The Fed’s Overly Narrow Focus on the Financial Sector

by Reihan Salam

Mike Konczal of the Roosevelt Institute pores over the transcripts of the deliberations of the Federal Reserve’s Board of Governors during the 2007, the year when a collapsing housing market started to threaten the stability of the U.S. financial system. And he finds, not surprisingly, that the Board focused far more on the health of major financial institutions than on the financial health of consumers, the parlous state of which continues to plague the U.S. economy.

During the Bush years, a number of conservative policy analysts focused on the idea of helping low- to middle-income households build financial assets, an agenda that tended to center on facilitating homeownership. Yet this “ownership society” agenda was badly undermined by the housing bust, which served as a powerful reminder that households have assets and liabilities, and that the value of an asset can collapse. Ray Boshara, a center-left thinker now based at the St. Louis Fed, has called for refocusing on strengthening household balance sheets:

For too long the asset-building field, along with the related fields of mortgage and consumer debts, financial literacy, higher education, affordable housing, and other areas were productive but largely “siloed”—not systematically working together, thus obscuring the bigger picture. In part because of those silos, as well as misguided faith in ever-rising asset values, no one thought the balance sheets of lower-income and minority households—who disproportionately had too little savings, too much debt, and too few assets beyond housing—could bring the economy down, but they did. We learned the hard way that we must think comprehensively and proactively about household balance sheets—why they matter, and what we can do to improve them.

This is, in my view, promising terrain for the center-right. The contemporary center-left gestalt centers on the importance of public investment, a robust form of which is celebrated in Konczal’s critique of the coupon state. An agenda built around family-friendly tax reform, education reform, facilitating entry into cartelized public and private sector markets (e.g., the accreditation cartel in higher education, the protection of financial services incumbents, etc.), universal 401(k)s, etc., would emphasize the importance of family-centered savings and investment, particularly for bottom-half families. The challenge, of course, is that such an agenda would be discomfiting for a number of right-leaning constituencies and its cost, at least in the near-term, would be non-trivial, particularly for incumbent providers of educational, medical, and financial services. So those of us who think that this is a promising way to go have a long, hard slog ahead of us. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.