Fed monetary policy didn’t cause racial inequality and can’t do much to cure it

American liberals have taken a skeptical view of central banks going back to the early days of the republic, when Jefferson opposed the chartering of a “national bank” that he feared would favor the economic interests of merchants and manufacturers over yeoman farmers.

At the end of the 19th century, populist William Jennings Bryan crusaded against the hard-money men eager to sacrifice the heavily indebted farmer on “a cross of gold.” The creation of the Federal Reserve by progressive reformers in 1913 was meant as a democratic check on the power of Wall Street tycoons, but the old suspicions quickly resurfaced when the Fed moved to tighten credit rather than loosen it during the early days of the Great Depression. In recent decades, liberals have seen the repeated bailouts of banks and financial markets as all the proof they need of the Fed’s fealty to the capitalist class.

The latest manifestation of this skepticism comes in a proposal from congressional Democrats to change the Fed’s charter in the setting of monetary policy. In addition to its traditional mandate to stabilize prices and maximize employment, Democrats would add a third: eliminating racial disparities in income, wealth and employment. Like a number of ideas coming out of the Democratic left, this one is impractical, counterproductive and guaranteed to achieve quick symbolic victory rather than enduring social and economic change.

The standard liberal critique of monetary policy is that, by being too quick to raise interest rates at the first sign of inflation, the Fed prevents low-skilled workers from securing wage increases from employers desperate to retain and attract workers. A mandate to reduce racial disparities, say proponents, would require the central bank to allow the economy to run “hotter” for longer.

That might have been a compelling argument a generation ago. But over the last 30 years — a period of quiescent inflation, slower growth and repeated financial crises — the Fed has mostly kept interest rates at remarkably low levels. Unfortunately, during that period the wages of lower-skilled workers have barely kept ahead of inflation, for reasons that have less to do with monetary policy than with technology, globalization, deregulation and changes in corporate norms. But what this low-interest environment did accomplish was to artificially inflate the value of financial assets — stocks, bonds and real estate — and along with it, the incomes of those who already own them, trade them, manage them or receive them as part of their compensation packages.

In short, rather than narrow the gap in income and wealth between White and Black, rich and poor, this era of loose money has dramatically widened it. It has created a bonanza for investment bankers, hedge fund managers, venture capitalists, tech entrepreneurs and the pashas of private equity. And it has been a boon to anyone who already owned a big house or a successful business and to their heirs and descendants. The idea that by printing even more money and lowering interest rates even further, the Fed can tip the balance of power from capital to labor sounds like nonsense.

This isn’t to argue that racial inequity is not a big and growing problem — it surely is. But the honest truth is that for most of its 107-year existence, the Fed has mostly pursued a race-blind monetary policy on behalf of a racially biased economic system. The unintended effect of monetary policy may have been to further entrench racial and class inequities built into that system. But the way to reduce that injustice isn’t to add a corrective racial bias to monetary policy, if that were even possible. Rather, it is to do the hard work of fixing the things that make the economic system racially biased in the first place — including the way corporate executives and directors are recruited, the way education is funded, and the rules that govern the operation of labor, product and financial markets.

In that regard, the Fed has plenty to answer for — not in its conduct of monetary policy but in its other role as the country’s leading financial regulator.

The radical deregulation that began under former chairman Alan Greenspan led to a level of bank consolidation that eliminated thousands of community and regional banks and the kind of relationship banking that they practiced. One consequence was to reduce the flow of credit to minority communities. Another was that it opened the door to the explosive growth of an unregulated shadow banking system that has no obligation not to discriminate against minority borrowers or reinvest the savings of minority depositors in the communities in which they live.

The prevailing business model of today’s banking system — originating loans to be packaged and sold to investors — provides too little credit to financially responsible minority households and small businesses even as it peddles too many abusive predatory loans to too many unqualified minority borrowers. Lagging levels of Black homeownership and Black entrepreneurship speak eloquently to the failure of this model, as did the block after block of boarded-up homes and storefronts in Black neighborhoods after the 2008 financial crisis. A new mandate requiring the Fed to significantly reduce racial, class, gender and geographic disparities in the availability of credit — also part of the Democratic proposal — is a great idea that is long overdue.


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