Karen Petrou’s Engine of Inequality is a similar book, though it also examines Fed policy in response to the COVID crisis. It engages in a sharp, post‐​COVID critique of the adverse effects on income and wealth inequality of those broad‐​ranging interventions. Petrou is the co‐​founder and managing partner of Federal Financial Analytics, which has been a mainstay in banking and financial‐​sector consulting in Washington, D.C. since the 1980s. Engine of Inequality is her first book.

Getting right to the point / Anyone who has followed the ups and downs of the financial sector and its fits of instability since 2007 remembers where things stood just over a decade ago. The financial authorities, with the Fed leading the way, had bailed out the big banks, arguing that they were simultaneously helping Main Street. In a widely watched 60 Minutes interview, then–Fed chairman Ben Bernanke walked around his hometown of Dillon, S.C. to dramatize the point. The financial authorities rallied behind the 2010 Dodd–Frank Act reforms, which in the words of President Barack Obama were going to put a stop to taxpayer bailouts once and for all.

In her introduction, Petrou starts fast and sets the scene well by summarizing the post–Great Recession environment and the ensuing COVID-19 recession. The Federal Reserve “proclaimed that all was right with the national economy and financial system,” and the “Obama administration also congratulated itself on the sound economy and resilient financial system.” Then the pandemic destroyed the confident narrative of the Fed and the Obama administration. In Petrou’s words, “COVID blew away every one of the foundations on which the Fed thought the economy and financial system so securely rested.”

Focus on inequality / There has been a recent push from policymakers for the Federal Reserve to bring its vast powers to bear on far‐​flung issues such as climate change and racial equity. There are some elements of that thinking in Engine of Inequality. Petrou criticizes the Fed’s leadership for the assumption that “inequality and even endemic racism are awful, but still someone else’s problem to solve.” Her primary argument is that addressing inequality fits comfortably within the Fed’s current explicit mandates of maximum employment, price stability, and moderate interest rates.

She dedicates an early chapter (“How Unequal Are We?”) to defining inequality and presenting evidence that it has been increasing in the United States. By inequality, she means not just income inequality, but also wealth inequality:

Throughout this book I refer to “economic inequality” even though much popular discussion focuses on “income inequality.” The reason to focus more broadly on economic inequality is that there are at least two key components that determine the have‐​a‐​lots, have some, and have‐​nots…. First indeed comes income…. I’ll look not only at what you earn, but also at what you have left over…. In short, income is what you earn and wealth is what you keep. Wealth is usually measured as net worth.

Graphically, Petrou makes the case that, since the 1980s, inequality has gotten much worse. She relies on time series data showing the share of income distribution produced by the top 1% of earners as compared to the share for the bottom 50% of earners in the United States and Western Europe, as well as a comparison of growth in income and wealth for the top 10% as compared to the bottom and middle quintiles. Her analysis leads her to conclude, “Western Europe remains more equal than the U.S.”

Bailouts and ultra‐​ultra‐​low interest rates / Petrou claims throughout the book that this level of inequality results from the Fed’s interventions. One direct way the “haves” benefited from Fed actions was through the bailouts of financial institutions and more broad‐​based market support programs, which most certainly redounded to the benefit of well‐​off investors. She goes further to point out the interventions’ damaging long‐​run effect:

All of these Fed bailouts create vicious cycles in which risks grow higher, bailouts seem even more essential to the Fed, and financial markets become even more assured that, the next time stress rolls around, the Fed will open its bailout windows all over again.

I agree with her solution, which is to follow a policy that “retracts the Fed’s safety net from beneath financial markets.” She also faults the Fed for relying on performance benchmarks driven by “across‐​the‐​board indicators,” which to her “matter only to the wealthiest Americans who own most of the assets in the stock and bond market.”

Petrou also makes the case that “ultra‐​ultra‐​low” interest rates engineered by the Fed cripple the ability of lower‐​income and younger households to accumulate a nest egg for purchasing a home and for setting aside money for educational expenses and retirement. For older Americans already in retirement, these rates constrain the returns for low and moderate‐​risk investment vehicles. For her, the answer is to assure that the Fed “recrafts U.S. monetary policy so it sets interest rates at levels [she considers] a living return.”

Although I agree with the argument that the distortive effects of abnormally low rates can hurt those in lower‐​income groups and on a fixed‐​income, Petrou’s case studies were not always convincing. To support her thesis that the poor have been made worse off by the Fed’s low interest rates, she bemoans the case of “a parent saving for a child’s education [who] puts $2,000 a year into a savings account.” In an environment where “the parent earns only the half of one percent interest rate paid on small savings,” such a small saver would be underwater, taking into account inflation. She implies that lower‐​income households have no easily accessible platform to participate in the “77 percent” returns achievable in the stock market from 2007 to 2019 given that “the bulk of household stock ownership … was in the hands of the wealthiest 10 percent of households.” What she completely misses is the ability of this type of small saver to invest for the long‐​term in the stock market by choosing a 529 education account. Through these accounts, those in lower income groups can become part of the investor class and do so with very low minimums (well below Petrou’s $2,000 a year example).

Not a partisan advocate, but a clear narrative / Throughout Engine of Inequality, Petrou fancies herself a technocrat schooled in the facts when speaking about inequality: “Because my nature is one of an analyst, not an advocate, I dove into the data.” She offers several interventionist programs for those of modest incomes, including a Family Financial Facility to “aid solvent families experiencing sudden income loss and do the same for small businesses forced to shut their doors,” and “a bank focused on equality.” Her policy prescriptions definitely fall on the progressive side of the ledger, as she admiringly describes Western European social and economic policy and favorably cites economists Joseph Stiglitz, Paul Krugman, and Thomas Piketty.

Her analysis of income inequality as compared to Western Europe is incomplete, as she does not focus on how lower‐​income earners in the United States dynamically improve their lot over their life cycle to join the middle class or how their incomes compare to those in other developed countries. Instead, she primarily compares them to Jeff Bezos and other top earners. Petrou regularly engages in a zero‐​sum game analysis of class warfare, as if to say that if Bezos is wildly successful or purchases a “Beverly Hills estate [at a cost of] $165 million” it somehow takes food from the mouths of those at the other end of the income and wealth spectrum. She makes a good case that we should not bail out millionaires and billionaires, but she does not explain why it is justified to bail out or subsidize credit for anyone else given the unintended consequences and resulting dependency of doing so.

Although Petrou spends much of the book criticizing the Fed and the unintended consequences of its interventions, she still makes the case that we should push forward with greater government intervention. She summarizes this in a curious comment in the Introduction: “Much in this book lambasts the Fed, but I still trust it with my money more than Facebook.” The question for me is why. Similarly, she states in discussing payment innovations like Facebook’s Libra that “many in the citizenry prefer central bankers to big bankers and Big Tech.” Her supporting arguments are not convincing given the history of the Fed’s management of the payment system.

Engine of Inequality provides good, reasoned research for the debate over the Fed’s role in the economy and the financial system and makes important points about the distortions caused by the Fed and their effects on people of modest income and means. But it is a grand leap to go from this reasoned critique to agreeing with the policies she advocates. Those policies have the same flawed underlying basis as the government intervention that the Fed she so harshly criticizes represents.