CFA members have expressed concern central bank stimulus in response to Covid-19 has exacerbated the wealth gap, creating a “goldmine” for the investor class, and question what this means for future action.
The CFA Institute surveyed its global membership in May 2021 and produced the results in the research paper Covid-19, One Year Later. This compares last year’s crisis with previous crises and focuses on central banks’ decisions to intervene and the unintended consequences this has had on current financial and socio-economic equilibriums.
When Covid-19 began to spread across the world and governments locked down countries in a bid to stop the virus from overwhelming hospitals, central banks made use of monetary policy tools such as interest rate reductions, asset purchasing and lending to shore up the economy. Governments also moved to offer ‘furlough schemes’ for individuals and businesses that were unable to work or operate during the pandemic lockdown.
When the 6,040 CFA respondents were asked what they thought were the consequences of the “unprecedented drive of accommodative monetary policy and financial support had been” almost half (44%) of the respondents around the world indicated “the stimulus has created a goldmine for the investor class, widening the wealth gap with the working class, which does not benefit from significant asset ownership”.
This was felt most strongly in Southeast Asia and Oceania where 47% of members chose this option (see table).
Olivier Fines (pictured), head of advocacy EMEA at CFA Institute, talked to ESG Clarity about the findings: “[Central bank stimulus] prevented financial markets from crashing but those who have benefited from the non-crash are those that have financial assets. The most well-off have done very well,” he said.
“In terms of earnings, people have done ok – if they lost their jobs the compensation measures worked pretty well.
“When it comes to wealth those who have financial assets, those assets have done extremely well.”
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He added central bankers often deny their actions have a direct impact on markets as that would mean they are intervening.
“But our thesis is that their action did distort prices – it meant the markets dismissed the crisis. The stock market took around five months to recover from the slump that was observed in February/March of 2020. In contrast, it took five years to recover from 2008.
“Markets absorbed the massive influx of liquidity and inflated prices. When you are rich enough to have assets that went up – it aggravated the wealth gap favouring the investor class.”
The conundrum is, Fines added, if central banks had not reacted with stimulus there could also have been massive repercussions.
“The alternative of not doing anything would have caused mass unemployment and market crash of biblical proportion, and we have grown into a society that cannot tolerate risk.
“It’s a double-edged sword of policy – doing good for the left failing to recognise the bad you are causing on the right. It is a very complex problem to deal with.”
CFA members recognised the stimulus was necessary but were unhappy with how it was shared out. The second highest consequence chosen in the survey by members was: “The stimulus has been necessary. It has been benefitted society at large, even if the various relief programmes could have been better targeted.” Some 41% of global members indicated they agreed with this statement.
“A high proposition of people thought the stimulus was necessary and not a single central banker would dismiss whether those actions was necessary,” Fined commented.
“Essentially, what happened was helicopter money with the hope it would be equally distributed, but of course, it doesn’t work like that. It has favoured the investor class. It created inflation that benefitted equities.”
He added the “new normal” being considered by members in one in which central banks need to constantly support the economy.
“It sounds extremely disturbing but when you analyse facts it’s entirely possible.
“But what we are saying in our report, is to be careful of policy impact on markets as it is creating side effects. In this case, it has aggravated the wealth gap.”