Almost 10 years after the Great Recession ended, the growing threat of a new economic slowdown raises a troubling question: When the next recession strikes, what can the world’s central banks do? With interest rates low and their balance sheets still loaded with assets bought to fight the 2008 crisis, do they have the tools to respond? This column is one of five looking at that question.The Great Recession was supposed to be a great reset, an end to an economic boom that had made the rich richer and left almost everyone else behind. The conventional wisdom at the time was that Wall Street bankers and those in the upper-income brackets would be hurt the most -- more or less a repeat of the Great Depression, which wiped out much of the vast inequality of the 1920s.

But that’s not what happened -- if anything, the exact opposite occurred. Insurance firm Allianz in a study last year found that from 2010-2017 the wealth gap in the U.S. between rich and poor had grown the fourth fastest out of the more than 50 countries they had looked at, behind only Bulgaria, Slovenia and New Zealand. As if more evidence were needed, the U.S. Gini co-efficient, a popular though flawed gauge of inequality, now stands at 0.48, up from 0.46 before the financial crisis. (A reading of 0 means total equality, while 1 indicates one person holds all the wealth.) 

That’s an utterly counterintuitive result. Economic slumps tend to even things out for fairly unsurprising reasons: when wealth is destroyed, it’s the people who have it who tend to be most affected. Figuring out why the 2008 collapse ended up widening inequality is particularly important now. The current U.S. expansion is on the verge of becoming the longest ever, and some economic indicators have started to signal the next recession may not be far away.Related: The Fed Needs to Fight the Next Recession Now

If the recession-fighting techniques of the last decade are responsible for widening inequality, central banks will need a new set of tools soon or risk not only widening the wealth gap but also eroding confidence in their ability to set monetary policy. And there is emerging evidence that could be the case.

A new paper from economists Ernest Liu, Atif Mian and Amir Sufi suggests the reason the recession didn’t put a dent in inequality may very well be the Fed’s fault. Low interest rates, particularly when they get to close to zero, tend to increase inequality, even as they revive the economy, the economists argue. That’s not a totally surprising conclusion. Low rates boost stock and other asset prices while depressing the returns of small savers. And 90 percent of stock-market wealth is owned by the top 10 percent.

But Liu, Mian and Sufi argue that’s not the most important inequality-transmission mechanism of low interest rates. The real wealth transfer comes from the fact it’s the well off, both individuals and companies, who have the easiest time borrowing in times of financial crisis. Another problem: As inequality grows, Fed actions become less effective. Rich borrowers don’t spend their interest savings, which tends to keep demand for consumable goods in check.

There are, to be sure, some reasons to be skeptical of this argument. Low interest rates during the Great Depression didn’t hold back the leveling of economic inequality. Furthermore, common ownership through index funds also has risen dramatically since the recession. Some believe that’s lowering competition, including for labor, and limiting wage gains. Central banking expert David Wessel, director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, says there is no sign Fed officials see inequality as something that should limit their ability to lower interest rates in the face of a recession.

But is that what the Fed should do? At a minimum, holding off on interest rate cuts, while potentially causing more economic harm initially, could put more pressure on Washington lawmakers to act. Economists who worry about inequality, including former Barack Obama administration official Jason Furman, think government spending will need to play a “large and sustained role” in combatting the next recession.

Beyond that, the Fed should do more to ensure credit is available for all, perhaps by giving a broader guarantee to community banks that tend to serve smaller businesses. Some have suggested that the Fed could just send money directly to lower-income individuals, paid out of its accounts, although that might run into legal obstacles. One thing the Fed could do is make direct loans to individuals, or offer high-interest savings accounts. It would have to establish how far down the income ladder a policy like that could reach. And the banking lobby would surely cry foul if the Fed were to create businesses that competed directly with them. There also is a risk that drawing deposits away from banks might further depress lending in a crunch, although lenders unfortunately tend to tighten credit when it is needed most.

Whatever the Fed does, there is a strong case to be made that it needs to find new tools to fight recessions. The American public still widely believes that the government’s financial-crisis rescue effort bailed out Wall Street, but not Main Street. That wasn’t entirely the Fed’s fault. Congress created the $700 billion bank bailout fund, and the Treasury administered it. But it is the Fed’s problem nonetheless. Another economic slowdown that leaves the well-off even more so, and the rest of us less so, will further undermine credibility in the Fed, our most important institution for fighting recessions. That would certainly leave our entire economy and all of us, both rich and poor, worse off.

To contact the author of this story: Stephen Gandel at sgandel2@bloomberg.net

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

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