Post Crisis Rates Feed `Wealth Gains' for the Rich, Nordea Says

(Bloomberg) -- The new global head of macro research at Nordea Bank AB says it’s now clear that the historically low interest rates that followed the global financial crisis have led to “wealth gains” for the rich while others are more indebted.

Kristin Magnusson Bernard, who used to work with financial stability at the European Central Bank, says the lessons learned from cutting interest rates to historic lows mean policy makers may well look to new tools to support economies in the future.

Though central bankers displayed “remarkable creativity” during the financial crisis, they could come up with “a few more” ideas, Bernard said in a phone interview.

“Probably you could prop up the economies a bit more and probably you could keep the markets at a high, but what’s the price for that?” Bernard said. “You will have a lot of credit extensions to weaker households while you will have a lot of wealth gains for the rich, and at some stage that discussion starts to bite.”

No corner of the world has had negative rates longer than the Nordic region, with Denmark standing out as the absolute record holder after first going below zero in 2012.

Coincidentally, income inequality has grown in Denmark, with the so-called Gini coefficient rising to 27.6 in 2017 from 26.5 percent in 2012. Gini coefficients measure income distribution across the economy -- the lower the number, the greater the level of equality. Despite the increase, Denmark still boasts one of the world’s highest levels of income equality.

With extremely low interest interest rates, “you will have some households who benefit disproportionately from having a lot of financial assets, while others will be very, very exposed to credit bubbles,” Bernard said.

Another unintended consequence of extreme monetary stimulus has been the politicized dimension of the policy. “If you’re the only game in town, you enter into a political sphere, and the fact that you’re becoming such a political heavyweight will question your independence,” Bernard said. “Many of the central banks are mindful of being close to that border.”

She said concerns about uneven effects also apply to macro-prudential policies, such as counter-cyclical capital buffer requirements for banks.

“You typically see that monetary policy gets into all the cracks, and macro-prudential policy not so much,” she said. “Macro-prudential tools are politically very, very unpopular because they hit some households very, very hard.”

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