The Hill: Rethinking the Fed

May 27, 2020 Op-ed

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.