November 8, 2011
If the Federal Reserve had thought more about Main Street when it was bailing out the financial system, there might not be an Occupy Wall Street movement throughout the country today.
The belief that the economic system is rigged in favor of the rich and powerful is an important factor driving OWS. This belief is based, in part, on the way in which the financial bailoutwas handled by monetary authorities. Policymakers insulated banks from losses using the argument that protecting Wall Street would also prevent large losses on Main Street. But the bailout alone wasn’t enough to prevent big problems on Main Street, and it came to be viewed as largely a giveaway to the wealthy interests controlling financial institutions.
It didn’t have to be that way. Instead of bailing out banks directly, we could have given money to homeowners to help them pay their mortgages. The money could have been earmarked for mortgage payments so that it still ended up in the hands of banks, but by allowing the help to pass through households first, the distribution of the benefits from the bailout would be much different: Both households and banks would have realized gains, and this would have been much more politically acceptable.
However, monetary policy authorities do not generally place much weight on the distributional consequences of the policies they enact. With fiscal policy, the distributional implications of tax and spending changes – whether they fall on the poor, the middle class, or the wealthy – are an important element of the politics surrounding these policies.
Why the difference? A key factor is that politicians determine fiscal policy while monetary policy is in the hand of technocrats at the Fed. And those technocrats – mostly economists – have been trained to ignore distributional issues. Distributional questions involve value judgments, and economists shouldn’t be making such judgments in their role as professional economists. That’s what politicians are for.
Thus, what matters most to macroeconomists is the size of the pie. With a bigger pie, it’s possible for everyone to have more – everyone can be made better off – but how the pie is divided up is generally not the focus of macroeconomic policy. If the economic system allocates the gains unequally and politicians choose to leave the unequal gains from, say, a low-interest rate policy in place, then that’s not the fault of the economists or the policy itself.
But distributional issues cannot always be ignored. The failure of monetary policy authorities to consider the distributional consequences of the bailout has turned the public against Federal Reserve policy. Some of that is unfair – the Treasury played a key role as well – but nevertheless much of what the Fed did in response to the crisis is viewed by many as just another way that the system funnels money to the rich and powerful.
Consider quantitative easing. This can work by lowering long-term interest rates and encouraging investment and the consumption of durables, and it can lower the value of the dollar and stimulate exports. But the primary way in which quantitative easing seems to work is by inflating the value of stocks and other financial assets that are held disproportionately by the wealthy.
If the increase in asset values causes the wealthy to consume more goods and services, then that could benefit Main Street. But when households are struggling to pay their bills, when the unemployed are struggling to find jobs, and when unemployment compensation and other social services are running dry, it’s no wonder that the trickle-down nature of these policies might be objectionable. That’s especially true when the amount that seems to have trickled down is just that – a mere trickle. Wall Street has recovered and profits are robust, but households are still looking at a less-than-optimistic future.
Deep recessions are invariably times when the working class gets hit hardest, and policies that are viewed as favoring the wealthy meet resistance. But instead of helping banks directly, what would have been wrong with policies that help households with good credit records refinance their homes at very low interest rates, help with car loans, help write down principal, and so on? If helping every household would have cost too much, then why not draw names at random so that everyone at least would have a chance to get some assistance. Where the Fed doesn’t have the necessary authority to provide the help, it should press Congress to give it the powers it needs.
The Fed and other policymakers would still need to support some banks directly in a crisis, especially when there is no time to waste in avoiding a cascading meltdown. But problems persist far beyond the initial crisis period, and spreading as much help as possible to households would lead to less public resistance to policies that are needed to combat severe financial meltdowns.