Don't Blame the Fed for Supply Side Recalcitrance

While there's a common refrain re "easy money" in a recent AEI article, this one comes with a twist. According to Tobias Peter and Edward Pinto, the Fed is also at fault for a growing divide in terms of inequality:  

The Fed's easy credit policies are widening wealth inequality as they fuel persistent home price inflation.

That's a serious charge. But how true is it? And does Chairman Powell - or the Fed for that matter - really not understand "how price inflation differs from inflation for commodities and services"? Granted, the authors have a point about current home price instability. But I believe these particular assertions against the Fed to be unsubstantiated and a convenient diversion from what's at stake. There's been plenty of times when it was appropriate to accuse the Fed of wrongheaded moves, but this isn't one of them. Rather, I'm encouraged by the Fed's recent maintenance of monetary velocity, especially given the difficult transitions of a post pandemic recovery. 

And insofar as the supply side is concerned re housing, technological innovation need not be as insurmountable as the authors imply. Of course builders struggle to meet demand due to high prices for labour and materials - not to mention NIMBY considerations! But when has this not been the case? Fortunately for all of us, a great deal of private sector activity has adapted and evolved, when faced with resource constraints. It's time for building sectors to do likewise, in shifting to manufacturing strategies which include more flexible means of ownership and land utilization. So we are within reason by asking at this historical juncture: if not now, when?

Also, consider the awkward policy expectations which Tobias Peter and Edward Pinto contribute to (re Fed obligations), by asserting:

The Fed's easy credit continues to drive housing demand higher, but has done little to boost supply.

Does this mean the Fed should somehow become more responsible for supply side circumstance? If so, in what capacity? The last time I checked, the Fed's primary responsibility was nominal in nature. Indeed, should they assume market activities currently neglected by other private interests, who is going to be comfortable with such an outcome? Hence even though this is an illogical assertion, it must seem occasionally "useful" anyway, since it implies private interests need not lose sleep over damaged markets. 

Another sad aspect regarding inappropriate blame, is that many in the Fed do take such criticisms quite seriously. Indeed, how often does Fed "meddling" actually mean members of the Fed are losing sleep on behalf of others less concerned? This is no minor matter, given the nature of present day structural shifts in the economy.

Just the same, one must be careful in assigning blame to today's non tradable sectors, despite their exacerbation of social inequality via quality requirements and lack of innovation. All the more so, since structural fault lines and their resulting disequilibrium, aren't easy to understood. What's at stake however, is that we start making up for lost time. Ultimately, it's real economy conditions instead of the nominal realm, which cause such social and political unrest. 

What about high house prices, then? Don't get me wrong, I dislike today's high house prices as much as the next person. But I'm not fool enough to imagine that tight money - let alone the possibility of bad deflation - would somehow make me more "equal" to anyone else. I don't want everyone to lose in this scenario, via the money illusion that would make it appear I was somehow getting ahead. Consequently, I'd rather not sacrifice the nominal stability that does more than anything else right now, to prevent an unraveling of mutual financial obligations and societal trust.

Sure, it would be great if I could find retirement housing that was more in line with my actual Social Security. But I'd still rather not witness millions of citizens facing a world of financial hurt, in the event of bad deflation and seriously falling house prices. Deflation simply isn't a good thing, unless it positively impacts output so as to make life better for all concerned. So, let's get serious about building homes and workplaces which take advantage of centuries of innovation. We've absolutely run out of excuses, and only further the damage all around by pretending it's not feasible to do so.