Fed Reserve's Kashkari talks money policy at town hall
Federal Reserve Bank of Minneapolis President Neel Kashkari asked an audience at the Kahler Grand Hotel not to take it easy on him.
"I'd like you to show me respect by asking your toughest questions," he said as part of his introductory remarks for a town hall-style meeting. Kashkari is on an ongoing listening tour where he hopes to learn firsthand about communities in the 9th District of the Federal Reserve.
Since taking over the Federal Reserve Bank of Minneapolis, Kashkari has announced his initiative to "end the problem of too-big-to-fail banks." That, he admitted, might sound strange coming from the man who oversaw bank bailouts under both President George W. Bush and President Obama.
"The U.S. economy had a massive heart attack," he said. Without the bank bailouts, the problem would have been worse. "It would have had depression instead of recession. We need to make sure that never happens again."
Town hall moderator Annie Baxter, a senior reporter for Marketplace, a provider of syndicated radio content, took the first crack at asking tough questions, grilling Kashkari on his plans behind ending the too-big-to-fail banks and monetary policy.
Kashkari said there are several ways to end the threat of big banks to the economy. The first would be to put a cap on bank sizes. The government could tax leverage, or borrowed funds that are invested speculatively, in the financial sector, which would encourage banks to hold less debt. A third option would be to put more regulations on banks to reduce their risk.
Some options, though, come with drawbacks. For example, regulations that reduce risk will mean the risk in the economy simply takes another form, one that may not be as well regulated.
"If you make the banks really safe, you push the risk to nonbank," he said. That means more risky investment in hedge funds, risk through insurance companies and shadow banks.
Baxter questioned Kashkari about his reputation as a rebel within the Federal Reserve system.
"I make no apologies for coming out punching," he said of his announcement to end the risk to the economy of big banks so soon after taking over in Minneapolis in January.
From the audience, the questions ranged from whether the Dodd-Frank Act — a response to the 2008 recession designed to add accountability to banking — was a failure to how moral hazard, the concept that investors take excessive risk because someone else bears the costs of that risk, played into the bank bailouts during the recession.
"I wouldn't call it a bust," he said, referring to Dodd-Frank. Today's banks have more capital, deeper liquidity and are better able to withstand stress. "But my gut tells me it has not gone far enough."
On moral hazard, a concept that came to light big as banks took risks knowing they would be bailed out by taxpayers, Kashkari said he is disappointed that no one has been prosecuted in the United States over illegal banking practices. Fines, he said, are a poor substitute.
"The notion that if a bank does a bad deed, you're punishing the shareholders," he said. "People need to be prosecuted."
Baxter asked if Kashkari, a Republican who ran for governor of California in 2012, would surprise the 2005 version of himself with his talk of regulation in banking.
"Probably," he said, adding that when he worked under President Bush, the thought was banks that took risks assumed the responsibility of that risk, and failure was a real consequence. "We were dragged to the bailout table. But since then, I've learned there are consequences to truly unregulated free markets."