Illustration by Annie Choi & Tala Kernan
Illustration by Annie Choi & Tala Kernan

Ever since the economy stopped shrinking, there has been a persistently wide gap between the fortunes of the wealthy few and everyone else. Today, Federal Reserve Chairman Ben Bernanke was twice asked by members of the House Financial Services Committee whether the central bank’s policies have been responsible. Both times, Bernanke denied that the Fed was favoring Wall Street over Main Street.

In doing so, however, Bernanke implied that the Fed’s ability to help regular people was limited by the tools at its disposal, because it is capable of directly affecting only interest rates and asset prices. The representatives weren't thrilled by that answer -- they need Main Street's votes.

The takeaway: If monetary policymakers want to avoid this sort of criticism in the future, they should find new ways to affect the economy that don’t rely on interactions with the financial system.

If this seems counterintuitive, bear in mind that there is no academic consensus about the distributional impact of monetary policy as it is currently conducted. Researchers at the International Monetary Fund studied the impact of “monetary policy shocks” in the U.S. since 1980. They found that “a contractionary monetary policy shock raises the observed inequality across households.” This was true even when the early 1980s were removed.

On the other hand, when the Bank of England studied the impact of its recent asset-purchase programs, it admitted that the bulk of the benefits went to wealthier households. Markus Brunnermeier and Yuliy Sannikov, two economists at Princeton, have argued that asset purchases work precisely because they redistribute wealth to banks and other holders of long-duration instruments.

Amir Sufi, an economist at the University of Chicago, has argued that the wave of foreclosures during the downturn has limited the benefits of lower mortgage rates and higher house prices over the past two years to a relatively small group of well-off Americans. Finally, Adam Posen, a former monetary policymaker at the Bank of England and now the president of the Peterson Institute of International Economics, argued in the Financial Times earlier this week that monetary policy always has “distributive effects.” According to him, central bankers should “confront this reality rather than run from it.”

There might be better options available. Suppose that the Fed offered a checking account to every American and deposited money into this account on a regular basis. If the Fed wanted to stimulate the economy, it could put money into people’s pockets at a relatively faster pace. If it wanted to slow things down, the Fed could pay depositors less. (Confiscating deposits would almost certainly make people upset, if Cyprus's recent experience is any guide.) This kind of reform could make monetary policy both more effective and less likely to produce unfair distributional consequences.

Does that seem too far-fetched? Well, a lot of people thought the same thing about quantitative easing just a few years ago.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)