Central Bank perversity: the downside to aggressive monetary policy.

• Author: Wolf, Charles, Jr.

In the crowded annals of well-intended public policies whose unintended consequences are often perverse, a standout performer is aggressive monetary policy (AMP). Its perversities include effects on retirees, on income inequality, and on market stability both domestically and globally.

As conceived and practiced by the Federal Reserve (as well as by the European Central Bank in the eurozone), AMP has two parts:

* First, lowering nominal short-term interest rates to near-zero levels on interbank loans; assuming a prevailing inflation rate of 1-2 percent, the near-zero nominal interest rates imply negative real rates, an Alice-in-Wonderland world in which lenders pay clients to borrow;

* Second, reducing long-term (such as ten-year) interest rates by large purchases of mortgage-backed securities, corporate bonds, or otherwise collateralized securities--so-called "quantitative easing" by the Fed.

What are the unintended perverse effects of AMP?

Nearly 50 percent of retirees over 65 years of age derive some income from their previously accumulated savings. The average of this savings-derived income is negligible--a mere $300-$500 dollars annually. However, at normal market-based rates, that income would be $l,200-$2,000, a more consequential amount for some retirees. Absent AMP, this income from savings would be still greater because retirees would have saved more if interest rates had been higher.

AMP is not a friend, but an adversary, from the standpoint of retirees.

Next on the list of AMP's perversities is income inequality. To be sure, inequality in the United States is driven by long-term societal and economic trends that are numerous, complex, deeply embedded in social and cultural legacies, and hard to change. The principal drivers are well known, although their relative strength is not. They include disparate education, the effects of parenting and family structure, neighborhood and environing circumstances, immigration, advancing technology, and innovation. Innovation and technological change typically entail substitutions of fewer higher-skilled and higher-compensated labor for more numerous and lower-paid labor--thereby propelling income inequality.

Separately and additionally, AMP is another contributor to inequality. AMP's role is separate from what might be termed the first-tier of renowned innovators such as Bill Gates at Microsoft, Steve Jobs and Tim Cook at Apple, Larry Page and Sergey Brin at Google, and Larry Ellison at...