Too Big to Fail:
The former U.S. Treasury official who led the 2008 bailout
program for the nation’s biggest banks says in his new role at the Federal
Reserve that Congress and regulators should consider breaking them up to
protect the financial system from another crisis.
Federal Reserve Bank of Minneapolis President Neel Kashkari,
speaking Tuesday in Washington, said his regional Fed bank will study ways to
toughen U.S. banking laws to prevent another financial crisis.
Regulators should consider options including breaking up the
nation’s largest financial institutions, loading them up with “so much capital
that they virtually can’t fail” and taxing leverage to make the system safer,
he said. Tougher oversight will require new legislation, he added.
“The biggest banks are
still too big to fail and continue to pose a significant risk to our economy,”
Kashkari, who managed the U.S. Treasury’s $700 billion Troubled Asset
Relief Program for rescuing banks in the crisis, said in his remarks. It was
his first public speech since joining the Fed on Jan. 1 as its newest policy
While Kashkari’s position fits with populist sentiment that has
driven the rise of presidential candidates including Democrat Bernie Sanders,
it’s at odds with top Fed leaders including Chair Janet Yellen, who isn’t
calling for dramatic steps such as breaking up large banks. Such changes would
also face a steep uphill battle to adoption by the Republican majority in
Congress, which wants to roll back parts of the Dodd-Frank financial law passed
in 2010, rather than go further as Kashkari proposes.
Kashkari’s remarks drew praise from Sanders. “Wall Street cannot
continue to be an island unto itself, gambling trillions in risky financial
instruments, making huge profits, assured that, if their schemes fail, the taxpayers
will be there to bail them out," the Vermont senator said in an e-mailed
Kashkari, who took over at the Minneapolis Fed following a
failed run for governor of California as a Republican in 2014, compared the
risk posed by big banks with that of a nuclear power plant in explaining why
the government would probably have to bail out banks again in the event of
another systemic crisis.
“The cost to society of letting a reactor melt down is astronomical,”
said Kashkari, who was a Goldman Sachs Group Inc. banker before joining the
Treasury during the administration of Republican President George W. Bush.
“Given that cost, governments will do whatever they can to stabilize the
reactor before they lose control.” Kashkari's, 42, said the Minneapolis Fed will hold a series of
events and collect public and financial-industry input before making proposals
by the end of this year on how to address the issue.
Kashkari's, asked about the economy and monetary policy after the
speech, stuck to the Fed’s January statement and said if the reality ends up
like the outlook, the U.S. will be headed in a “better direction.” He will be a
voting member of the interest-rate-setting Federal Open Market Committee in 2017.
The Fed’s Board of Governors in Washington sets policy for bank supervision,
which is implemented by the 12 regional Fed banks including Minneapolis.
In testimony before Congress last week, Yellen said regulations
imposed since the financial crisis have had “very substantial payoffs in the
form of a much more resilient and stronger, better capitalized, more liquid
Fed spokesman Eric Kollig declined to comment on Kashkari’s
My personal opinion after being involved in the Banking
Sector is the quality of the people they have on their staffs. In my situation there
is one individual who is making policy decisions based on what their bank is
doing and not based on any knowledge of what the industry is doing. This person
seems to live in their own very little world without even knowing what the word
algorithm means let alone how to develop and apply it. And I am sure there are
others in other banks with decision-making authority they should not have at
this time. It takes years to learn a job and also learn from the mistakes of
that others have made by reading and research.
Oh well small things for a small
mind, where common sense is not that common any more.