You Were Worried Obama Would Redistribute Income? Life is Just an Asset Bubble.

The moneyed classes need not have worried. During Barack Obama's Presidency, their wealth, if anything, has grown. The stock market is up from the end of the Bush, Part Deux years. This favors the well-to-do, who own most of the stock. Oil prices have risen sharply; OPEC and other oil producers worldwide are celebrating. The Federal Reserve's interventions have financed, not new loans, but stability for banks, big bonuses for bankers and nice gains for bank shareholders. Ordinary folks have benefited from the federal stimulus package. But the well-to-do have benefited more, since they had more to lose and their larger holdings of assets have enjoyed greater gains. Yes, the high end of the real estate market is slow. But most wealthy people--i.e., those with net worths over $5 million--have well under half their net worth invested in their homes. These are today's equivalent of coupon clippers and their wealth is mostly invested in financial assets.

The last point is important. It's not that the President is trying to make the wealthy wealthier while leaving the poor behind. He isn't. It's just that when the Federal Reserve and federal fiscal policy do things to help fix the economy, those things tend to favor the already prosperous. In recent years, Federal Reserve monetary policies have involved dumping large quantities of cheap credit and printed money into the economy. When the government prints money, as it is doing now, that money is like a flood. It has to go somewhere. Inflation hasn't been a problem. With rising unemployment, falling real estate values and thoroughly cowed consumers, retailers can't raise prices. They'd only scare off more customers. Instead, the money's been going into asset markets. Wealthy people own most of the assets, so when assets bubble up, wealthy people pocket most of the gains. This is an important reason why some investment banks are suddenly doing very well and paying large bonuses. They are dealers in asset markets--and participate in the gains from the asset bubbles.

An irony of all this is that the Fed was created to smooth out the economy's ups and downs. It was supposed to be a lender of last resort to banks in bad times, and a prudent regulator that would restrain banks' reckless tendencies in good times. Now, the Fed has become pro-cyclical as a regulator--seeing, hearing and speaking no evil while much evil was done in boom times, but cracking down when the economy slumped--and a printer of money too much of the time. The result has been an exacerbation of economic cycles. Realistically speaking, there's no going back on the idea of central banking. But the question arises whether the Fed is abusing its privilege to issue fiat money and should be subject to statutory constraints. It's no longer enough to require the Fed to control consumer price inflation. It also has to control the impact of government handouts of liquidity on asset markets.

Asset bubbles feel good at first. Owners of assets receive speculative profits, and spend the stuff like found money. Remember the way so many people burned up their home equity on good times? But the good times have passed while the debts remain. The bubbles created transitory prosperity, and lasting economic damage.

The Fed has announced that it will begin to withdraw the myriad accommodations it's provided to the financial system, although it has barely managed to inch forward thus far. What could easily happen when it really begins to retrieve some of the trillions of dollars of handouts would be increased mortgage rates, which would heighten the distress in the real estate markets, a falling stock market (and political repercussions from the concomitant drops in 401(k) accounts), and a further tightening of bank credit. Maybe credit cards would altogether disappear except for the wealthy, while home equity loans would be mentioned in the same breath as Triceratops. There would be political howling of the first and to the nth degrees. The Fed would probably back down and take the easy way out, printing money three shifts a day to shoot up the liquidity junkies again. Only once in its history has the Fed chosen integrity over expediency, when Chairman Volcker raised interest rates and held them up in order to quell the inflationary surge of the 1970s. To this day, he remains marginalized by Wall Street and official Washington for his uprightness.

So life has become a series of asset bubbles. If you're feeling blue because of portfolio losses, don't lose heart. The Fed will pump up asset values again sooner rather than later.

And if you're not a member of the moneyed classes and need a paycheck to put food on the table, you might see some wealth redistribution come your way when health insurance reform is enacted--whenever that is.