Fed Policies Are Supporting Rigged Market Concentration And Monopoly Power: Princeton Research Paper

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Written by Dana Sanchez
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Fed policies are supporting rigged market concentration and monopoly power, according to Princeton and University of Chicago researchers. Image: Mike_fleming / Flickr

Low-interest rates have advantages. They lower mortgages, theoretically make it easier for businesses to borrow money and they help consumers to finance stuff more easily.

Traditionally, low-interest rates are presumed to be expansionary — monetary policymakers.

But low-interest rates can have a negative effect on economic growth — a counterintuitive take on federal policies — according to a paper by Princeton and University of Chicago researchers.

Persistent low-interest rates favor larger companies, increase market concentration and help monopolies grow even stronger, stifling competition and productivity, the researchers wrote in the paper entitled “Low Interest Rates, Market Power, and Productivity Growth.”

The paper, issued in January 2019 and revised in August 2020, is written by Ernest Liu, a postdoctoral student at Princeton University and professors Atif Mian at Princeton University and Amir Sufi of the University of Chicago.

“A key insight of the authors’ model is that the traditional effect of low interest rates—wherein all companies invest—occurs when interest rates are reduced from a relatively high level, say from 7 percent to 5 percent,” according to a University of Chicago brief.

“However, if interest rates continue to fall and approach zero, the benefits increasingly accrue to larger firms … In a result that is incongruous with the traditional effect, economic growth slows as the interest rate decreases and larger firms exploit their relative market position.

“Importantly, if the initial interest rate level is relatively low and then falls, the benefits that accrue to leading firms is larger than if the initial rate were higher. In other words, in a world where interest rates start low and drop even further, larger firms benefit at a higher relative rate.”

The authors concluded that market leaders aggressively invest to escape competition when interest rates are low. Smaller companies become discouraged by the fierce competition that would be necessary
to gain market leadership.

No one in either political party is talking about the role of low-interest rates in driving market concentration, tweeted Sheila Bair, former chairwoman of the Federal Deposit Insurance Corporation (FDIC) and former president of Washington College.

A top U.S. banking regulator during the 2007-2008 global financial crisis, Bair said the Federal Reserve needs to shift focus and get credit flowing to workers losing their jobs and businesses crippled by the spread of coronavirus.

“They are throwing money in the wrong place,” Bair said in March when the Fed cut benchmark rates to zero and started a $700 billion Treasury- and mortgage-bond buying program.

“Lowering interest rates to zero doesn’t help if businesses can’t pay their loans back and they don’t have cash flow,” Bair said, according to MarketWatch. “We need to get help out there, especially to small businesses and people already losing their jobs.”

The Big Four tech firms Amazon, Apple, Facebook, and Google along with Microsoft, Netflix, and Tesla are even more dominant now than they were a few months ago, according to an Atlantic report.

But even if Congress decided to break up the four tech giants, the U.S. “would still have an astounding number of industries controlled by a tiny number of firms. That’s because the structure of modern capitalism favors companies that operate at once-unimaginable scale, in the absence of a government will to prevent monopolies from forming,” David Dayen wrote for the Atlantic.

“I’m all for robust antitrust enforcement. Markets don’t work without competition. Yet, overlooked is the role of low interest rates in driving market concentration,” Bair tweeted.

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“Yet, no one in either party talks about this. If there is bipartisan consensus on anything, it is to rely more, not less, on cheap debt to fuel economic growth,” Bair continued. “Ironically, I think the general public ‘gets it’. But our political leadership seems unwilling to fundamentally rethink the role of monetary policy in our economy.”

Bair oversaw almost 400 bank closures during the 2008 financial crisis.

As part of its response to the coronavirus crisis, the Fed stepped in to backstop the corporate debt markets, buying up bonds from hundreds of companies, Business Insider reported. That move helped trigger a new wave of corporate debt issuance this spring.

The Fed can’t prop up that market forever, Bair said.