Coming as a replacement to perhaps the biggest dove in Fed history, few were expecting former Goldman and Pimco staffer Neel Kashkari to be as vocally outspoken on a topic that is so near and dear to regulators everywhere: their own cluelessness, and more importantly, the topic of “too big to fail” banks, which according to the Fed are a pillar of stability in an unstable world, and which according to Kashkari are anything but.
It is doubly surprising because it was none other than Kashkari himself who served as one of the key architects of the bank bailout plan in the aftermath of the financial crisis. Shortly thereafter he lived for an extended period in the wild.
As MarketNews reports, “having seen the financial crisis first-hand while at the U.S. Treasury Department, the Federal Reserve’s newest regional bank president Neel Kashkari Tuesday said he is concerned that the largest banks are still too big to fail and perhaps should be broken up into smaller units.”
Kashkari, who assumed the leadership of the Minneapolis Federal Reserve Bank in November, said his bank is drafting a plan by the end of the year to end the threat he sees posed by the largest banks to bring down the financial system.
If anyone should know, Neel it is: he worked at two of the most systematically important firms in history: first Goldman, then Pimco.
Kashkari also oversaw the Treasury Department’s Troubled Asset Relief Program, known as the TARP, which parceled out bail-out funds to recapitalize many banks large and small, even to some critics said did not need the help. Originally an aerospace engineer, Kashkari lost his bid to unseat Jerry Brown as governor of California in 2014.
As Marketnews continues, Kashkari expressed skepticism that the Dodd-Frank array of banking reforms goes far enough, Kashkari told the Brookings Institution, in prepared remarks, “that despite these best efforts, banks will still sometimes make mistakes and run into trouble.”
Kashkari, joining FDIC Vice Chairman and former Fed bank president Thomas Hoenig as a foe of the idea that big is better, said, “I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy.“He said that the Dodd-Frank regulator apparatus, with its bank stress tests being assembled and partially implemented in the past six years, is proving insufficient.
Here are some of the key highlights from his speech:
- “We won’t see the next crisis coming, and it won’t look like what we might be expecting.”
- “Failures of large financial institutions pose massively asymmetric risks to society that policymakers must consider.”
- “A very crude analogy is that of a nuclear reactor. The cost to society of letting a reactor melt down is astronomical. Given that cost, governments will do whatever they can to stabilize the reactor before they lose control.”
And the punchline:
Unfortunately, I am far more skeptical that these tools will be useful to policymakers in the second scenario of a stressed economic environment. 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.
Which led to the these two prompt denials:
- EX-FED’S KOHN: DISAGREE W/KASHKARI; DON’T NEED BANK BREAKUPS
- EX-FED’S STERN: ALSO DISAGREE W/KASHKARI; LIVING WILLS ENOUGH
It appears we may have found one more avid reader of this website. Which makes us wonder two things i) how long until he is fired, or ii) just like in the case of Kocherlakota, who started of as an uber-hawk and ended up as a permadove, how long until Kashkari has a similar moment of involuntary “epiphany” and begins cheering for even more mega-TBTF mergers…