Federal Reserve Governor Sarah Bloom Raskin said the financial inequality resulting from stagnating incomes for most Americans and rapid growth in wealth for the richest 1 percent is hindering the U.S. economic recovery.
“This inequality is destabilizing and undermines the ability of the economy to grow sustainably and efficiently,” Raskin said today to a forum in Washington sponsored by the New America Foundation. The disparities help “drag down maximum economic growth and are anathema to the social progress that is part and parcel of such growth,” she said.
Raskin backed the Fed’s unanimous decision last week to sustain record monetary stimulus with the aim of spurring the economic recovery and reducing unemployment, which rose last month to 9.1 percent. Policy makers boosted their forecasts for unemployment and cut their forecasts for growth this year and next while deciding to maintain the Fed’s System Open Market Account domestic securities holdings near $2.66 trillion and its main interest rate near zero.
“Finding ways to help more Americans safely grow their incomes and net worth in real terms arguably diminishes the destructive influence of income inequality by giving everyone a more secure footing in the economy and the same kind of flexibility and choice available to the more affluent,” Raskin said.
Raskin didn’t speak about the immediate economic outlook or the Fed’s plans to end its $600 billion bond-buying program on June 30 as scheduled. She supported the plan, begun in early November, just a month after she took her post at the central bank.
Fed Chairman Ben S. Bernanke has said the bond purchases are intended to encourage consumer spending and fuel growth. Still, the stimulus plan isn’t a panacea for the economy’s problems, and unemployment probably won’t return to a more normal level of 5.5 percent until the middle of this decade, he has said in speeches and congressional testimony.
Raskin cited the Fed’s Survey of Consumer Finances, released in March, which showed the poorest 20 percent of families saw their net worth fall by 18 percent from 2007 to 2009 and households in the middle of the income distribution saw their wealth decline by 21 percent. Raskin also cited statistics on these families’ access to financial services, saying one in four households earning $15,000 a year or less don’t hold a bank savings or checking account.
Raskin said the financial crisis “has left many lower- and moderate-income Americans in danger” and that regulators must work to help these consumers gain access to financial services.
“It is incumbent upon regulators to ensure that these products and services are safe, affordable, transparent and easy to understand, regardless of the provider,” said Raskin, who was appointed to the Fed’s board by President Barack Obama, after serving as Maryland’s commissioner of financial regulation.
“In some cases, regulators may need to ban products that are inherently unfair or deceptive,” she said. “Regulators must also actively monitor the consumer financial market to guard against developments that might threaten the stability of the overall economy.”
Regulation and innovation by financial firms aren’t “inherently contradictory,” Raskin said in response to an audience question. Financial institutions should help to reduce inequalities in income and in access to financial services, she said.
In previous speeches as a Fed governor, she has called for the swift implementation of the Dodd Frank Act. The law, enacted last year, overhauls the nation’s financial rulebook with the goal of preventing another financial crisis.
Raskin, in remarks in April, said regulators will “certainly be dealing with the long-term consequences of the crisis for years to come.” That fallout, she has said, included “dislocation, joblessness and loss of confidence.”