Is Plinko The Best The Fed Can Do?

Many executives, investors, and white-collar workers are in great economic shape, having benefited financially from the recession. At the same time, a large percentage of the population is struggling mightily. Despite the economic recovery, they remain dependent on government checks, forbearance measures, and generous jobless benefits.

The Tweet below highlights how those at the upper arm of the “K” did this past year.

Plinko, Is Plinko The Best The Fed Can Do?

Why isn’t monetary stimulus helping everyone?

Plinko Monetary Policy

The Fed’s version of monetary policy is more akin to Plinko than you might believe. Instead of dropping a coin into a slot, the Fed drops dollars on Wall Street via bond purchases (QE). Once they purchase the bonds, the path of the coin, so to speak, is determined by the will of the banks that sold them the bonds. Unlike fiscal stimulus, the Fed cannot direct money to the economic sectors and/or people in need.  The Fed relies on the so-called “trickledown effect” to help the broad population and economy.

We can think of the Fed’s Plinko board as having four “reward” scenarios at the bottom. Once the Fed buys bonds the banks essentially have four options. Their choices determine the winners and losers.

  1. The banks can sit on the new reserves and earn interest from the Fed, with no effect to the economy. In this instance, they are the only winners.
  2. They can lend reserves out for productive purposes, which benefits future economic growth. Everyone wins in this scenario.
  3. The banks can also lend reserves for consumption purposes. Such debt provides a short-term spurt of economic activity. However, it creates future economic headwinds as the debt must be paid back and consumption was pulled forward.
  4. Lastly, the banks can lend the money to speculators allowing them to increase leverage on their assets. Speculative borrowers are the winners when this occurs.

In reality, money lands in all four slots. However, slots 1, 3, and 4 are where the bulk of the Fed’s purchases are ending up.

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