Fed’s Kashkari Bypasses Glass-Steagall for Capital ‘Solution’
Nov. 17, 2016 (EIRNS)—Minneapolis Federal Reserve chief Neel Kashkari was at the New York Economics Club yesterday to present his "Minneapolis Plan" to end the era of too-big-to-fail (TBTF) banks. Side-stepping the issue of reinstating the Glass-Steagall banking-separation law that was repealed in 1999, Kashkari was brought back to it by an EIR intervention.
His plan is a mandated huge capital increase for banks over $250 billion in assets, to 23.5% of risk-weighted assets, claimed to equal a tangible capital ratio of 15%; the Treasury would be able to raise that ratio even higher for systemic banks. Thus where Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig demands that banks double this current ratio, to 10%, Kashkari says it should be tripled to 15%. He acknowledged that bank credit in the economy—"growth"—would suffer for bank safety under this extreme capital requirement.
Avneet Hall attended for EIR. Kashkari put forward Minneapolis Federal Reserve Bank’s summary from a year-long deliberation on how to deal with TBTF banks, which was pretty blunt and easy to understand.
He started by saying that the banks are still TBTF and therefore pose a risk to the U.S. economy. He equated a financial crisis to a terrorist crisis and said that we must therefore chose how much are we willing to spend on safety/regulations, which do slow growth and are inconvenient, but which ensure that such disasters do not happen again. He said some countries and people are okay with the idea of a banking crisis and bailing out banks every 40-60 years but he is not ok with it. He said that if a bank has low capital, then its bailout probability increases, and emphasized that in the long term society is better off with these regulations. He also compared banks to nuclear power plants and said that we can’t get rid of them, so we just ensure they are governed by proper regulations.
Kashkari went through the social costs of the 2008 Financial crisis and called the polarization in the country its direct outcome. He said that usually after a depression, the growth rate is very high, but not in this case.
The moderator brought up Glass-Steagall and said that many candidates are talking about it, so why is Neel against it? Kashkari said he is not opposed to Glass-Steagall, but it alone would not have stopped the 2008 crisis, nor prevent a future crisis. He emphasized his plan of adequate capital reserves in investment and commercial banks as the basic solution.
In question-and-answer period, Hall brought up the popular revolt against low growth in the U.S.A. and Europe, the new paradigm that is emerging in Asia with New Silk Road and Asian Infrastructure Investment Bank, and why shouldn’t we pass Glass-Steagall and join this paradigm? She also explained that with Glass-Steagall, the investment banks wouldn’t have received large lines of credit from commercial banks and become TBTF.
Kashkari’s reply was that he was not aware of the AIIB and the New Silk Road, so he would not comment on that, but that even if Glass-Steagall had been in place in 2008, the bad behavior of investment banks would have continued. They would have still bought the mortgages and repackaged them into mortgage-backed securities and sold them to insurance companies, etc. He emphasized that he is not opposed to Glass-Steagall; having it would mean smaller institutions, a step in the right direction.