Wealth effect or trickle-down - Are these the same things?

 

Liberals" prefer "wealth effect," while "conservatives" say "trickle down."

“Janet Yellen, when she was president of the San Francisco Fed, wrote a paper discussing the wealth effect, the doctrine says that the central bank can make the wealthy - the asset holders - wealthier. They can create wealth through money printing and interest rate repression, and so the wealthy people that have these assets become wealthier, and then they spend some of this money, and as they spend this money, it props up the overall economy, because it's part of consumer spending. So maybe they're they're buying a new house, or they're building a castle, or buying a yacht, and a new vehicle, and they're splurging on other stuff, and hopefully the yacht is made in the United States somewhere, and so there'll be jobs, and people make money - so this is the whole theory of the wealth effect.

Ben Bernanke explained to the stunned American public that the Federal Reserve is purposefully making their wealthy even wealthier, so that they feel wealthy, and feel rich, and spend a little bit more of their money, and you know hopefully prop up the economy. So this is an official doctrine, and there's all kinds of economists that have written about it, so you can Google that, and it has a very spotty record in in terms of helping the actual economy. It has a very solid record in terms of making the wealthy wealthier, but the trickle down effect of that wealth effect is pretty small, and you end up with this huge division in wealth, and so that's the principle that the FED did this on…

I think the wealth effect has been discredited, I think it's bogus, it's a fake doctrine, but that governed the Fed's action at the time, and it was well established in economic literature, and Bernanke explained it to the American people, so it's not something that Fed did secretly. It discussed it. It said this is what we're doing, and this is why we're doing it, we're going to make the wealthy wealthy, and hopefully they spend a little bit of that, it's going to help the economy, and that was the theory.”

- Wolf Richter

There is a lot of food for thought in the comments by Wolf Richter. The Fed has pumped the economy with liquidity and has been slow to reduce this liquidity because of a fear of financial stress. Is Richter correct? To a degree, yes. The wealth effect has always been about an increase in wealth leading to more spending. More wealth is created for this in lower economic brackets, yet this also means that those who have more wealth will be the primary beneficiaries. Housing prices will rise, a wealth effect, but again you have to own the asset.  

Narrative is critical. A perversion of a story will lead to a negative reaction while a benign or good story will be accepted as good policy.