People in America get really angry at the Federal Reserve and at the “money system” in general during economic crises. The Fed draws hostility because of its power, its insulation from democratic accountability, its lack of transparency, and because of its historical and structural connections to finance. It has a lot of power in the economy because it has a big impact on the supply and cost of credit, that is, interest rates. It also plays a key role in supervising banks and historically has seemed to take it easy on the banks when it shouldn’t have, such as in the lead up to the financial crisis.
But how easy are its policies? Do the complaints directed against the Fed have merit? And have the policies adopted by the Federal Reserve post the 2008 financial crisis actually served to benefit society as a whole? Gerry Epstein, a Professor of Economics at the University of Massachusetts at Amherst, and a fellow of INET, has conducted extensive research which highlights the way the Federal Reserve’s policies in the aftermath of the crisis, and concludes that Wall Street and wealthy Americans are in fact the biggest winners from policies like quantitative easing, while Main Street Americans have seen little improvement in their economic lives. A more broadly based fiscal policy response might have engendered a recovery less skewed toward the haves, rather than the have nots. End result? Inequality is getting worse, people are getting a lot angrier and we get political phenomena like Donald Trump. And the Fed’s political position has likely been compromised.
Although defenders of the Fed and central bank practitioners in general argue that the distributional impact of policies such as quantitative easing (QE) have probably been either neutral or even egalitarian in nature due to its employment impacts, Epstein maintains in the interview below that these positive impacts were nonetheless swamped by the large dis-equalizing effects of asset price appreciation, which disproportionately benefits the top tier of society. Bankers in particular also experienced statistically significant increases in profitability after controlling for common determinants of bank performance through asset appreciation. And critics, often for good reason, remain legitimately concerned that the Fed is wielding its vast powers in the interests of the banks and not in the interests of the people. Epstein’s research seems to bear out this grievance. After the financial crisis, Americans have perceived that the banks have been bailed out, but a significant proportion of the population is still in serious economic trouble as Professor Epstein highlights in the interview.