August 24th, 2021

Legitimacy Gap

We live in the age of the central bank. The financial crisis of 2008 and the COVID-19 crash of last year have made visible the central role of the US Federal Reserve and its overseas counterparts in the international financial system, and their dramatic actions earned them applause for avoiding a second and third Great Depression. Rescuing banks and preventing financial collapse are the tasks of central banks, and their success brought relief to the economy. But these actions bore a distributional impact. Most of the financial policies adopted in response to the crisis—quantitative easing, bond purchases, and low interest rates—have protected wealth without creating opportunities to accrue new wealth for those who don’t possess it. As the “K-shaped“ charts of the 2020 recovery made plain, a market rebound did not spell economic wellbeing for ordinary people.

The outsize role of central banks—especially the Fed—in the international financial system has led to some of skepticism about central banks and their independence.

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