Neel Kashkari, in his first speech as head of the Minneapolis Fed, called on lawmakers to take radical action to rein in banks and protect taxpayers.
The former Treasury official was the 2014 Republican nominee for California governor, he announced that he was launching an initiative in his new role as president of the Federal Reserve Bank of Minneapolis to develop tougher regulations to solve the problem of banks considered too big to fail.
Kashkari indicated that his work at Treasury helped inform his current view, where he managed a key part of the banking and auto industry bailouts during the financial crisis of 2007-2009, reports Reuters.
Dodd-Frank regulations did not go far enough, he said in his remarks which indicated a fine line between the policymaking of the Fed and political advocacy. He argued that the biggest banks are too big to fail and continue to pose a significant, ongoing risk to the U.S. economy. Kashkari said, “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.”
Taking a swipe at the existing rules for winding down failing banks should they run into difficulty amid a weak global economy, he urged lawmakers to consider breaking up large banks into “smaller, less connected, less important entities”. He said, “I am far more skeptical that these tools will be useful. We won’t see the next crisis coming.”
He said Congress should consider treating banks like public utilities, compelling banks to hold so much capital that they “virtually can’t fail.” Kashkari, who is a former executive at Goldman Sachs Inc., said the following.
“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.”
David Wessel, director of Brookings’ Hutchins Center on Fiscal and Monetary Policy, told Kashkari during a panel discussion after the speech, “There are lines in your speech that I can imagine Bernie Sanders or Elizabeth Warren saying,”
Kashkari said global economic and financial developments would be an “important” input when the Federal Reserve next meets on March 15-16. He was a senior advisor to Bush administration Treasury Secretary Henry M. Paulson when the financial system was on the brink of meltdown in the fall of 2008. He ran the the Troubled Asset Relief Program, the $700-billion bank bailout initiative, and continued in that role for the first few months of the Obama administration. He received mixed reviews for his performance as the first head of TARP, which ended up turning a modest profit for the federal government.
He said that he estimated moderate growth and a gradual increase in interest rates, while adhering to the Fed’s January statement. He declined to specify how many rate hikes there might be this year.
Kashkari added he does not expect negative rates will be needed in the United States but it was something the central bank could use if deemed necessary.
Kashkari did not mention Glass-Steagall and stressed that he was not calling for specific actions but launching an effort to study how to better address the risks posed by the nation’s largest banks, reported LA Times.
Financial markets have plunged amid slowing global growth and several central banks are using negative interest rates to avoid deflation and stimulate economic activity.Two weeks following the Fed raised its benchmark interest rate for the first time in a decade, Kashkari took the helm of the Fed’s smallest regional bank last month.
Neel Kashkari does not have a vote on the Fed’s rate-setting committee until 2017 under its rotation system, but participates in deliberations.
[Photo by Chip Somodevilla/Getty Images]