Former Goldman Sachs exec. Former Global Head of Equities at PIMCO. Treasury official in charge of bailing out TBTF banks with the TARP program. Republican candidate for Governor of California. With a resume like that, the last thing Washington or Wall St. expected was for Neel Kashkari to attack the very banks he handed bailout billions to,in his first speech as President of the Minneapolis Federal Reserve.
The plans of the self-styled “free market libertarian,” which some people describe as more extreme than anything Bernie Sanders or Elizabeth Warren have put forward, are resonating with a public sick of their tax money going to cover billionaire bankers’ bad bets.
What are those plans, and how did Kashkari become the total opposite of what people believed he was before?
In what some commentators are calling “going rogue,” Kashkari’s first speech as Minneapolis Fed president was a full-throated challenge to the cozy status quo between banking regulators and TBTF banks. He called for the “Too Big To Fail” (some say “Too Big To Jail”) banks to either be broken up so that they are not a threat to the entire economy if they go under, noting that they should “be able to make mistakes —even very big mistakes— without requiring taxpayer bailouts and without triggering widespread economic damage,”
This surely can’t be what the banks and some banking regulators expected from the former Assistant Secretary of the Treasury that ran the Troubled Asset Relief Program (TARP.) Kashkari says that his experience in managing the bailout taught him how interconnected
Kashkari outlined some alternatives to breaking up the megabanks: Raising the required amount of capital they hold so that they would not need a bailout; or taking the big banks when their leverage exceeded a certain point (the taxes to be used for any needed bailout.)
Noting that we never saw the 2008 financial crisis coming, we will never see the next one coming, either. He urged Congress to implement more effective laws than Dodd/Frank while we still have time. “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.”
The economies of scale that comes from being a TBTF bank are outweighed by the dangers it poses to the economy as a whole, according to the new Minneapolis Fed president, saying
“I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy. Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all.”
Kashkari said he would back up his rhetoric with details by the end of the year, noting that the research staff at the Minneapolis Fed have been studying solutions to the hazards posed by overly-large banks since the 1970s.
Who Said He Could Talk?
Kashkari has apparently ruffled feathers not just in the boardrooms of the megabanks, but also inside the Fed itself. Asked by a reporter from the Minneapolis Star Tribune if he’d gotten any phone calls from the other senior Fed officials, he said “Some have reached out positively, others I haven’t heard from, and I’m looking forward to. It goes back to something I said earlier. Do we want to tackle big, important issues or don’t we? Do we want to speak up if we see a risk, or don’t we? Sometimes when you speak up and you see something, you’re going to make some people unhappy.”
Agreeing that he expects a firestorm of controversy from those opposed to any tighter regulation of Wall St., he noted that he was savaged so much over the TARP bailout that he was used to the heat. Speaking of the things he had learned from being in the eye of the storm that was the financial crisis of 2008, he said that the biggest lesson was “that the externalities of large bank failures can be massive. I am not talking about just the fiscal costs of bailouts. Even with the 2008 bailouts, the costs to society from the financial crisis in terms of lost jobs, lost income and lost wealth were staggering — many trillions of dollars and devastation for millions of families.”
His actions are extremely unusual for a regional Fed president, especially one who is new to the job. It is expected that some senior Fed officials are very upset at him blowing into town and making a grandstanding gesture calling attention to the Fed’s lack of progress in pushing for monetary reform. Others call Kashkari’s speech a shameless political ploy for when (not if) he runs for office again. Still others warn his plans would stifle lending and pressure the economy.One former Fed official that offered qualified support for Kashkari’s plan was former Fed Chairman Ben Bernanke, who was in the audience. He noted that the ideas put forward would relieve the Fed from having to use monetary policy to combat asset bubbles.
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