Some of you may recognize the name Neel Kashkari. He’s the $700 Billion man, he got that name when he was 35 and running the TARP program. When Hank Paulson was appointed Secretary of the Treasury in 2006, he brought Kashkari along with him from Goldman. Kashkari’s face was very visible during the financial crisis (yes, he looks like me, purely co-incidental I assure you). Anyway, after trying to run against Jerry Brown for the governor’s seat in California in 2014, Kashkari was appointed president of the Minneapolis Fed. He’s caused quite a kerfuffle among Fed watchers, because he kinda channeled Bernie in a speech today. Here’s how the NY Times covered it:
“I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy,” Mr. Kashkari said at the Brookings Institution.
The speech caused a stir in Washington. Such views are common at both ends of the political spectrum – providing fuel for the presidential campaigns of Senator Bernie Sanders, Democrat of Vermont, and Donald Trump, a Republican – but Mr. Kashkari is a moderate Republican and a former employee of Goldman Sachs.
“There are lines in your speech I can imagine a Bernie Sanders or Elizabeth Warren saying,” David Wessel, a former economics editor at The Wall Street Journal who moderated the Brookings event, told Mr. Kashkari during a panel discussion after the speech. “It’s not what one expects from a Goldman Sachs Republican.”
The speech itself is well worth a read if you have an interest in this issue. There is no technical language and it’s easy to follow. Here’s the section that made people sit up and take notice:
Given the massive externalities on Main Street of large bank failures in terms of lost jobs, lost income and lost wealth, no rational policymaker would risk restructuring large firms and forcing losses on creditors and counterparties using the new tools in a risky environment, let alone in a crisis environment like we experienced in 2008. They will be forced to bail out failing institutions—as we were. We were even forced to support large bank mergers, which helped stabilize the immediate crisis, but that we knew would make TBTF worse in the long term. The risks to the U.S. economy and the American people were simply too great not to do whatever we could to prevent a financial collapse.
I believe we need to complete the important work that my colleagues are doing so that, at a minimum, we are as prepared as we can be to deal with an individual large bank failure. But given the enormous costs that would be associated with another financial crisis and the lack of certainty about whether these new tools would be effective in dealing with one, I believe we must seriously consider bolder, transformational options. Some other Federal Reserve policymakers have noted the potential benefits to considering more transformational measures.6 I believe we must begin this work now and give serious consideration to a range of options, including the following:
- Breaking up large banks into smaller, less connected, less important entities.
- Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
- Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.
Options such as these have been mentioned before, but in my view, policymakers and legislators have not yet seriously considered the need to implement them in the near term. They are transformational—which can be unsettling. The financial sector has lobbied hard to preserve its current structure and thrown up endless objections to fundamental change. And in the immediate aftermath of the crisis, when the Dodd-Frank Act was passed, the economic outlook was perhaps too uncertain to take truly bold action. But the economy is stronger now, and the time has come to move past parochial interests and solve this problem. The risks of not doing so are just too great.
For the record, I fully agree with Kashkari’s analysis and have held this view for some time. Simple, direct solutions are the answer to limiting the impact of systemically important financial institutions failing, and at the top of the list should be breaking them up. But I would never, in a million years have predicted he would come around to this view. Glad to see Paulson’s protege has come around.
PS. There must be something about the Ninth Fed district (Minneapolis) that turns bankers into unreconstructed lefties, because Kashkari took Narayana Kocherlakota’s old job. Kocherlakota went through a remarkable transformation into an interest-rate dove during his tenure. Kashkari seems to have gone through a similar transformation.