ECB promotes inequality – economy

To start with the praise: The European Central Bank (ECB) again saved us from the worst in the Corona crisis. Without their courageous intervention in spring 2020, a massive financial crisis could have developed. But no matter how correct that may have been in the short term: In retrospect, a massive undesirable development becomes visible.

The intervention of the ECB in the Corona crisis is of historic proportions. During the financial crisis, the ECB’s total assets grew by EUR 813 billion between 2007 and 2010, and by EUR 2,261 billion between February and December in 2020 alone. The least discussed consequence of this is rising wealth inequality.

At the beginning of the pandemic, share prices fell briefly due to economic uncertainty. At the same time, the number of unemployed and short-time workers rose. A year and a half later, these figures are still above pre-crisis levels, and the real wages of employees are currently even falling. In contrast, the stock markets initially collapsed in 2020, but prices are currently at an all-time high. Real estate prices have also risen sharply. The massive and sustained expansion of the ECB’s balance sheet is driving up assets. Even though the pandemic is still not over.

Also the bank for international settlement sees the expansionary monetary policy as one of the main reasons for the highs on the stock exchanges. In a recession, the central banks usually act by lowering the key interest rate and currently mainly through massive bond purchases and subsidized billions in loans to the banks, since the central key interest rate is already negative. The ECB is deliberately buying bonds at high prices because it will depress interest rates in the hope of stimulating the economy. However, the high prices for bonds and the associated low interest rates make alternatives such as stocks or real estate more attractive for investors. With them, investors hope to generate more returns. And the more capital flows into stocks or real estate, the more these values ​​rise.

This effect of monetary policy benefits above all those who already have relatively high assets in the form of bonds, stocks or real estate. These people are still clearly in the minority in Germany. Despite an increase in 2020 own in Germany only 17.5 percent of the population aged 14 and over have shares or equity funds. Only 46.5 percent of all Germans own a residential property. Thanks in part to the boom on the stock exchanges, 2020 rose again the number of billionaires in Germany by 29 to 136, while numerous employees are still on short-time work and often suffer real income losses.

This is also due to the fact that monetary policy only has an indirect effect on the real economy. The ECB tries to stimulate the economy via the financial markets. Theoretically, employees should also benefit from the improved economic situation and consume more. These higher spending should then increase inflation. It is unclear whether an increase in wealth generated in this way will benefit the manufacturing economy in the long term and, via increased real wages, also the employees. That also depends on whether banks pass on the low interest rates and whether companies use them for additional investments. The effect is controversial. The empirical evidence showsthat the cheap money is used partly for investing, but also for share buybacks and Dividend payments is being used. There is a much clearer picture with regard to the influence on the financial markets: The impulses from the ECB arrive directly there, which is manifested in higher stock exchange prices and real estate prices.

How the cycle of crisis intervention can be stopped

Just to make this clear again: It was important and right that the ECB intervened in crisis situations. But it is also important to focus more on the increased influence of monetary policy and its consequences for wealth inequality and to look for ways out. It recently confessed that the actions of the ECB are currently increasing inequality even the outgoing Bundesbank chief Jens Weidmann joined. From his point of view, however, this is not a problem as it is only a short-term trend and monetary policy would be normalized again.

However, the supposedly short-term trend has been going on since 2009. The answers to the financial crisis from 2007 to 2009 and to the euro crisis from 2010 to 2012 were mainly monetary and fiscal policy measures that tended to favor wealthy financial investors and thus increase wealth inequality.

In order to end the cycle of crisis intervention, three points are central. First, the central banks should use and develop their instruments in such a way that the social imbalance is not exacerbated. This also requires courageous and open communication that makes it clear that monetary policy can no longer increase employment and real wages on its own in the current environment, especially not with the help of further bond purchases and subsidies for banks.

Second, governments should take on a greater role again in combating (financial) crises and take on the previously ignored task of correcting the concentration of wealth generated by crisis interventions. A more active spending and revenue policy could counteract inequality while reducing the need for further central bank intervention.

Third, the central banks must be relieved of their task of constantly rescuing an unstable financial market. In March 2020, the central banks had to intervene on an unprecedented scale because numerous banks and funds had far too little loss or liquidity buffers at the beginning of the pandemic. Once again, too high risks were taken in trust in the rescue by the central banks. We finally need consistent debt brakes on banks and shadow banks and a higher level of liquidity. It is hard to understand that central banks and politicians are not addressing these risks much more clearly. Anyone who does not want central banks to be constantly forced to intervene that also lead to inequality must quickly make the financial market crisis-proof with such measures – before the next turbulence.