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Op-Ed: Overreliance on the Fed is compromising the future for millennials

Sheila Bair, former Chair of the FDIC
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Millennials have been dealt two very bad economic hands during their lifetimes.

First, they weathered the 2008 financial crisis brought about by reckless risk-taking in the financial sector. Now, they confront a much more severe economic calamity caused not by Wall Street's misbehavior but by a malicious virus. Yet in both situations, the burden is disproportionately falling on working families, many of them millennials who are just now starting to accumulate some wealth and security.

And while Washington has responded aggressively with early commitments to help Main Street, as stimulus programs unfold it's becoming apparent that Wall Street (again) is going to come out on top.

The primary reason for this is that our elected officials have ceded too much responsibility for the economy to the Federal Reserve. But the Fed is not well equipped for this role. It is essentially a big bank, primarily configured to lend to other big banks.

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When an economic crisis hits, its instinctive response is to pump money into them. It can do this easily because, unlike us, big banks are allowed to have reserve accounts where the Fed can directly credit funds.

When the Fed wants to stimulate the economy, it can make loans to big banks at very low rates or buy assets from them outright. The Fed used these kinds of tools during the 2008 financial crisis to help stabilize the banking system, but it's not clear those tools did much for the rest of the economy.

To Federal Reserve Chair Jay Powell's credit, this time around the Fed has promised to help Main Street by supporting lending to small and medium-sized businesses. But the Fed is finding that hard to do because there are so many of them. The programs the Fed is trying to launch are administratively more cumbersome and have more conditions than the programs supporting large institutions.

And the Fed must still rely on banks as intermediaries. Meanwhile, trillions have already been lent out to Wall Street firms to support their "repo" operations (short-term funding markets), and trillions more will be dispersed to support commercial paper (short-term debt), money market funds (also bailed out in 2008), asset-backed securities, corporate debt and municipal bonds. The Fed is even propping up corporate junk bonds.

Small business relief trickles out as Main Street waits for promised aid payouts

Wall Street has responded gleefully as these programs will, directly or indirectly, boost financial markets. The Dow has responded favorably, even as jobless claims now total 17 million and counting.

I find no fault with the Fed in unleashing this massive support. It may well be necessary to keep our bloated financial system functioning. And my 401(k) plan is grateful. But these kinds of programs do not trickle down to the real economy, as we learned in the years following the 2008 crisis when working families continued to struggle.

Overreliance on the Fed has "financialized" our economy. Every time we get into trouble, we look to the Fed to make it cheaper to borrow, even when too much debt is the cause of the trouble, as it was in 2008. The Fed provides cheap funds to the financial sector , in turn, lends cheaply to consumers and businesses. But this cycle is not sustainable and with each credit boom and bust, our economy becomes less stable.

We need to fundamentally rethink the role of the Fed in our economy. We need to stop using debt as a driver of economic growth. And when confronted with economic crises, we need an efficient system to provide cash assistance to Main Street instead of loading working families up with more loans.  Importantly, Congress has tried to get cash assistance quickly to households pursuant to the CARES Act.

Millennials are a growing political force ... More than any other group, their futures have been compromised by our perverse reliance on financialization.
Sheila Bair
former Chair of the FDIC

Unfortunately, the transmission mechanism for doing so is woefully inadequate compared to the lightning speed efficiency of the Fed's ability to dump money into big Wall Street banks. Households are only now starting to receive funds in their bank accounts from the U.S. Treasury Department.Those which do not use direct deposit for their tax refunds will have to wait longer for paper checks, some even into the fall.

A growing number of experts have been urging the Federal Reserve to embrace digital currency technology, which would make it feasible for all businesses and households to have the equivalent of their own reserve accounts. Imagine how efficiently the Fed, acting as an administrator for authorized programs from Congress, could distribute stimulus funds if it took such a bold move.

Millennials are a growing political force and now the largest living adult generation, surpassing the baby boomers. More than any other group, their futures have been compromised by our perverse reliance on financialization.

Perhaps they can help us achieve a new paradigm where the financial sector plays a supporting role in real economic growth, instead of dominating the center stage.

Where the markets reflect real value, not debt-infused bubbles. Where stimulus — when it's needed — is transmitted to Main Street, not Wall Street. And where a more sustainable future is guaranteed for us all.

— By Sheila Bair, former Chair of the FDIC and a member of the CNBC Financial Wellness Advisory Council

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.