Rethinking the Fed

For years, consumer advocates warned the governors and staff of the Federal Reserve about a scourge of predatory lending sweeping the nation. At a 2005 meeting, one advocate grew so frustrated at the Fed staff’s dismissiveness that she leapt to her feet and pleaded, “How many anecdotes makes it real? How many tens of thousands of anecdotes will it take to convince you that this is a trend?” Not enough, apparently. The Fed failed to act until it was too late, and in the resulting financial crisis, millions of Americans paid the price in lost jobs and homes. As the Fed now looms larger in our economic lives than it maybe ever has in its 106-year history, this story is relevant because it encapsulates the culture of our nation’s central bank as an institution that values numbers and markets over people and experiences. If it is going to exercise so much power in today’s economy, we need it to do better.

Last week, with a Senate oversight hearing and a bailout commission report, we have gotten some initial glimpses of the implementation of the CARES Act, the multi-trillion-dollar legislation that did a lot of things, including spend money on hospitals, states, the unemployed and small business loans. Most of the money authorized by the law, and its greatest potential economic impact, came in the form of authority for the Fed to pour trillions of dollars into our financial markets. Instead of giving money directly to furloughed workers, the law punted to the Fed. In theory, some of the credit is supposed to get to households and businesses, but it trickles down through financial assets like exchange-traded funds and collateralized loan obligations that are both risky and benefit investors more than workers.

It is undeniable that the Fed has responded forcefully to the economic disruption caused by the COVID-19 pandemic, pumping hundreds of billions of dollars into various financial markets, but Congress has now given wide discretion to the Fed to allocate resources. If Congress can’t work an issue out, surely the technocrats at the Federal Reserve can fix it.

Rather than what it was meant to be, a lender of last resort, the central bank is effectively our nation’s policymaker of last resort. Outsourcing more and more authority to central bankers to solve our structural economic problems is a convenient device for a polarized Congress that can’t seem to meet the basic needs of its constituents.

This is a shift for Federal Reserve Chairman Jerome Powell. He used to tell elected representatives all the things he can’t do to support the economy, like lending directly to municipalities. That would mean picking winners and losers and the Fed doesn’t do that. Now, he says the ability to print money to support the economy is essentially unlimited, including to buy junk-rated corporate bonds and funds that hold junk bonds. The Fed has also hired one of the biggest sponsors of ETFs, the massive private asset manager BlackRock, to run its bond buying programs, creating unavoidable conflicts of interest. The Fed’s actions in the financial markets have been so unprecedented, some are suggesting — only half joking — that they will soon be buying equities, too.

The Fed’s posture for some time has essentially been that Congress should largely keep out of its business and let the adults manage the economy. While our central bank has a reputation as an inherently neutral institution, it is run by human beings who are just like you and me. Its lawyers and economists may wield legalisms and economic models to justify their decisions as if they are immutable laws of physics, but their methods are embedded with assumptions and value judgments, their models can fail to reflect Americans’ lived reality, and they can be wrong about critical questions like whether we have hit full employment. Anyone who has read transcripts of their interest rate-setting committee knows that businesspeople have an influence over how these leaders views our economy.

In fact, the leaders of a public institution that holds itself out as apolitical make political choices all the time: They just cloak them in neutral, market-friendly language. Pontificating about inequality without using the full force of the tools that they have to fight this problem is a choice. Waving through every single bank merger over the last 17 years is a choice. Adhering to the beltway consensus about deficit scolding is a choice. Not attaching any restrictions on corporate lending facilities to protect workers or rein in executive pay, and making them available to private equity firms and commercial real estate vehicles, are choices. Failing to join other central banks in a joint effort to combat the risks of climate change, failing to reform unstable money markets and letting banks pay out billions in dividends to shareholders instead of ensuring those funds are lent to businesses and real people are all choices, too. All of these choices have winners and losers.

These decisions have real, tangible consequences. How the Fed’s leaders approach the full employment component of monetary policy impacts communities of color, as does the structure of their municipal support programs. Their negligence in not modernizing the nation’s payment infrastructure and instead allowing a private system to dominate for decades exacerbates inequality by raising costs for low-income people. Bank mergers, consummated with the blessing of the Fed, and consolidation reduce credit access for rural communities and small businesses. Financial crises, caused by years of laissez faire supervision and regulation, disproportionately harm low-income communities and communities of color. And lack of diverse representation in its boards of directors leads to biased decision- and policy-making.

When members of Congress then delegate policy choices to the leaders of the Federal Reserve, they cede their authority to unelected central bankers who use that power to preserve a status quo that marginalizes the needs of millions of Americans.

This moment shows us that we can expect more from our central bank than listening tours. Do we actually want the Federal Reserve more involved in spending policy to lift up all of the participants in our economy? Should all of our people have an account at our central bank, as legal scholars have advocated, giving human beings the same access to state-conjured financing that big companies enjoy? Why shouldn’t our public bank have a role financing a transition to a sustainable planet, as other central bankers around the world are proposing? By failing to act on some of the most pressing issues of our time, our central bankers are making their own choices. It’s up to the rest of us to decide what we want to do about that.

Graham Steele is the director of the Corporations and Society Initiative at Stanford Graduate School of Business, a senior fellow with the American Economic Liberties Project and a former staff member of the Federal Reserve Bank of San Francisco.