the Financial Times reported calculations by the London-based fund ABP Invest showing that in the 2000 dotcom and 2007 credit booms US margin debt reached a level equivalent to around 3 percent of gross domestic production. It is now equivalent to nearly 4 percent.
But even the figures provided by FINRA are a major underestimation of the total debt involved because, through the use of financial derivatives, banks are able to further finance highly leveraged trading as was revealed in the collapse of Archegos.
The cheap money provided by the Fed is enabling the orgy of speculation which has seen the transfer of trillions of dollars into the hands of the world’s richest individuals, while millions of people in the US and around the world confront a return to conditions not seen since the days of the 1930s Great Depression.
There was a revealing exchange which took place during the CBS program “60 Minutes” earlier this month when Fed chair Jerome Powell was questioned on the escalation of margin debt.
The interviewer, Scott Pelley, noted there had been a 49 percent increase in margin debt so far this year and asked: “At what point does the Federal Reserve start to rein in this speculative bidding up of stock prices based on borrowed money?”
Powell replied: “That sounds like margin debt. I don’t know that statistic. I really can’t react to that statistic.”
The assertion by the Fed chief that he is completely ignorant of the level of margin debt, given its significance for the stability of the financial system, simply beggars belief.
Powell chose to answer in the way he did because of fear that any comment on the issue—and even the vaguest hint that margin debt was reaching dangerous levels and might need to be reined in—would set off turbulence on Wall Street, so dependent has it become on the flow of ultra-cheap money from the central bank.
Another broad indicator is the increase in the money raised by special purpose acquisition companies (SPACs). The firms, sometimes described as blank cheque companies, raise money and obtain a stock market listing with the aim of taking over another company which wants to go public and join the share market boom without having to through the often-complex procedure of making an initial public offering.
In the first three months of this year SPACs raised almost $88 billion, more than for the whole of 2020.
There are numerous individual phenomena which express the extent of the speculation. Chief among these is bitcoin, which earlier this month rose to a high of $64,000 before pulling back somewhat.
The rise and rise of Tesla shares is in the same category. The company is also tied in with the bitcoin speculation. On Thursday it announced its net income for the March quarter was $438 million, a record. The company revealed it had sold $1.5 billion worth of bitcoin which contributed $101 million to the bottom line.
The complete divorce of the share market value of the company from underlying real value—a characteristic feature of the stock market boom as a whole—is indicated by the fact that Tesla’s market value of $700 billion is more than five times the combined value of Ford and General Motors. Sales of the former in the US in the first quarter alone were more than double Tesla’s global sales for a year.
Possibly the most egregious expression of the market mania is the case of Hometown International which owns a small deli in Paulsboro, New Jersey. The deli had sales of just $21,772 in 2019 and only $13,976 in 2020 when it was closed for six months due to the COVID-19 pandemic. But recently its share market valuation topped $100 million. As one hedge fund manager commented “the pastrami must be amazing.”
The rise and rise of Hometown’s market value is indicative of a broader process. Shares and other assets, including major industrial commodities such as lumber and copper, are being purchased purely on the basis that other buyers will come in at an even higher price.
While commentators, barely able to see beyond the end of their nose and no doubt dazzled by the rise of their own portfolios, have been hailing the market rise as a resurgence of the US economy out of the pandemic, it is an expression of its deeply diseased character.
It should be recalled that the origins of the present maniacal phase of the stock market boom lie in the massive intervention by the Fed beginning in March 2020 when markets collapsed and the $21 trillion market for US Treasury bonds, the basis of the global financial system, froze.
The Fed’s intervention, amounting to trillions of dollars and supporting all financial markets, including the purchase of stocks for the first time, was an extension and qualitative development of the policies it has pursued ever since the stock market crash of October 1987 when it initiated the program of supplying ever cheaper money to the markets in response to a crisis.
The history of these interventions shows that whatever their effect in short-term stabilisation they prepare the conditions for the resurgence of the underlying crisis in even more virulent form.
All the conditions are now developing for another crisis, going far beyond the scale of the crash of 2008, in which the working class will be directly confronted with the necessary task of taking political power in its own hands in order to begin the reconstruction of the US and global economy on socialist foundations.
This Treasury Official Is Running the Bailout. It’s Been Great for His Family.
Deputy Treasury Secretary Justin Muzinich has an increasingly prominent role. He still has ties to his family’s investment firm, which is a major beneficiary of the Treasury’s bailout actions.
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Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin have become the public faces of the $3 trillion federal coronavirus bailout. Behind the scenes, however, the Treasury’s responsibilities have fallen largely to the 42-year-old deputy secretary, Justin Muzinich.
A major beneficiary of that bailout so far: Muzinich & Co., the asset manager founded by his father where Justin served as president before joining the administration. He reported owning a stake worth at least $60 million when he entered government in 2017.
Today, Muzinich retains financial ties to the firm through an opaque transaction in which he transferred his shares in the privately held company to his father. Ethics experts say the arrangement is troubling because his father received the shares for no money up front, and it appears possible that Muzinich can simply get his stake back after leaving government.
When lockdowns crippled the economy in March, the Treasury and the Fed launched an unprecedented effort to buy up corporate debt to avert a freeze in lending at the exact moment businesses needed to borrow to keep running. That effort has succeeded, at least temporarily, with credit continuing to flow to companies over the last several weeks. This policy also allowed those who were heavily invested in corporate loans to recoup huge losses.
Muzinich & Co. has long specialized in precisely this market, managing approximately $38 billion of clients’ money, including in riskier instruments known as junk, or high-yield, bonds. Since the Fed and the Treasury’s actions in late March, the bond market has roared back. Muzinich & Co. has reversed billions in losses, according to a review of its holdings, with 28 of the 29 funds tracked by the investor research service Morningstar Direct rising in that period. The firm doesn’t publicly detail all of its holdings, so a precise figure can’t be calculated.
The Treasury is understaffed, and Muzinich was overseeing two-thirds of the department before the crisis hit. He spent his first year as the Trump administration’s point man on its only major legislative achievement, the landmark $1.9 trillion tax cut that mainly benefited the wealthy and corporations.
As the markets panicked about the economic impact of the coronavirus, Muzinich’s responsibilities expanded. The Treasury worked with the Fed on the emergency lending programs, and the agency has ultimate power to sign off. Muzinich was personally involved in crafting the programs, including the effort to bail out the junk bond market, The Wall Street Journal reported in April. He communicates with Fed officials daily by phone, email or text, the paper said.
That effort has many skeptics. The Fed has never bought corporate debt in its more than 100 years of existence, much less that of the indebted and fragile companies that raise money through the sale of junk bonds. Private equity firms, hedge funds and specialty investment firms like Muzinich & Co. dominate the market for junk-rated debt. In effect, the Fed has swooped in to protect the most sophisticated investors from losses on some of their riskiest bets.
Muzinich & Co. Profited From the Government’s Actions
Muzinich & Co.’s largest fund, with over $10 billion in assets, jumped in value when the Treasury and the Federal Reserve announced plans to buy bonds.
Justin Muzinich’s ongoing ties to the family firm present a thicket of potential conflicts of interest, ethics lawyers said. Instead of immediately divesting his stake in the firm when he joined the Trump administration in early 2017, Muzinich retained it until the end of that year. But even then, he did not sell his stake and use the proceeds to buy broad-based securities such as index funds, as is common practice. Instead, he transferred his piece of the company to his father, who owns Muzinich & Co. In exchange, he received what amounts to an IOU — a written agreement in which his father agreed to pay him for the shares, with interest, but with no principal due for nine years.
“This is something akin to a fake divestiture,” said Kathleen Clark, a law professor and ethics specialist at Washington University in St. Louis. “It sure looks like he is simply parking this asset with a relative, and he will likely get it back after he leaves the government.”
A Treasury spokeswoman declined to say whether Muzinich has pledged not to take back the stake in the family firm once his public service ends. Muzinich “takes his ethics obligations very seriously” and “any suggestion to the contrary is completely baseless,” she said.
She added the arrangement with his family firm was approved by the Office of Government Ethics and agency ethics lawyers, who recently reexamined the setup given Muzinich’s role in the economic crisis response. They concluded that there is no currently envisaged scenario in which Muzinich would make decisions as a government official that would affect his father’s ability to repay the money he owes under the IOU.
“Treasury’s career Designated Agency Ethics Official has determined that there is no such conflict of interest, as there are no current or reasonably anticipated matters in which Deputy Secretary Muzinich would participate that would affect the note obligor’s ability or willingness to satisfy its financial obligations under the note,” she said in a statement. (The note obligor is Muzinich’s father.)
Muzinich & Co. did not respond to multiple requests for comment.
Muzinich’s relationship with the family firm also creates potential conflicts related to Muzinich & Co.’s clients. The firm makes money by charging investment management fees to several dozen wealthy individuals, insurance companies, pension funds, as well as what filings describe as a “quasi foreign government corporation.” The client list is not public and it’s unclear whether Muzinich would know about clients that came on board since he left. But any large investor has much to gain, or lose, from decisions being made by the Treasury about the bailout policies.
“The clients of this firm, I imagine, must be thrilled that Muzinich has this vitally important, powerful position with a huge amount of discretion and authority,” Clark said.
The Treasury spokeswoman declined to answer a question about the firm’s clients.
Even as Justin Muzinich has presided over bailout policies criticized by some observers, Muzinich & Co. executives have praised the government’s actions in recent briefings for investors. One described the interventions “as providing somewhat of a floor underneath the high yield market.”
Another Muzinich executive, David Bowen, who manages one of the firm’s high-yield bond portfolios, said during a May 20 webinar, “The Fed has been about as supportive, helpful, accommodative — whatever word you want to use — as anyone could imagine.”
Untangling the Financial Relationship
When Treasury Secretary Steven Mnuchin hired Justin Muzinich as counselor in early 2017, in many ways he was selecting a younger version of himself.
Like Mnuchin, Muzinich grew up in New York City, the son of a wealthy finance executive. Also like his boss, Muzinich spent years collecting a series of elite credentials: He attended Groton and holds degrees from Harvard College, the London School of Economics, Yale Law School and Harvard Business School. He worked at Morgan Stanley and spent a few months at a hedge fund associated with billionaire Steven A. Cohen, followed by a few years at EMS Capital, which invests the money of the wealthy Safra family.
Colleagues praise Muzinich as hardworking and serious, and Democrats have expressed relief that he isn’t as inflammatory as many other Trump appointees. Powell, the Fed chair, called Muzinich “creative and extremely capable” in a statement to The Wall Street Journal in April.
In 2010, he joined the family firm and became its president. His father, George, founded the company in 1988, specializing in handling portfolios of American high-yield bonds for European pension funds. The company expanded to offer funds to other institutional investors and wealthy individuals, but it stuck to its focus on corporate credit — particularly the riskier type that pays higher interest rates. Headquartered in New York and London, the firm has eight offices across Europe and one in Singapore.
“Talking about credit all the time might sound boring, I’m sure it does,” Justin Muzinich said in a 2014 interview, “but that is what makes you good.”
As he rose in the family business, Muzinich also launched himself into GOP policy circles, advising the presidential campaigns of Mitt Romney in 2012 and Jeb Bush in 2016. He owns a $20 million ultramodern beachfront house in the Hamptons and a $4.5 million Park Avenue apartment and commutes from New York City to work in Washington.
When Muzinich entered the Trump administration, he reported owning stock and stock options in the family firm collectively worth at least $60 million. The true value could be much higher, but disclosure rules don’t require officials to give a specific figure for any asset worth more than $50 million.
The Treasury’s ethics officers are frequently called on to rule on complex questions, given that the department tends to attract people from careers on Wall Street who have large, complicated financial holdings — from ex-Goldman Sachs Chairman Hank Paulson to banker and Hollywood financier Mnuchin.
Stakes in individual companies can create conflicts of interest. So incoming Treasury officials typically sell those stocks and invest in broad-based options like mutual funds. Ownership in private investment funds can be particularly thorny because ethics rules treat each of the fund’s investments in specific companies as sources of potential conflicts. Sarah Bloom Raskin, who preceded Muzinich as deputy secretary in the Obama administration, reported holding only a collection of index and mutual funds that either track the whole stock market or a large basket of companies.
But government ethics officials did not require Muzinich to sell his stake in the family firm through his first year in office as counselor to Mnuchin.
According to ethics filings, Muzinich said that he did not divest it until December 2017, the month the tax law was signed. (Several months later, in April 2018, Trump nominated him to be deputy secretary.)
Muzinich did not receive cash for most of his stake in the family firm. Instead, his more recent financial disclosures show that the stake, held in a family trust, was replaced with an opaque asset described as a “receivable from family,” valued at over $50 million.
Muzinich’s disclosure filings don’t reveal much about this asset at all. They don’t say who the family member is or explain the arrangement. They don’t say how the terms were negotiated, or even if the valuation of the deal was vetted by an independent third party.
It turns out that Muzinich transferred his stake to his father. But his father didn’t have to pay him right away. According to a Senate Finance Committee memo obtained by ProPublica, Justin received two promissory notes from his father in return for the shares. The notes pay Justin between $1 million and $5 million in interest over a year, at a rate of 2.11%. Moreover, his father does not have to pay any principal on the loan for nine years.
Neither the financial disclosure forms nor the Senate memo say how long the agreement is supposed to last. Neither addresses the possibility of his getting the shares back after he leaves the government. The Treasury says the transaction is “not reversible” but did not elaborate.
In other words, Justin still has an ongoing long-term stake in the financial well-being of Muzinich & Co., since his father now owes him more than $50 million. If the company were to plummet in value or even go under, it could cost Justin. Actions the Treasury and the Fed take can either enhance the chances he gets his money back or lower them.
The Treasury defended the IOU transaction as an appropriate remedy for any conflicts of interest. The agency provided a statement from Elizabeth Horton, an ethics attorney who left the agency in 2019 and who worked with Muzinich on the divestiture from his family business. Horton said that when Muzinich first joined the agency, “the Treasury ethics office correctly advised him that he did not need to divest his holdings in his family business because of the generalized nature of his work on tax reform legislation.” She said that when his duties changed, “I advised Mr. Muzinich that an exchange for a fixed value note was an appropriate way to divest.”
Horton said that advice was “consistent with practice in previous administrations” — though the Treasury declined to cite similar cases. “Muzinich worked very closely with the ethics office and was extremely attentive to his ethics obligations,” Horton said.
ProPublica reached out to four ethics officials, including two former Treasury ethics lawyers. None could recall a similar divestment transaction. Three of the four disagreed that it resolved Muzinich’s conflicts, while one said that turning it into an asset with a value that doesn’t fluctuate with future developments should shield him from any allegations of impropriety.
The deal does not look like an arms-length transaction, said Virginia Canter, who served as a career ethics attorney at Treasury during the George W. Bush administration and is now at the watchdog group Citizens for Responsibility and Ethics in Washington.
“The terms of the loan suggest something less than a bona fide transaction,” she said. “Once he leaves office, nothing in the arrangement appears to preclude Muzinich from forgiving the debt owed to him by his father so they can amicably agree on returning to Muzinich the interest in the Muzinich family business.”
As ranking member of the Finance Committee, Sen. Ron Wyden opposed Muzinich’s nomination as deputy secretary because of his role in crafting the tax bill. Although he would have preferred a cash sale of the Muzinich & Co. stock, Wyden said in a statement that in July 2018 Muzinich had agreed to “strengthen his recusal commitments to include matters where his family’s company is a party.”
That satisfied Wyden at the time, but it is a very narrow restriction. A vast range of issues before the Treasury could affect Muzinich & Co. regardless of whether the firm was directly a party to any of them.
How Justin Muzinich treated the transaction for tax purposes could reveal whether it was a true and final sale or not.
Ordinarily, a sale of an asset such as equity in a company would trigger a capital gains tax bill. In Muzinich’s case, that could run into the tens of millions of dollars, even though his father paid him no cash upfront. But there is an exception if the asset in question is merely transferred with a commitment to have it returned, said Steve Rosenthal, a tax law expert at the Urban-Brookings Tax Policy Center.
“If you are merely parking or pledging securities, and you are going to get them back, that’s not viewed as a taxable transaction,” he said.
It is not clear how he reported the transaction to the IRS, and whether he was left with a huge tax bill. The Treasury declined to comment on the tax issues.
Tax Reform — for Friends and Family
Through his first year in the administration, even as Muzinich continued to own his stake in the family firm, he met with a wide range of business executives to hash out major tax provisions that would affect them, according to his 2017 calendars that ProPublica obtained after suing the Treasury last year under the Freedom of Information Act. Others were obtained by the watchdog group American Oversight. The Treasury redacted large sections of the calendars, saying that they required consultation with the White House before they could be released.
One of the most important principles in the federal government ethics rules covers whether an official is dealing with a “particular matter” that would affect a discrete group of people with specific interests or a “general matter” that affects a larger and more diverse group.
The Treasury spokeswoman said the tax reform bill was to affect a very large and diverse group, so ethics rules did not prevent Muzinich from working on it. He was allowed to keep his equity in the company while working on the tax bill because his “duties did not include particular matters that required divestiture of certain assets.”
But many industries had specific interests in the tax bill that they lobbied on — industries that may include clients of Muzinich & Co. Insurance companies, for example, featured prominently. Muzinich met with trade groups representing insurers as well as Liberty Mutual, The Hartford, Zurich and Blue Cross Blue Shield. In the final tax bill, property and casualty insurers fared particularly well by dodging new limitations on deductions that applied to other companies.
Insurance companies invest their premiums in order to increase their profits. In its regulatory filings, Muzinich & Co. reports that 17 of its 89 clients are insurance companies, which have given the firm more than $1.4 billion to invest. Muzinich & Co. did not provide a list of its clients.
Some of the companies Muzinich & Co. has stakes in also have been lobbying the Treasury on their own behalf. For example, Muzinich & Co. helps its clients invest in business development companies, a type of investment fund that enjoys lower taxes in exchange for providing capital to medium-sized companies. The firm itself owns stock in BDCs, many of them run by private equity companies such as Ares Capital Corporation, which has paid millions of dollars to lobby for looser rules governing the BDC industry.
Even beyond any overlap with the family firm’s interests, Muzinich’s calendars, which cover the period from February to September of 2017, reflect the administration’s priorities in negotiating the tax deal. Muzinich spent long days in meetings with private equity titans, energy company CEOs and heavy-hitting interest groups like the Business Roundtable and the anti-tax group Americans for Prosperity. His calendar shows no meetings with labor unions or progressive groups.
Muzinich did meet often with the Treasury’s in-house tax experts but frequently didn’t follow their recommendations. Richard Prisinzano, who served in the agency’s tax analysis office until August 2017, recalled trying to tell Mnuchin and Muzinich that drastically lowering corporate tax rates would likely prompt businesses to transform into C corporations, which often pay lower rates under the new law.
He argued that such a change would further reduce tax revenues. Muzinich disagreed, Prisinzano said, protesting that businesses wouldn’t change their corporate form just to lower their taxes. “He really pushed back,” Prisinzano recalled. “He said to me, ‘The secretary is a numbers person, and the numbers don’t make sense to him.’”
“‘I’m a numbers person, and they make perfect sense to me,’” Prisinzano said he responded. “That was not an answer that they liked.”
In the following two years, many large businesses did indeed convert into C corporations, including private equity giants Ares, Blackstone and KKR. The government hasn’t produced an estimate of how big a hit taxpayers took from these conversions.
During his confirmation hearing as deputy secretary in July 2018, Democratic senators pressed Muzinich on whether he agreed with the White House that the tax bill would “pay for itself,” despite the dire projections of independent forecasters such as the nonpartisan Congressional Budget Office. “Yes,” Muzinich responded.
It has not come close, as corporate tax collections plunged and left the national debt at historic levels on the eve of the pandemic.
Muzinich Takes on the COVID-19 Crisis
As the economic response to the novel coronavirus consumed Washington in March, Mnuchin turned again to Muzinich to negotiate with Congress over the shape of a bailout intended to sustain companies as they weathered the worst part of the crisis.
Ultimately, Trump administration officials and lawmakers settled on a package worth more than $2 trillion, divided into aid regimens for different sectors of the economy. While setting general parameters, the Coronavirus Aid, Relief and Economic Security Act gives the Treasury wide latitude over how the money is to be distributed. It calls for $50 billion in grants and loans for the airline industry, for example, with few rules on who should get what. (In another potential intersection with Muzinich’s Treasury work, Muzinich & Co. started a new business line to loan money to airlines to buy planes in February.)
Perhaps the greatest power the Treasury now has is the authority to sign off on Fed loan programs funded with CARES Act money. The Fed has said it will leverage that money to lend up to several trillion dollars.
Among their biggest decisions: Which firms to include in the $600 billion Main Street Lending Program, which will lend directly to mid-sized businesses, and how to structure two programs that will purchase up to $750 billion in corporate bonds.
The Main Street program, which has yet to launch, changed substantially after it was first announced to sweep in bigger companies and those with heavier debt loads. Offering a glimpse into how the Treasury directly shaped the Fed programs, Energy Secretary Dan Brouillette told Bloomberg the change was made in part to make sure beleaguered oil companies had access to the program’s favorable terms. Muzinich & Co.’s U.S.-based funds include dozens of energy companies.
Mnuchin also deputized Muzinich to fix problems that arose during the first round of funding for the Paycheck Protection Program, which offers forgivable loans to small businesses. The government hasn’t said who got money through the program, but Muzinich & Co.’s portfolio includes many companies that are small enough to be eligible.
The Fed’s bond purchasing programs will go even further to help companies with poorly rated credit.
On March 23, the Fed and the Treasury announced a sweeping stimulus program that would involve buying hundreds of billions of dollars of investment-grade bonds. Selling bonds is a way for large companies like Boeing or PepsiCo to raise money for new investments, to fund day-to-day operations or to pay back older loans. Companies that are strong and profitable are expected to be able to pay back the borrowed money. Their bonds are deemed “investment grade” and come with lower interest rates. The news of the Fed program on its own heralded a dramatic recovery in the bond market, which in three weeks recovered nearly all of the 13.6% it had lost since the plunge began on March 6, according to one index.
Then, on April 9, the Fed announced, with the Treasury’s approval, that it would expand its efforts to buy some junk bonds. These carry higher interest rates because the borrowing companies are viewed as riskier and may already be heavily in debt. One index tracking that market segment surged nearly 8% on the news, the most in a decade. This risker category of bonds has expanded dramatically in recent years as companies took on higher debt burdens to do things like acquire competitors and buy back stock. These are the bonds in which Muzinich & Co. has long specialized.
At the end of 2019, Muzinich & Co. reported it had $2.8 billion of assets under management in its U.S. high-yield bond strategy. A Muzinich fund that focuses specifically on those bonds took significant losses in March, as companies like oilfield services provider Targa Resources and Caesars Entertainment saw the price of their bonds fall 30% and 35% respectively.
The government’s announcement buoyed Muzinich & Co.’s high-yield holdings along with everyone else’s. The portfolio manager for the firm’s U.S. high-yield offering also praised CARES Act’s tax provisions that would “help high yield companies.”
In a separate development in May, the Fed expanded another Treasury-backed lending program in a way that could help Muzinich & Co.’s portfolio. The central bank said May 12 it would support “syndicated loans,” another form of corporate debt often in which riskier firms borrow money from multiple lenders. Muzinich & Co. had more than $3 billion in assets under management in U.S. and European syndicated loans at the end of last year.
The good news for Muzinich & Co. keeps coming. As the firm’s head of investment strategy, Erick Muller, told investors in a May 13 webcast about the junk bond market: “The recovery is pretty spectacular.”
Doris Burke and Hannah Fresques contributed reporting.
JPMorgan Chase Bank Wrongly Charged 170,000 Customers Overdraft Fees. Federal Regulators Refused to Penalize It.
Documents and records show that bank examiners have avoided penalizing at least six banks that incorrectly charged overdraft and related fees to hundreds of thousands of customers.
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This story was co-published with The Capitol Forum.
Federal bank examiners considered levying fines and sanctions when JPMorgan Chase informed them last year that faulty overdraft charges caused by a software glitch had impacted roughly 170,000 customers.
But the bank urged the Office of the Comptroller of the Currency, or OCC, its chief regulator, to take less severe action, according to two people directly involved in the probe and internal documents reviewed by ProPublica and The Capitol Forum.
Rather than openly penalizing Chase, the nation’s largest bank, OCC officials decided to issue a quiet reprimand — a supervisory letter — that would go into the bank’s file and stay out of public view, according to the people and regulatory paperwork.
The agency’s deputy chief counsel, Bao Nguyen, approved the supervisory letter in June and accepted Chase’s explanation of the incident and its promise to repay its customers, according to the people and regulatory paperwork.
Since 2017, when President Donald Trump took office, the OCC has found at least six banks wrongly charged overdrafts and related fees, but in each case, the agency quietly rebuked the bank rather than pushing for fines and public penalties, the investigation by ProPublica and The Capitol Forum shows.
In several instances, front-line examiners who wanted the bank to be fined were overruled by OCC officials. The previously unreported cases show how the OCC under Trump quietly held back from punishing banks for abuses, while the administration sought more broadly to loosen banking rules and other consumer financial protections.
Brian Brooks, a former bank executive, has led the OCC on a temporary basis since May; last month, the president nominated Brooks to a full, five-year term.
Brooks and his predecessor at the OCC, Joseph Otting, both helped run OneWest Bank, a lender that Treasury Secretary Steve Mnuchin founded in the aftermath of the 2009 financial crisis.
Banks found to have charged excessive overdraft fees and other faulty charges include Wall Street giants such as JPMorgan Chase, American Express and U.S. Bank and large regional lenders such as Zions Bank, Union Bank and First Horizon.
An OCC spokesman said the agency would not comment on the specific instances cited in this story because such matters are confidential. The OCC has a range of tools to police bank misconduct, the spokesman said.
“It is frequently the case that deficiencies can be corrected much more quickly — including correcting harm to customers — by using supervisory tools,” said spokesman Bryan Hubbard, referring to confidential sanctions. “Most importantly, the absence of a public penalty does not indicate a lack of action.”
A bank might be cited first with a confidential sanction and later punished openly, Hubbard said. “Our actions may or may not be complete.”
Big banks collect over $11 billion in overdraft-related fees each year, according to a report from the Center for Responsible Lending, which found in a study that punitive bank fees often hit vulnerable customers the hardest.
Overdraft policies vary by bank but the typical fee is $35, and a customer can accrue additional penalties multiple times a day, CRL reported. Banks could simply decline a charge if a customer lacked the funds, but instead lenders promote “overdraft protection” as a convenience that comes at a cost. For customers whose accounts often hover near zero, that convenience is just another snare in a financial trap, said Rebecca Borné, a CRL lawyer who worked on the study.
“Imagine you struggled to buy groceries over the weekend and you wake up Monday to $100 in overdraft fees,” Borné said. “That happens to people who can least afford to pay.”
Chase had promised some online customers that they would get an alert before their accounts went negative, but the bank told the OCC that did not happen as roughly 170,000 accounts dwindled to zero, according to industry and regulatory officials. Chase charges $34 for an overdraft and allows three such charges a day on an account with insufficient funds. A customer could be charged as much as $102 per day.
Chase, which operates nearly 5,000 locations nationwide, reported the faulty auto alerts to the OCC as required, but the problem had stayed out of public view until now.
“We found that some customers were not receiving some account alerts due to a systems issue in 2018,” Chase spokesman Michael Fusco said. “We have fixed the issue, proactively notified and reimbursed affected customers.”
Chase had roughly 52 million active digital customers at the end of last year, according to securities filings, and that figure has grown by millions each year over the last several years.
In interviews, several bank branch employees working in different parts of the country said Chase could have easily underestimated the number of customers who were impacted, based on the number of complaints they heard.
Chase insists its remediation work was reliable. “We completed a thorough review of all accounts and identified the impacted customers,” said Fusco.
Under the agreement between Chase and the OCC, the bank agreed to refund customers that it believes were wrongly charged, but with no outside, independent check on the work, officials said.
The Chase matter shows how faulty overdraft policies can take hold at a bank and weigh on customers.
Jamie Dimon, the CEO of JPMorgan Chase & Co., has in recent years pushed the bank’s online presence and a corporate mantra “Mobile first, digital everything.” Chase encourages consumers to find a screen and open their own Total Checking accounts.
With a few clicks, a new Chase customer can choose to receive an account alert for everything from low balances to suspicious transactions. Customers who rely on online banking might rarely have cause to visit a Chase branch.
But customers did come knocking when their auto alerts failed and they were hit with surprise overdrafts and other penalties, said current and former employees interviewed by ProPublica and The Capitol Forum.
Chase customers had complained about faulty auto alerts for more than 12 months when the bank brought the issue to the OCC late last year, according to regulatory officials and agency paperwork.
Chase insisted that the error was just a coding hiccup and that the fix was manageable, but some OCC officials believed the bank still deserved punishment since so many customers were hurt.
To some front-line examiners, the faulty alert program amounted to an “unfair and deceptive” practice that could draw a public penalty under the law.
The question of what to do next fell to Nguyen.
Nguyen joined the OCC in June 2018 as a deputy to Otting, then Trump’s OCC chief, and Nguyen had a large role in managing one of Otting’s top priorities: rewriting the Community Reinvestment Act, which requires banks to lend in poor neighborhoods.
Otting presented the new CRA in May and stepped down a day later. The CRA rewrite will make it easier for banks to pull back from serving poor neighborhoods, according to several consumer-advocacy groups that are challenging the move in court.
When the Chase matter reached Nguyen’s desk, he agreed that the bank had been deceptive, but he ruled that no penalty was warranted, according to regulatory paperwork.
For one thing, Chase had stepped forward to admit the problem. Regulators can give banks credit for policing themselves, and Nguyen decided that would hold true in the Chase matter, regulatory officials said.
Nguyen did agree to record the incident in the supervisory letter added to the bank’s confidential file. Nguyen declined to comment and referred questions to the OCC.
Supervisory letters are one of the mildest rebukes that the OCC can issue, and critics say the letters have negligible impact.
After Wells Fargo admitted in 2016 that its employees created fake accounts to hit skyhigh sales goals, the OCC found that it had been issuing supervisory letters for seven years warning the bank about its sales practices.
Lawyers from the OCC and Chase worked together to write the final language of the supervisory letter in which the bank insisted that it did nothing wrong, according to regulatory officials.
Notably, said the officials, the OCC handled the matter itself and without help from the Consumer Financial Protection Bureau — an agency created to ensure that financial firms do not mistreat ordinary customers.
“It would not have gone down well if the OCC did not involve us in a consumer matter,” said Richard Cordray, the first CFPB director who served President Barack Obama.
Cordray said that he would not second-guess any regulator’s decision about sanctions without knowing the facts, but that the Trump administration had clearly shown it was not eager to sanction bank wrongdoing.
“These are different times and different leaders,” he said, “but the OCC and CFPB used to take aggressive action together when we saw consumers being hurt.”
The CFPB did not respond to a request for comment.
Dubious disclosures and lax enforcement are part of many overdraft abuses, said Borné of the CRL, and they were a problem in the incidents handled by the OCC. American Express, the credit card giant, also offers short-term loans that are supposed to be repaid in regular monthly installments. Customers pay interest on the loan, of course, but American Express never explained that customers who missed a payment could also be charged interest on late fees and bounced checks, the OCC concluded. That was unfair and deceptive, OCC examiners determined in recent months, but the agency’s chiefs decided to hand the bank a quiet reprimand rather than a public sanction.
“Due to a technical error, some personal loan customers were incorrectly charged,” American Express said in a statement. The firm said it will now notify customers and issue credits for undue fees. American Express declined to say how many customers were affected but said the charges were generally less than $1 each.
Seven years ago, U.S. Bank unveiled a novel credit card program that the bank said could reduce costs for many customers. FlexControl Essentials promised to let customers first pay off everyday purchases — like gasoline and groceries — which the bank said could lower the monthly bill.
But customers of U.S. Bank, the nation’s fifth-largest lender, were baffled by the Byzantine system used to determine what was an “everyday” purchase and how much money they actually owed, according to several current and former bank employees.
U.S. Bank knew FlexControl Essentials was balky, and the bank spent five years trying to improve it before retiring the offer in 2018, the year the OCC took notice, according to bank and regulatory officials.
Within the OCC, some officials thought FlexControl Essentials was more than just a credit card program gone awry — it was a consumer abuse. For several weeks in early 2018, OCC lawyers debated next steps and whether they should dig deeper into how many customers might have been hurt, according to enforcement paperwork and two officials involved.
By the summer of 2018, though, the OCC decided to let the bank quietly scrap the program without paying a fine or facing a public sanction, according to regulatory sources.
In a statement, U.S. Bank declined to comment on the FlexControl Essentials program except to say it was retired in 2018. “Customers continue to have great flexibility with our products and we appreciate their continued support,” the bank said.
Three years before Chase grappled with errors in the auto alert program, the bank had to face a separate problem that was costing customers.
Banks are expected to clear checks within a “reasonable period of time,” which in many instances means two days. But under the rules, the wait can stretch for a week or more. Ultimately, banks not only decide when to clear a check but whether to clear it at all and how much a check is even worth.
That was the issue in 2017 when bank examiners found flaws in Chase’s handling of checks that had stray markings, sloppy handwriting or were otherwise deemed illegible. Banks can take extra time to examine those checks and ultimately even decide what the checks are worth.
OCC examiners found that Chase customers were sometimes shortchanged and some agency officials wanted to openly sanction the bank, according to regulatory officials. In the end, Chase was allowed to push the issue aside with no penalty by the end of 2017.
In a statement, Chase said that the bank identified the problem itself in 2017 and then “worked quickly to resolve it and have since credited all impacted customers.”
Taken together with the faulty auto alerts program from this year, Chase was twice found to have wrongly charged customers but faced no public penalty.
Banks ultimately control the sequence of deposits and withdrawals in a way that can boost corporate profits. A bank customer who exceeds their balance in the morning and replenishes the account by sundown might still incur an overdrawn account fee.
Another customer who overdraws an account with one costly purchase — a sofa — might be charged a fee for that item plus all the other miscellaneous purchases they made that day from a gas fill-up to a cup of coffee.
Bank regulators allow some maneuvers as long as they are disclosed to the customer, but at least three banks in recent years were deemed to have wrongly snared customers in how they added and subtracted money from an account, according to regulatory and industry officials.
One offender was Zions Bank, the largest lender in Utah, which tucked three separate, fee-generating schemes into murky disclosures, according to OCC officials who tracked the matter for more than a year.
Zions Bank customers who pushed their accounts into negative territory with a single purchase were charged a $32 penalty for that one buy and then the same fee for every other purchase made that day, examiners found.
Zions Bank customers also could get charged many overdraft fees for being just a few bucks short, examiners agreed. The third abuse was that Zions Bank charged a daily overdraft penalty on top of individual purchase penalties, regulatory officials said.
At the heart of every Zions Bank infraction was faulty disclosures and that customers did not know they had a right to opt out of any overdraft program — a step that might mean more rejected charges for the customer but also fewer surprise fees, according to the enforcement officials.
The OCC determined that Zions Bank ran afoul of a 2010 banking rule that explicitly required banks to get customer consent before enrolling them in overdraft protection, according to two regulatory officials with firsthand knowledge of the matter.
In a statement, Zions Bank said it always abides by the law requiring a customer “opt in” for overdraft protection.
“Zions Bank is committed to maintaining the highest standards of fair and transparent customer services,” the bank said in a statement.
The Zions Bank abuses matched tactics at Union Bank, a leading lender in the west, according to industry and regulatory officials familiar with the matter. Union Bank was charging customers overdraft fees despite the customer having a positive balance at the end of the day, according to the officials. The problem had been going on for years when it came to the attention of bank examiners in 2017, but rather than sanction the bank publicly, the OCC filed a supervisory letter, according to regulatory sources.
A spokesman for Union Bank declined to comment for this story.
First Horizon, a leading lender in the south, came to the OCC last year to report problems with its own overdraft program, according to industry and regulatory officials.
The bank had wrongly charged customers overdraft fees when they went into the red for a few hours but ended the day with a positive balance, according to enforcement officials, and that practice ran contrary to the bank’s marketing and disclosure documents.
By the time the problem was detected, it had gone on for at least two years, although the bank promised to make customers whole, according to regulatory and industry officials.
The OCC opted not to punish the bank publicly and instead issued a private reprimand, regulatory officials said.
In a statement, First Horizon acknowledged the issue and said it tapped an outside consultant to manage customer refunds.
“The issue was corrected and our impacted customers were notified and refunded,” the bank said in a statement.
Do you have access to information about bank regulation and enforcement that should be public? Email Patrick Rucker at patrickmrucker@protonmail.com. Here’s how to send tips and documents to ProPublica securely.
Correction, Dec. 14, 2020: This story originally misspelled the name of a Center for Responsible Lending lawyer. She is Rebecca Borné, not Bourné.
How the Federal Reserve Is Increasing Wealth Inequality
The Fed’s low-interest-rate policies have stabilized the economy and turbocharged the stock market. But those who don’t own lots of stocks haven’t benefited anywhere near as much as those who do.
Ever since the COVID-19 pandemic struck, the Federal Reserve has gotten plenty of kudos for moves that have helped stabilize the economy, kept house prices from tanking and supported the stock market. But those successes have obscured another effect: the inadvertent impact the Fed’s ultra-low interest rates and bond-buying sprees are having on economic inequality.
Longstanding inequality in the U.S. has been exacerbated by the Fed’s role in touching off a multitrillion-dollar boom in stock markets — and stock ownership is heavily skewed toward the wealthiest Americans.
Tan, precariously perched on the lowest rung of America’s working class, earns about $25,000 a year as a job coach for adults with special needs near Irvine, California. She’s a single mom and grandmother and can afford food, rent and healthcare only with the help of federal safety net programs.
Her savings account totals around $11,000, most of it from recent tax refunds and stimulus payments. She’s reluctant to risk that money in stocks, so the bull market will probably continue to charge past her. Meanwhile, thanks to the Fed’s near-zero interest rates, the best rate her credit union could offer was 0.5% for a long-term certificate of deposit. That would mean earning less than $60 a year on her savings while tying the money up for five years.
Tan’s situation is far from unique. Social Security is the top source of wealth for most lower-income households with workers nearing retirement, according to Teresa Ghilarducci, an economist at The New School in New York City who specializes in retirement. If the guaranteed income stream of Social Security is treated as an asset, she estimates it amounts to 58% of the net worth for near-retirees in the bottom half of the U.S. wealth distribution. Other retirement savings represent only about 11% of their net worth, and stocks are just 1%. (Home equity accounts for most of the remainder.)
Large swaths of Americans like Tan have essentially missed out on any direct wealth increase from the market’s near doubling since its bottom 13 months ago. Rather, the major beneficiaries have been the wealthiest 10% of Americans, who owned 89% of stocks and mutual fund shares held by U.S. households as of year-end, according to Fed statistics. More than half of that — 53% — is owned by the top 1%.
The Fed’s policies have helped generate jobs and reduce unemployment, which was their goal. In the process, however, the Fed has accelerated the decades-long increase in economic inequality by helping increase the wealth of people at the top far more than it has increased the wealth of working-class Americans.
“High-wealth households do much better in a low-rate environment than lower-wealth households do,” Mark Zandi, chief economist of Moody’s Analytics, said. “The low-interest environment increases inequality by increasing the wealth of people who are well off.” Zandi noted, however, that less well-off people don’t lose money because of the low rates; they simply don’t do as well as wealthier people.
Home prices have also benefited from the Fed’s easy money policies, and home ownership is much more evenly distributed than stock ownership is. The wealthiest 10% own only 45% of the real estate held by American households, according to the Fed. The remainder is owned largely by middle-class households, for whom home equity is often their biggest source of wealth.
But stock holdings are where the truly massive gains have come. It’s also where there was a big scare last year before the Fed and the CARES Act came to the rescue. COVID-19 sent unemployment soaring and stocks plummeting, as the market fell 35% from Feb. 19 to March 23, 2020.
To the Stockholders Go the Spoils
The value of U.S. stocks was growing faster than home equity before last year, but the gap exploded after actions by the Federal Reserve stabilized the markets.
In contrast, the nation’s total home equity — the value of houses less the debt on them — rose only about $1.3 trillion from the end of last year’s first quarter (eight days after the market low) through Dec. 31, according to the Fed. Even if you tweak the housing numbers to reflect this year’s gains, or measure the stock market’s gain from before the February drop, the disparity between stocks and home equity is huge.
“Inequality is a cumulative process,” said Karen Petrou, author of “The Engine of Inequality: The Fed and the Future of Wealth in America” and managing partner of the Washington-based consulting firm Federal Financial Analytics. “The richer you are, the richer you get, and the poorer you are, the poorer you get, unless something puts that engine in reverse,” she said. “That engine is driven not by fate or by untouchable phenomena such as demographics but most importantly by policy decisions.”
Under President Joe Biden, the federal government is trying to both create jobs and funnel lots of money to people like Tan with the $1.9 trillion American Rescue Plan stimulus package. Indeed, Tan is grateful for the $4,200 in stimulus funds she recently received. “This country has really, really blessed me a lot,” said Tan, a naturalized citizen who emigrated from Indonesia in 1984.
The Biden administration is also pushing for a $2.3 trillion infrastructure bill. But even without a penny yet having been spent on that, the federal government is running up record budget deficits, with more to come.
A considerable part of current and future deficits will be indirectly financed by the Fed, which has been increasing its holdings of Treasury IOUs and mortgage-backed securities by at least $120 billion a month, and has directed its trading desk to increase purchases “as needed” to maintain smooth functioning in the financial markets.
During Donald Trump’s four years as president, the Fed added $2.25 trillion to its holdings of Treasury IOUs, which helped cover the $7.8 trillion of debt the Treasury issued to finance budget deficits during the Trump years. It’s likely the central bank will be the biggest source of finance for Biden’s deficits, just as it was for Trump’s.
Why does that matter? Because when the Fed buys securities, it does so with money that it creates out of thin air. Pumping more money into the financial system increases the money supply, and some of that cash inevitably ends up making its way into the stock market, boosting prices.
Biden is making tax increases a big part of his infrastructure pitch, which in theory would make that legislation less reliant on the Fed. But it doesn’t mean taxes will go up anywhere near as much as he’s proposing. Or that taxes and spending will rise in lockstep. After all, spending is a lot more popular than raising taxes.
Now, let’s step back a bit and see how we got to this point.
During the 2008-09 financial crisis, the Fed initiated “quantitative easing,” a policy under which the central bank buys massive amounts of Treasury IOUs and other securities to inject money into the markets and stimulate the economy. Then-Fed Chair Ben Bernanke championed that approach, which complemented aggressive moves by the Treasury and helped keep giant banks and the world financial system from cratering. (Lots of people still lost their homes to foreclosure, another example of how helping the financial system might not help average people. But that story has already been told.)
Quantitative easing helps stimulate the economy by driving down interest rates, which hurts savers. A telling indicator involves money market mutual funds, where savers have traditionally tucked away spare cash in hopes of earning more interest than bank deposits pay. Money market funds used to produce much more income than stock market index funds. But that ratio began to slip in 2008 and has kept on slipping. At the end of 2007, Vanguard’s federal money market fund was yielding 4.46% and dividends on the Admiral shares of its Total Stock Market index fund yielded 1.78%. (A dividend yield is a fund’s annual dividend divided by its share price.) At the end of 2008, the yield was 1.74% for the money market fund and 2.82% for the stock index fund. The current numbers: 0.01% and 1.28%.
Such low rates have forced average savers to either get by with less interest income or put more money into stocks than they would have otherwise done. That added demand has been one of the factors that has helped push stock prices upward.
Economists are beginning to view the interplay of the Fed’s actions and inequality in a new light. Central bankers used to think that “we didn’t have to worry about inequality when we did monetary policy,” Olivier Blanchard, former director of research for the International Monetary Fund, said during a December virtual forum sponsored by the Peterson Institute for International Economics. Blanchard said he has since come to believe that monetary policy does impact economic inequality because a change in interest rates has “major, major distribution effects between borrowers and lenders, between asset holders and not.”
Spokespeople for the Fed, the Treasury and the White House declined to discuss the impact of soaring stock prices spurred by ultra-low interest rates on economic inequality. So we looked at what some key people involved in the 2008-09 and 2020 Fed bailouts have said publicly.
Fed chair Jerome Powell hasn’t directly addressed the central bank’s role in exacerbating inequality, though he has expressed sympathy for people left behind during the economic comeback. (“There’s a lot of suffering out there still,” he told “60 Minutes” in an interview that aired on April 11. “And I think it’s important that, just as a country, we stay and help those people.”) In a congressional hearing in February, Powell testified, “We can’t affect wealth inequality. … We can affect indirectly income inequality by doing what we can to support job creation at the lower end of the market.” When pressed to discuss problems of wealth inequality by Sen. Elizabeth Warren (D-Mass.), he told her that “those are really fiscal policy issues.”
Bernanke, currently a fellow at the Brookings Institution, acknowledged in a 2017 Brookings paper that “all else equal, higher stock prices mean greater inequality of wealth.” But he maintained that “whatever effects monetary policy has on inequality are likely to be transient, in contrast to the secular forces of technology and globalization that have contributed to the multi-decade rise in inequality in the United States and some other advanced economies.” Like Powell, Bernanke argued that inequality is the purview of fiscal policymakers (Congress and the White House) rather than the Fed.
Janet Yellen, who was the Fed’s vice chair under Bernanke and is now Treasury secretary, asked in a 2014 speech whether income inequality is “compatible with values rooted in our nation’s history.” But she largely defended ultra-low rates during a Q&A at a 2013 conference of business journalists. Older savers were “suffering from low returns on their CDs,” she said, but “they have children and they have grandchildren” who will benefit from the stronger economy.
However, the economic effects of quantitative easing eventually fade, according to researchers at the Bank for International Settlements, a Switzerland-based institution that acts as a central bank for central banks. The BIS concluded in a 2017 study that quantitative easing had more success boosting stock prices than boosting economic growth. Over time, the economic impact trended toward zero while stocks saw a “significant and persistent positive impact,” the researchers found.
The latest round of stimulus checks will help close that gap a little by putting money in the pockets of low-income earners like Tan. But near-zero interest rates will make it harder for them to save the money for the future, as Tan hopes to do. She would like to set aside $1,000 to $2,000 in savings accounts for her 16-year-old son and three-year-old grandson in addition to saving for her retirement and a rainy-day fund.Jason Furman, a former chair of President Barack Obama’s Council of Economic Advisers and currently an economics professor at Harvard, summed up the inequality tradeoff this way in an interview: “I don’t want to have a lower stock market and higher unemployment.” In other words, increasing wealth for the wealthy is an inevitable side effect of keeping interest rates low to support the economy and create jobs.
And as the Fed pumps more money into the financial system by buying Treasury securities and indirectly supporting federal stimulus programs, the run-up in stock markets is likely to continue — and leave people like Tan even further behind than they already were.
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