Bank of America's top economist thinks Ben Bernanke is 'being too generous to his critics'

Ben bernankeREUTERS/Jason ReedFormer Federal Reserve Chairman Ben Bernanke

They’re destroying the dollar! They’re restricting economic growth! Their power goes unchecked!

We’ve all heard the accusations thrown at the Federal Reserve, especially in response to their unconventional methods aimed at limiting the effects of the recent financial crisis.

But Fed critics have now taken up a new argument: the central bank causes income inequality in the US.

And neither former Fed Chairman Ben Bernanke nor Bank of America Merrill Lynch’s’ Ethan Harris are happy about these accusations.

In a blog post for the Brookings Institution last week, Bernanke dismissed claims that monetary easing widens the wealth gap because they raise asset prices for the wealthy. Bernanke said this argument comes only after other criticisms of the Fed have been discredited, and it is just as incorrect as the arguments that came before.

Harris, however, argues that even Bernanke understates the work the Fed has done to reduce income inequality.

“In our view, if anything, Bernanke is being too generous to his critics,” Harris wrote in a note to clients Tuesday.

“By speeding up the recovery in the labour market the Fed has taken major strides toward eliminating the cyclical widening of the income distribution.”

Harris adds:

[T]here is no better way to reverse a cyclical deterioration in income distribution than to quickly restore full employment. Unemployed people by definition have no labour income and rely purely on government help or investment income. Hence, in most cases, unemployment pushes workers into the bottom of the income distribution. Thus, the main cause of the cyclical increase in income inequality was not that wages were weak relative to investment income, but rather that the unemployment rate surged from 4.4% in mid-2007 to a peak of 10.0% in October 2009. The reversal back to 5.4% means 4.6% of people actively looking for a job are no longer earning zero labour income.

Harris and his team took the argument a step further and explained how the Fed’s policies have disproportionally helped disadvantaged groups.

That is, the unemployment rates for Black and Hispanics dropped more than those for Whites and Asians. The same is true for uneducated workers versus those with college degrees.

While disadvantaged groups are still worse off than their counterparts, these improvements are certainly a step in the right direction, Harris says.

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