He Led The Financial Bailout But Says Banks Are Still Too Big To Fail

Transcript

STEVE INSKEEP, HOST:

Here's an argument that big American banks are still a danger to the economy. It come (ph) from a prominent source. Neel Kashkari had an extremely close look at the financial crisis that sparked the Great Recession. He ran the massive government bailout of financial institutions. Today he is president of the Federal Reserve Bank of Minneapolis that's part of the nationwide Fed banking system. And he made news this week by saying that reforms since the financial crisis did not go far enough.

Let me just get you to state the problem, if I can. You said major banks are still too big to fail. What do you mean?

NEEL KASHKARI: Well, we still have these giant banks in the center of our financial system. There have been big reforms through the Dodd-Frank Act to make the banks safer, and they are stronger and safer. They have more capital to absorb potential losses and they've got more liquidity so they can fund themselves. But if there were another crisis and banks ran into trouble, I'm afraid that taxpayers would have to step in again and bail out these banks. So we have not solved the problem, and we need to.

INSKEEP: Haven't you just stated what the solution was, at least according to the Obama administration and its supporters in Congress? The supporters of the Dodd-Frank legislation, as it was called, imposed these stress tests on banks, made sure they were in a stronger position and essentially said they would not fail.

KASHKARI: Well, unfortunately, I don't think we've gone far enough. I think these crises come. They're not what you're expecting. They surprise us and then they can overwhelm these defenses. And so we need to be honest with the American people - that if there were a crisis today and many banks ran into trouble, it's very likely we'd have to turn to the taxpayers to bail the banks out again. And I don't think most Americans think that's acceptable.

INSKEEP: Would you throw out a few names of banks that you're thinking of when you're thinking of banks that are still too big to fail?

KASHKARI: Sure. I mean, banks like JPMorgan, Goldman Sachs, Bank of America, Citigroup and others.

INSKEEP: And so what do you want to happen to those banks?

KASHKARI: Well, we're launching a research program to bring experts from around the country who have serious proposals - the proposals include breaking up the banks into smaller, less important entities. Putting so much capital in the banks that you regulate them like a nuclear power plant, turn them into a utility so they almost virtually cannot fail or even taxing leverage so that if - the risks move from banks to nonbanks or insurance companies - that you can capture that wherever it goes. There are transformational solutions out there that, in my view, have not been given serious consideration.

INSKEEP: Why is it that you think the executives in charge of some of these large banks are not taking those steps themselves if they look around and see that they're necessary, as you seem to think they are necessary?

KASHKARI: Well, it's not in their financial interest. It's in their financial interest and there shareholders' interest to grow as large as possible. And unfortunately, the risks are then borne by society.

INSKEEP: Some people may look at your resume and wonder if your views have changed over time. Didn't you used to work for Goldman Sachs?

KASHKARI: I did and then I went to the Treasury Department under President Bush, and the financial crisis hit. And I was one of the first responders helping to stabilize that terrible financial crisis from triggering another Great Depression. In that experience, I learned how devastating these crises are. I learned how much risk there actually is in the financial system and so I applauded the reforms in Dodd-Frank, but I didn't know if they had gone far enough. Now, six or seven years later, I think it's time to go forward and make more transformational reforms.

INSKEEP: Meaning, when you worked at Goldman Sachs, you didn't see the world quite this way?

KASHKARI: I did not.

INSKEEP: And it was the financial crisis that changed that?

KASHKARI: It absolutely was. And it's the experience of how hard it was to stabilize the crisis and how devastating the crisis was for millions of Americans. And that's thing - an analogy I used in the speech I gave yesterday is that these big banks are like nuclear reactors. If a nuclear reactor melts down, it's truly devastating for society. Given that cost, governments will do whatever they have to to try to stabilize the reactor before it melts down.

Well, there's a similar thing in big banks. If a big bank fails and if there's risk in the economy, it could trigger contagion to other banks, and it could lead to a widespread downturn. You know, our economic crisis in 2008 - it inflicted tens of trillions of dollars of harm to American families and to the American economy - tens of trillions of dollars. That downside risk - we need to do more to take it off the table.

INSKEEP: And then you were involved in that bailout that you don't want to happen again. Are you saying that that bailout, given the crisis, was the right thing but that ever doing that again would be the wrong thing?

KASHKARI: Yeah. We never want to be in a situation where we are forced to do that again. We were forced to do it in 2008. We hated it, but it was the right thing to do at the time. Let's make sure that we improve conditions so policymakers in the future are never put in that position again.

INSKEEP: You know, I'm curious if breaking up the banks would really make all that much difference. I'm thinking of a historical analogy. There was a time when there was an oil company, Standard Oil, that was considered massively too powerful and so it was broken up into a number of other giant oil companies which remain giant today and hugely influential. If you took Goldman Sachs and made four Goldman Sachses out of it, would they really lose that much influence or really be no longer too big to fail?

KASHKARI: Well, it's not the influence that I'm trying to solve. I look at analogy of the tech bubble. We had this big boom in the '90s. It all crashed in 2000. That was devastating for Silicon Valley, but there was no risk of an economic collapse for the broader country. We need our big banks and our banking system to be able to have that type of a shock without bringing the rest of the country down with them.

INSKEEP: Although the person at the top of your pyramid, Janet Yellen, the Fed chair said just last week that banking since the crisis is more resilient and stronger than it was. Are - is she mistaken?

KASHKARI: No, I agree with the chair. I agree with Chair Yellen. The question I'm asking is - have we gone far enough to avoid bailouts? I think we have to go quite a bit further. Even last week, Chair Yellen said it's too soon to declare victory on too big to fail.

INSKEEP: I want to remind people that you're a Republican. You once ran for governor of California as a Republican. You were appointed to a high position by a Republic president. But of the various presidential candidates, the one who has spoken most openly in favor of your proposal this week is Bernie Sanders, Democratic Socialist of Vermont. What do you make of that?

KASHKARI: The Federal Reserve is nonpolitical. It's nonpartisan. I'm in a completely nonpartisan role. But I want as many people across the political spectrum as possible to be supportive of these ideas. And so I would welcome everybody who cares about these ideas to speak up.

INSKEEP: Neel Kashkari is president of the Federal Reserve Bank in Minneapolis. Thanks very much.

KASHKARI: Thanks for having me. Transcript provided by NPR, Copyright NPR.