Since the Great Recession, the Fed has transformed itself into an entity more and more responsible for asset prices. This was the stated goal since 2009 as the Fed adopted a new philosophy called the "Wealth Effect." The thinking behind it was simple: growth in asset prices would translate to an increase in consumer spending and hence demand itself. It was a 'trickle down' economic philosophy an increasingly financialized economy.
This backdrop has defined our post-2009 era which stirred certain pathologies that were reflected in the greater culture and politics. It was the time when 'finance became a culture' and actual-productivity plummeted across most developed economies, especially the United States. But somehow in spite of the accumulating dysfunction across most key areas, everything kept trudging along, partly thanks to investors being satiated with record returns.
While the near-zero interest rate regime may now be ending, it is worth considering how much of the water we were all swimming in excused poor state capacity, distorted economic fundamentals, and how it even kept a lid on the dysfunction potentially blowing up in our faces. Now that we have to reckon with these realities, it may be wise to ask how many worldviews were simply products of the the cheap money regime - which is now, in a shock to many, coming to a close. Whether or not it will easily be let go, however, is another matter.
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Notes -
Look at this graph. It shows the yield on inflation indexed 30 year U.S. treasury bonds. That tells you what the long run risk free real interest rate is. The Federal Reserve has no control over it. It is determined by the supply and demand for capital. It has been below 2% (the long run historical average) for over a decade. Most of the time, it has been at around 1% or lower.
This number should be inversely proportional to asset prices. It also proportional to asset returns. Low interest rates have not increased investment returns. Low interest rates correspond with lower returns.
Whether low interest rates increase wealth depends on the reason interest rates are low. If it's because of a reduced demand for capital, then wealth decreases. If it's because of an increased supply of capital, then wealth increases.
I don't understand your issue with stock buybacks. It's just another way for companies to give money back to the shareholders. It is the responsible thing to do if they can't put it to good use. The investors who sell their stock can invest that money elsewhere or spend it. Why should companies waste it on R&D that they don't think will generate a good enough return? If interest rates are low, they would only do this if the returns to the R&D were very low.
I also don't understand the issue with financialization. Financialization is good for many reasons, not least of which is the lower interest rates. It allows people to invest their savings more easily with less risk. The fact that this leads to higher asset prices is a consequence of the value created by financialization. The low interest rates make capital affordable for investment opportunities with lower expected returns. It increases the capital stock and grows the economy.
The increased housing prices due to financialization is also a very good thing. Higher property values make homeowners, who make up the majority of the population in Canada and the United States, richer. It makes new housing construction more profitable, which increases the housing supply, and lowers rents. An increased housing supply driven by lower real interest rates makes mortgages more affordable, because interest payments fall.
I think too many people think the alternative to buybacks is paying labor more when it's really paying owners dividends.
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