On Tuesday, U.S. voters joined those in other nations and surprised the powers-that-be with an unequivocal message:  economic growth isn’t enough, employment opportunities are too few, and too many people are sliding too far behind the hopes they have for themselves and their children.  Last Thursday, I was pleased to deliver the keynote dinner speech at the annual FRB/ECB meeting on international banking.  In it, I urged central bankers quickly to consider the political ramifications of the combined impact of monetary and regulatory policy, citing wide-spread wrath about growing income inequality as clear evidence of the unintended impact of well-meant policy.  Based on recent research, I said that income and wealth distribution is demonstrably wider, due in part to financial policy, and pressed for corrective action, not just the Fed’s new, detailed research agendas.  But don’t listen to me – hear the election:  on Tuesday, voters said that they aren’t data, they are people – people hurting badly after eight years and demanding rapid-fire fixes.

I thought that this critical message delivered after an ample dinner with generously-served wine would lead at least some central bankers to throw their dinner rolls at me.  Instead, questioning was astute and concern demonstrably acute – central bankers know that huge portfolios and ultra-low or even negative rates have widened income inequity and hampered wealth accumulation.  They had hoped that a dose of this medicine would rapidly right fragile markets, but they appear to know now that prolonged policies are instead driving voters to actions with consequences dangerous not only for sustained growth, but also national unity. 

With Tuesday’s message loudly validating these concerns, central banks need to advance from considering their consequences to remedying them quickly.  Voters told the Fed that the central bank’s research now and to come on what “full” employment means doesn’t matter because about half of all Americans do not feel fully employed.  And, even if they are, then they nonetheless remain dissatisfied with the economy – exit polling showing that Trump voters in Rust-Belt states would have voted for Bernie Sanders if given a chance says it all and then some.

The way to deal with adverse consequences is not to blame others or contemplate more doctoral dissertations.  Better to adjust action.  Not dramatically – I am not suggesting that the Fed sell off all of its portfolio, let rates rise as high as some formulas suggest, or water down the post-crisis regulatory framework. 

But, decision theory and – even better – practical experience argue for incremental decisions and then targeted adjustments so that, over time, policies are tested, tried, and – after corrections – found to be true.  Because the Fed threw everything it had all at once at both the U.S. financial system and its macroeconomy, it doesn’t now know what helped a bit and what hurt voters so much.  Study would add certainty, but by the time the studies are done, financial markets will have changed still more and for all we know voters will then go from angry to furious and then on to dangerous. 

My own action suggestions are to reduce the Fed’s portfolio so that asset prices gradually rationalize and rich people aren’t made still richer by financial-market gains while others are left behind.  My solution also is to raise rates gradually to make it possible for lower- and moderate-income households to save for home ownership, handle retirement, and otherwise protect themselves from uncertainties such as the next recession.  My solution also is to change the new rules first so that banks that falter are sure to fail without resort to taxpayers even if the changes needed to accomplish this force tough strategic decisions.  As resolution becomes more assured, financial intermediation should be better enabled through regulated institutions by realigned rules.  Urgent priorities here are aspects of the supplementary leverage ratio that bind bank deposit-taking capacity or shrink credit for entry-level wealth accumulation.

One can and should argue with these solutions, but the argument so far – steady as you go will someday work – has led the U.S. electorate to reject all Fed policy out of hand along with much else that makes the country a more diverse, caring and – perhaps most important – stable bastion of global prosperity.  Because financial-policy corrections were not made along the way from 2008 to 2016 as good ideas led to bad consequences, a sharp course change has now been mandated.  I hope we do not end up on uncharted rocks.