Saturday, February 20, 2016

Minneapolis Fed President Says We Need to Break up Big Banks

Here we have yet another current monetary official suggesting the idea that we are vulnerable to a systemic failure. In this case, as Bloomberg reports, we have Minneapolis Fed President Neel Kashkari saying that big banks "pose a significant risk to our economy." Below are some quotes from the article and then some added comments.

"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 maker."
. . . . .
"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 joins several other regional Fed presidents outside of the major U.S. banking centers who have made similar statements about too-big-to-fail policy. Former Dallas Fed President Richard Fisher proposed that big banks be “restructured into multiple business entities,” while St. Louis Fed chief James Bullard has backed limiting the size of individual U.S. banks to a proportion of gross domestic product.
Kansas City Fed President Esther George, a former bank regulator, said in a 2014 interview that she was “disappointed but I guess not surprised” that the problem of too-big-to-fail banks remained and called for “meaningful consequences” for banks that don’t submit adequate “living wills,” or plans to be resolved if they were to fail."
My added comments: This article illustrates perfectly an irony I have noted while doing research for articles on this blog. That irony is that while many critics of central bank policy are often viewed as somewhat extreme in their forecasts for an economic crisis, it is the monetary officials themselves (both current and former) who feed a lot of the concern about the potential for another major crisis. They don't mind using scary language at all when it suits their purposes.
Here we have an article in mainstream Bloomberg with a headline suggesting a breakup of big banks is needed to "avert a meltdown." My first thought is that the headline is just hyperbole to attract reader attention and get people to read the article. But then you read the actual remarks by a sitting Fed President who compares the situation with too big to fail big banks with the potential for a nuclear reactor to melt down. This did not come from any central bank critic. It came directly from a sitting regional Fed President.
Mr.Kashkari is by no means alone in using this kind of language. We have documented here on the blog dozens of statements by both current and former monetary officials issuing warning after warning about systemic risks that could lead to some kind of new major crisis. These warnings are from people inside the system, not from critics on the outside. So, before they get too critical of those outside the system who constantly forecast another crisis is coming, it might be worthwhile to look in the mirror. It seems like monetary officials don't have a problem using the type of scary language we also see from their critics. 
Here, we just admit that we don't know if another crisis is coming any time soon or not. But since both current and former officials seem to want to constantly warn about the potential for one, it seems advisable to make readers aware of that and encourage readers to stay informed and have some kind of backup plan in mind. 

Added note 2-25-16: Another Fed President (Bullard) steps up to support Kashkari.

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