09/26/2014 02:51 pm ET Updated Nov 26, 2014

The Federal Reserve's Artful Compassion for Households in 'Sobering' Condition

If President Obama is the U.S. military's Commander-in-Chief, the chairwoman of the Federal Reserve, Janet Yellen, is the finance sector's "Money-Power-in-Chief." Building on Ben Bernanke's legacy-like resurrection of a wounded economy, Yellen now hopes to burnish the image of central banking. Widening its mission, the Fed moves further into its role as the nation's economic engine. In so doing, it strengthens impressions of a post-congressional era where the idea of demo-plutocracy has more explanatory power than the term democratic republic. Now, Fed chair Yellen hopes to remedy social injustice through the bank's money-power. Perhaps the Fed chair ought to consider what China has wrought with its money power.

In China, the state has shrewdly created new capital and applied it to endeavors that heighten worker productivity and new business efficiencies through applications of advanced technology and infrastructure development. China's strategy has produced an economic transformation unheralded in global history. This is not to say, however, that China's growth policies should be emulated beyond the pursuit of productivity gains and enhanced business efficiency. China's environmental troubles are serious as are other problems such as soaring economic inequality and an iniquitous, non-merit based concentration of wealth and power by means of crony capitalism. In short, China's system looks like ours in rewarding disingenuously labeled merit and outright undeservedness (as ethically and prudently construed).

It is true that economic growth is helping tens of millions of Chinese move from near-poverty into lower-middle class standing. This is good. Nonetheless, this trend reflects extensive investment from the West as well as what was, until recently, a considerable competitive wage advantage held by the Chinese. Economic growth in the U.S. cannot be similarly stimulated by low wages, as American consumers are already strapped by cost of living overhead. In a consumer-driven economy, low wages are a prescription for slow growth. Consequently, some business people, like Seattle's entrepreneurial investor, Nick Hanauer, advocate for large increases to minimum wages in high cost metropolitan areas.

For Hanauer, higher wages will create a self-propelling virtuous cycle, as long as rising consumer costs don't swallow up the gains. (There is a lot to applaud here.) Fortuitously, American industry has spare capacity, suggesting that rising demand may not drive higher inflation. Perhaps this is why Fed chairwoman Janet Yellen believes the Fed's stimulation of the economy will support increased business profitability so as to foster continued hiring and higher wage opportunities.

There is, however, a different lens through which to see the Fed's hope, or perhaps Machiavellian strategy. The Fed has implemented its 1977 congressional mandate on maximum employment and stable prices for 37 years. Where has it gotten us? If one considers the data provided by Robert Reich in his Inequality for All docu-drama, a detrimental side effect of this distribution-blind focus is a growing economic inequality gap. Indeed, it is within this period of astonishing growth for corporate profits that the financial sector has enlarged its share of national income while the condition of lower-income families in America has become sobering, to use Janet Yellen's term.

Now, with QE3 winding down, Yellen pledges that the Fed will further help 'the large share of American families with very few assets and extraordinary vulnerability' by continuing with the asymmetrical policies that have transferred the earnings of the many into the vaults of the few. Her statement on the matter, offered September 18 in the nation's capital, is this: "The Federal Reserve's mission is to promote a healthy economy and strong financial system, and that is why we have promoted and will continue to promote asset-building."

Whose assets are being built? The top 5 percent of the nation's households hold about 80 percent of the nation's publically traded stock. Indeed, across all categories of important assets, the top 1 percent hold the lion's share. Once Fed-speak is decoded, Yellen's rationalization does not approach noblesse oblige. Yes, the trickle-down economy is building momentum, but the inequality gap grows wider as high returns on mega-assets for elites trump low returns on micro-assets for working class people -- individuals with little risk tolerance or ability to meaningfully diversify, as explained by Thomas Piketty.

Regular folks struggle to save for investment because the overhead costs of trying to live a decent life are rising much faster than the Fed's calculation of consumer price inflation. If the Fed did not favor the financial sector with cheap money, the CPI measure of the cost of living would decline, thus increasing people's buying power even without wage increases. But this does not happen, in the aggregate, because the spillover effects of asset inflation contribute to "rising stable prices" -- a way of describing the Fed's desire for controlled inflation as a means of subsidizing the profitability of banks' leveraged investment portfolios and the security of their large corporate loans. After all, modest, steady CPI inflation reduces the chance of corporate failure, thus helping establishment wealth hold its place and transmit hereditary and fraternal advantage across generations.

Glaringly absent in the Fed's policy platform is a commitment to a fair architecture for capitalism that equitably distributes the fruits of enterprise by providing incentives for ethically pricing each person's contributions to the sustainable public good. The Fed is all too willing to reward the financial sector, using its faulty congressional mandate to exonerate its actions. It's just that the paternalistically correct thing for central bankers to do is feel "sobered" by the condition of working class families, while enabling policies that keep the proletariat in their place. If this is noblesse oblige, the economic inequality gap will just get wider.