Nobel laureates agree the counterplan’s key

Joseph E. Stiglitz, “Fed Can Influence Banks to Spread Opportunity,” The New York Times, 10-28-14, https://www.nytimes.com/roomfordebate/2014/10/27/what-could-the-fed-do-to-address-inequality/fed-can-influence-or-banks-to-spread-opportunity

Central banks play a key role in shaping our economy – their policies affect growth, employment, inflation, financial stability and yes, inequality. So what if G.D.P. goes up by 2.5 percent and inflation is controlled? If the majority of citizens are worse off, then our economy is not performing well. The American economy has been failing: Median income today, adjusted for inflation, is lower than it was a quarter century ago. This should be a major concern of the Federal Reserve, and it is great that at last it has a chairwoman who recognizes this. There is much that the Fed can do. In the past, the excessive focus on inflation meant that insufficient attention was paid to its other objectives – growth, employment and financial stability.

When central banks, in their obsession with inflation, ratchet up the interest rate every time that wages increase, especially when wages increase faster than productivity, they ensure that workers get a declining share of G.D.P., but workers never recover the losses they suffer in those periods when the economy is weak. It's part of the explanation for the yawning gap over the past 40 years between productivity growth and wage growth. Today, so long as inflation remains mild, the Fed should hold back on interest rate increases until wage growth makes up for the lost time of the Great Recession.

The Fed affects inequality by what it does and what it does not do. Its failure to do what it should have done in maintaining financial stability is a case in point: The crisis has contributed greatly to our country's inequality. Yellen emphasized the importance of opportunity and noted that access to finance is an important aspect of entrepreneurial opportunity. But the flow of money to small- and medium-sized enterprises is still weak. Restricting the banks from other activities (e.g. originating derivatives and credit default swaps) that have often proved more lucrative but also volatile than old-fashioned banking, would encourage them to devote more of their resources to lending that might help create new businesses and jobs.

Another set of policies being tried by a few central banks essentially either provides preferential access to the discount window for small and medium enterprise loans or imposes S.M.E. lending requirements (like C.R.A. requirements) for banks wishing access to the Fed window.

Finally, the Fed is the most important regulator of our financial system. It could and should do more to prevent abusive credit card practices, usurious interest rates and predatory and discriminatory lending. These practices are especially costly to the poor. The monopolistic fees charged for the use of credit and debit cards are like a tax that enriches the coffers of the financial system rather than going for public purpose.

This reality needs to be taken on board by the Fed. Yellen should be congratulated for asking what can be done to ensure that our economy and our financial system once again serves our society.