Ex-Goldmanite , Now Minneapolis Fed President Neel Kashkari Calls for “Transformative” Changes to Banks, Ending TBTF, Even Regulating Them as Utilities

What does one make of it when someone whose career has been based on having powerful friends and contacts at the top levels of the financial services industry appears to be acting as a traitor to his class? In this case, the apparent turncoat is one Neel Kashkari, ex Goldman, ex Treasury, ex Pimco employee, now the new President of the Minneapolis Fed, who in his first speech in his new job, said all sorts of unpleasant truths: the financial crisis imposed huge costs on society as a whole, Dodd Frank didn’t go far enough, the authorities won’t be willing to risk using untested new powers in a financial meltdown and will bail out banks again. He also argued that the financial system was now stable enough to make (by implication overdue) transformative changes to end the “too big to fail” problem, such as breaking up banks and regulating them like utilities. Kashkari plans to come up with a comprehensive plan by year end and is seeking public input, including having expert discussions that will be webcast.

Now readers might think I’ve gone soft in the head by virtue of having an insider advocate some of our pet ideas, such as treating banks like utilities, when I tell you there are reasonable odds that Kashakri is serious.

As much as there was a great deal to like in his speech, I feel compelled to comment on a couple of issues before turning to the big question of “What to make of this?”

Kashkari Calls for a “Bold Approach”

This is the guts of Kashkari’s speech:

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. The Federal Reserve Bank of Minneapolis is launching a major initiative to develop an actionable plan to end TBTF, and we will deliver our plan to the public by the end of the year. Ultimately Congress must decide whether such a transformational restructuring of our financial system is justified in order to mitigate the ongoing risks posed by large banks.

Although TBTF banks were not the sole cause of the recent financial crisis and Great Recession, there is no question that their presence at the center of our financial system contributed significantly to the magnitude of the crisis and to the extensive damage it inflicted across the economy…

I believe we must seriously consider bolder, transformational options. Some other Federal Reserve policymakers have noted the potential benefits to considering more transformational measures.6 I believe we must begin this work now and give serious consideration to a range of options, including the following:

• Breaking up large banks into smaller, less connected, less important entities.
• Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
• Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.

Options such as these have been mentioned before, but in my view, policymakers and legislators have not yet seriously considered the need to implement them in the near term. They are transformational—which can be unsettling. 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.

A Few Quibbles

Kashkari, and sadly, this is now conventional wisdom, treats some earlier financial crises as less serious than they were deemed to be at the time. From his speech:

When roughly 1,000 savings and loans failed in the late 1980s, there was no risk of an economic collapse. When the technology bubble burst in 2000, it was very painful for Silicon Valley and for technology investors, but it did not represent a systemic risk to our economy.

While Kashkari is correct that the US was not at risk of a seize-up, the S&L crisis was widely expected to impose much greater macroeconomic costs than it did. The banking system had taken a body blow and experts anticipated it would take a very long time for banks to repair their balance sheets, which in turn would dampen the recovery. The financial system got back on its feet faster than projected because Greenspan engineered and maintained a very steep yield curve, which gave banks big profits, which they used to shore up their capital levels.

Similarly, while I agree that stock market busts, even big ones like the dot-bomb era, have limited macroeconomic impact unless the stock buys were fueled with a lot of borrowed money. However, Greenspan, imprinted by the 1987 crash, thought otherwise, and drove interests rates negative, in real terms, for a full nine quarters, when the past Fed response in a recession was to drive interest rates low only for a quarter or at most two.

This section of the speech is intriguing:

Many of the arguments against adoption of a more transformational solution to the problem of TBTF are that the societal benefits of such financial giants somehow justify the exposure to another financial crisis. I find such arguments unpersuasive.

• Finance lobbyists argue that multinational corporations do business in many countries and therefore need global banks. But these corporations manage thousands of suppliers around the world—can’t they manage a few more banking relationships?
• Many argue that large banks benefit society by creating economies of scope and scale. No doubt this is true—but cost/benefit analyses require understanding costs, too. I don’t see the benefits of scale of large banks outweighing the massive externalities of a widespread economic collapse.
• Some argue that if we limited U.S. banks in size or scope, they would be at a disadvantage relative to banks in countries with looser regulations. If other countries want to take extreme risks with their financial systems, we can’t stop them—but the United States should do what is right for our economy and establish one set of rules for those who want to do business here.

Yves here. Now I could (and have) argued with validity of each of the big banks defender talking points that Kashkari cites. For instance, there is ample evidence that banks show diseconomies of scale above a relatively small size threshold. But Kashkari doesn’t bother arguing whether these claims hold up. He says that even if they are true, they don’t deserve to be taken all that seriously.

What to Make of Kashkari’s Plan to Develop a “Bold” Plan?

Many of my interlocutors were suspicious of Kashkari’s appointment to the Minneapolis Fed presidency, and saw it as Government Sachs or other insiders pulling strings to get a pliant ally a seat at the table. He’s relatively young, 42 years old. He was at Goldman for four years, sought a public service job he did not get (White House fellow) and then went with Hank Paulson to Treasury, where he was moved over from his original role at Treasury to work on crisis matters, most notably administering the TARP on a day-to-day basis.

After Kashkari left Treasury, he joined Pimco and became head of their effort to enter the equities business. This was an odd choice, since Kashkari had been on the investment banking side of Goldman, meaning he had no experience in equity research, stock picking, or the asset management business. The six mutual funds he created all underperformed. Kashkari left Pimco to run for California governor as a Republican and lost to Jerry Brown. This is Wikipedia’s summary of his political positions:

Kashkari has been a Republican his whole life. In a 2008 speech to the American Enterprise Institute, Kashkari described himself as “a free-market Republican.” In 2013 he described himself as a “pro-growth Republican”. He opposes most of Obama’s economic agenda and supports cutting business regulations. He has called for cutting Social Security and Medicare and replacing the Patient Protection and Affordable Care Act. In 2012, he voted against California’s Proposition 30, which raised taxes in the state, and for Proposition 32, which would have weakened labor unions’ political influence. In a March 2014 interview, he praised Wisconsin governor Scott Walker’s controversial policies limiting collective bargaining.

On social issues, he has described himself as libertarian[78] and “a different kind of Republican”, supporting abortion rights, Same-sex marriage, and a path to legal status for illegal immigrants.[72] He voted against California’s Proposition 8, which banned same-sex marriage in 2008…

Kashkari cites Paulson, Mitch Daniels, and Jeb Bush as political mentors. He voted for Obama in the 2008 presidential election and Romney in the 2012 election.

Kashkari’s deep ties to the financial services industry, his support of the internally inconsistent idea of “free markets,” and his libertarian, anti-regulatory stance are reasons aplenty to think his call for bold measures is just a great big Trojan horse.

But the official position of the financial services industry is that Dodd Frank went too far and has hobbled them with all sorts of red tape that has hurt their profits. And senior executives and their mouthpieces have adopted a “take no prisoners” posture, howling over even minor regulatory changes or criticisms of their conduct (remember how loath they are to admit they fight tooth and nail admitting they have done anything wrong?).

Now it could be that Kashkari is trying to develop a plan to compete with Elizabeth Warren’s 21st Century Glass Steagall Act, one that would be weaker and thus easier to get passed. But the banks don’t want another round of reforms, even weak reforms. And Kashkari is messaging to the left of Warren. His mention of breaking up the banks, or the even more radical idea of regulating them as utilities, effectively endorses her and Bernie Sander’s calls for breaking up the banks until he puts a real plan forward, which is nearly a year away, an eternity in politics.

My best guess is this plan is all about Kashkari advancing his career via infighting effectively at the Fed. Fed presidents, except at the New York Fed, have limited authority. In a famous incident in the 1990s, four regional Fed presidents, including Janet Yellen, complained to Greenspan about how they were marginalized and that staff at the Board of Governors had more power than they did. Moreover, the central bank is preoccupied with monetary policy. Kashkari has no expertise on this front and would not be treated with much respect. Many people outside the Fed regarded his credentials as far too thin to deserve the job; he’d be seen as a lightweight internally as well.

But by launching a splashy bank reform initiative, with the explicit aim of developing a legislative proposal, Kashkari has opened up a new front, and one where he has the advantage over Fed incumbents, save bank reformer Danny Tarullo, who presumably will be an ally. Kashkari’s assets are his bully pulpit, which he has made clear he intends to use heavily, and the Minneapolis Fed staff, which historically, and perhaps still, has some insight into “too big to fail” issues. In fact, this is an area where Yellen has performed badly. Recall how Elizabeth Warren dressed her down over the Fed’s repeated failure to make the biggest banks develop viable living wills or take action to force them to divest assets or simplify operations. In other words, Kashkari’s initiative looks like a challenge on terrain where the leaders of the Fed, Yellen, Stanley Fischer, and the power behind the throne, general counsel Scott Alvarez, have not covered themselves with glory.

And Kashkari has devised a process that will keep his initiative in the headlines:

Starting in the spring, we will hold a series of policy symposiums to explore various options from expert researchers around the country. We will also invite leaders from policy and regulatory institutions and, yes, the financial industry to offer their views and to test one another’s assumptions. We will consider the likely benefits, costs, risks and implementation challenges of these options. We will invite the media to these symposiums and livestream them so that the public can follow along and learn with us.

Following the symposiums, we will publish a series of policy briefs summarizing our key take-aways on each issue, so that all can provide feedback. And feedback can start now. We have established a website where anyone can share with us their ideas on solving TBTF. If you are a researcher—if you work in the financial sector—if you just have a good idea for solving TBTF, wherever you are, please share it with us at minneapolisfed.org.

Now we’ll have an idea of how serious Kashkari’s plans really are by who gets invited to these confabs. However, it is worth noting that policy development is just about never done is such a public manner. I’m not sure financial services industry incumbents recognize that the bland talking points they serve up in private discussions to often-not-knowledgeable recipients, like spread-too-thin Congressional staffers, won’t hold up so well when presented before a larger audience that includes lots of people who know how Big Finance actually works.

In other words, Kashkari may have concluded that breaking some financial services industry china is a career-advancing move. How much of a ruckus he really intends to create will become apparent in the coming months.

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  1. Bubba_Gump

    Remember after TARP when he retreated to an off-grid cabin somewhere in the woods for a year or two to “think?” I was surprised when he re-joined the banking sector upon his return to civilization, but who knows what his real motives are. An intriguing character.

  2. Dino Reno

    My alarms bells are going off nonstop. Now, suddenly, the Fed is working on a plan to regulate the big banks so Bernie and Warren can take the day off because the Fed has it covered. What’s next? A study on cutting bonuses and instituting jail time? There might even be forums and public comment. Suddenly the revolution has been instiutionalized and the revolutionaries neutralized. Goldman’s Manchurian candidate strikes again.

    1. JeffC

      Maybe he’s angling to become Bernie Sanders’s Secretary of the Treasury (stretching Sanders’s no-Goldmanites pledge).

      1. polecat

        Paulson, Daniels, & JEB Bush……..as …Mentors??…….I think he’s giving cover to the repubs, ..I mean…he’s going to release his ‘plan’ in a year….AFTER the presidential election…Please. pull the other one Neil !!

    2. oho

      “Now, suddenly, the Fed is working on a plan to regulate the big banks so Bernie and Warren can take the day of”

      Or to be cynical, it could be that while outside of Wall Street Kashkai started talking to some good ol’-fashioned industrialist (or regional banking) Republicans who have their own reasons to dislike Wall Street.

      …And Kashkari thinks that siding with these regional industrialists and Main Street is both morally right and beneficial to his career.

      Or Kashkari is more like a pre-Ayn Rand libertarian who dislikes the concentration of power in Manhattan

    3. inhibi

      I feel the same. Kashkari, a career banker and ex-clan member calling for banks to be regulated? How amusing.

      Its smoke and mirrors all the way home. Until I see bankers jailed en masse for the insane amounts of fraud they generate year over year, I will studiously ignore any attempts by ex-clan members trying to win votes for supposed “morals” they have after spending a few years in a faraway mansion.

      The only “bold” plan I see is bringing banking fraud into the civil arena. That is, if grand larceny (stealing more than $500 sometimes $1000) equated to 5-10 years jail time, then millions in fraud equates to lifetime prison terms for UPPER MANAGEMENT. It would simultaneously control the TBTF by essentially placing the caveat of ‘the larger you are, the more responsibilities you hold, and the larger the punishments will be.’

      1. Nathanael

        When members of the elite start breaking ranks, it’s because they can see the handwriting on the wall. This is generally a sign that the revolution is succeeding.

    4. washunate

      Agreed. But it is interesting nonetheless. This completes the Heartland Trio opposition to East coast banking.

      Maybe we can call it the I-35 rebellion. What’s interesting to me is not so much intentions or purposes; clearly this is pretty watered down and quite suspect. But KC, Dallas, and now Minneapolis have voiced concerns publicly, however weak or strong they may be, about policy in DC and NY. That in itself strikes me as a notable marker on our journey.

  3. grayslady

    Thanks for the insights. I saw an article about this yesterday and was, frankly, astonished, given Kashkari’s background. He seems like a very ambitious individual, although not particularly qualified for the positions he has sought. Is Kashkari the new Donald Trump of the Fed? Is he merely trying to fashion himself as a populist in finance in order to build up his c.v. for another political run?

    1. Fair Economist

      That’s my immediate suspicion – pose as the “guy for breaking up the banks” with a proposal that will look pretty good but never be implemented, and use that rep in politics. He’ll be “the man they wouldn’t let break up the banks.)

      It’s possible he’s sincere about this issue, but it actually doesn’t matter much. He won’t succeed and the attempt will just make him more palatable politically, while still pushing that host of horrible proposals.

      Regardless of his motives, we’ll have to look at the proposals he comes up with. That’s what democracy is about – you have to work with people you don’t like to get things done. If something worthwhile can be extracted from his efforts, it should be.

  4. auntienene

    Maybe he’s positioning himself for the next crisis. He’ll look like a prophet and maybe a savior, too, High political office will be within reach.

    1. Larry Y

      He just outright said that on Bloomberg TV – said when he was at Treasury (2006?) was to prepare for next crash, and no one in the main stream saw the Great Recession coming, especially how real estate played into it.

    2. Jim Haygood

      Quite possible. Moreover, Kashkari likely is aware that the next recession could again feature a banking crisis, and may well be blamed on the Fed.

      Thus, having a pro-active study of potential TBTF bank reforms underway is a survival strategy for the Fed itself.

      ‘We tried to warn Congress, but they just wouldn’t listen.’

  5. TiPs

    When I read this on Bloomberg yesterday, here’s what I thought: ranked by assets, Goldman probably won’t qualify as TBTF, several of their largest competitors will (JPMorgan, BoA, and Citi for sure).

      1. TiPs

        Does SIFI = TBTF? Again, by asset size the banks (throw Wells Fargo in too) I mentioned are all 10x or more the size of GS. That’s why I’d be interested in finding out what Kashkari’s criteria are for TBTF.

        1. craazyboy

          I’d say yes. I believe SIFI was an attempt to quantify “TBTF” – because really TBTF is really how big a kaboom you can make, taking into account things like “contagion risk”, rather than just asset value.

          But anyway, it’s refreshing to see a Fed member spout what seems to be obvious to the rest of us.

        2. Yves Smith Post author

          Absolutely, that’s what the SIFI designation is about.

          Kashkari even suggested that banks smaller than SIFIs (without using that term) could be TBTF in stressed times, as in what posed a systemic threat varied with underlying conditions.

      2. Yves Smith Post author

        He was only at Goldman for four years.

        I neglected to mention that this bank-unfriendly position could come out of his shorter time in the asset management industry or by having run the TARP. Asset managers don’t like broker dealers. They know they are screwing them, or at least trying to, and they can’t do much about it.

  6. Ulysses

    Very difficult to determine intentions in this case. I’m optimistic that, at the very least, this may have the effect of mainstreaming ideas of those who challenge TBTF. Sort of like Gov. 1% Cuomo coming out for $15/hour — the sincerity is less important than the recognition of a shifted Overton window.

    1. JohnnyGL

      Yeah, I agree that intentions may not matter. What is probably important here is that some members of the elite now see that they have a choice between 1) getting on the reform bus and helping shape it, or 2) find themselves under it when the next crisis comes.

      1. polecat

        correction: When, not if, the next financial imbroglio hits, they’ll be on the bus alright, as it’s crashing and burning !!

        i just think no matter how much they attempt to change their putrescent spots,at that point it won’t matter…….the bankster elite will have lost the public trust completely !!!……..as for congress,…well, they’re less than slime….

  7. Larry Y

    Kashkari was just on Bloomberg GO. Stayed on message, and the hosts threw 0% interest rates, Steve Rattner, etc. at him. Pretty interesting that he said the financial sector was bailed out without much benefit to “Main Street”.

  8. Mickey Marzick in Akron, Ohio

    Why KashKari would propose such a transformation/reform in an election year? Why now? Yes, the POLITICs may be more important. On the surface the very suggestion of “banking reform” from an insider would seem to benefit Bernie Sanders’ campaign to the detriment of Hillary Clinton’s messaging to “Cut it out!” That said, which of the two would the Republicans prefer to run against – Bernie or Hillary?

    The calculus may be that Bernie’s avowed “democratic socialism” would be an easier target for the Republican nominee, especially when any transformation of the banking sector involves more government regulation – SOCIALISM. Then too, Sander’s is clearly the more immediate threat. Defeat him and elect a Republican to the White House given the current crop of candidates, and kiss any idea of bank reform to the dustbin of history. Hillary, on the other hand, would be someone the bankers could live with as her incremental approach suggests some “nibbling” at the edges, but certainly not the “draconian” reimposition of Glass-Steagall proposed by Sanders/Warren. Defeat Sanders and it is a WIN-WIN regardless of who wins the presidential election so long as the Republicans still control Congress.

    Even then, if Sanders would win the nomination and go on to win the election, “banking reform” will be a long and tedious process. Any attempt to reimpose Glass-Steagall will raise a number of questions. The fact that the TBTF banks have obliterated the distinction between commercial and investment banking, unwinding the two will not be easily accomplished and have to occur over time. It has been almost twenty years since the repeal of Glass-Steagall in 1999. Wouldn’t such a decoupling require changes to the shadow banking system as well? Utilitization of the TBTF banks seems more plausible but the politics of doing so in the current political climate suggest otherwise. Yves’ expertise et al would be appreciated in sorting the details out and warrants further discussion. Even Kashkari might learn a thing or two.

    But why now? Is it merely a coincidence that KashKari proposed the need for banking reform in an election year?

  9. diptherio

    @Dino Rino:
    I seriously doubt he’ll go as far as calling for jail time. And if you think Sanders and Warren are “revolutionaries”…..we’ll just agree to disagree.

    I’m guessing that Kashkari is just burnishing his credentials for later runs for office, having figured out that lots of Repubs hate the banksters too. What I doubt is that he is actually serious about enforcing any actual changes, or that he has the ability to make changes happen. But making the right noises is good for his rep (with some people) so that’s what he’s doing…maybe…Really, we’re just going to have to wait and see, but I’m not getting my hopes up – I’ve been around a little too long to fall into that trap.

  10. Abigail Caplovitz Field

    I agree with all the skepticism and need to scrutinize this closely as it goes. However I’m thrilled to have his voice joining the Warren/Sanders chorus of transformational change is necessary and doable. It matters more than many others potentially weighing in this way because of his position and politics. That said, it’s only helpful if he really keeps up the talk. Committing to the symposia is a good sign, but my inner cynic could see them as a way of deconstructing the transformational change arguments and converting him, in the process polarizing and damaging the effort.

  11. Chauncey Gardiner

    Setting aside possible political motivations, Kashkari is simply acknowledging the obvious: The overturning of Glass-Steagall with the passage of the Gramm-Leach-Bliley Act, the hobbling of regulators and regulation, and the failure of the DoJ to seek criminal prosecutions of those who individuals who committed fraud, have been a massive policy failure not only in a broad social, cultural and economic sense, but for the majority of the TBTFs themselves. What has happened to their stock prices over the past 20 years, whether in nominal or real terms, reflects this back to them daily.

    I regard his speech as both constructive and necessary.

    1. steelhead23

      Yves mentions that he is relatively young and untested in his current position – an outsider of sorts. I see those as elements of change, both internally, and after seeing the light, externally. That’s what his speech suggests. I fervently hope his colleagues stand against him, perhaps even belittle him, as my sophomoric psychological analysis suggests that ostracism would make him bolder, not more timid.

      1. polecat

        “outsider’…………… If things get as bad as I dread they will, then he and his ilk will have to confront the real outsiders……….all 320+ MILLION of em !!!

  12. Synoia

    He is aware of the potential shitstorm from the current actions of the Banks. and is positioning himself for a larger role (career enhancing role).

    He cannot say the banks are too small, so what remains?

    He certainly has the attention of the large banks, who will have to genuflect in his presence. AS some politician said “I have your backs.”

    His career is more important to Him than any “principles.” He is looking for his next step up.

  13. RDeschain

    You can be a believer in markets and at the same time recognize that the system as presently designed is most likely to lead to (another) severe crackup that could imperil the public’s willingness to tolerate a market system. His background/professed beliefs aren’t inconsistent with what he’s saying here, it just means he may not be totally myopic (unlike most of our “leaders”)

    Whatever his motives, he’s saying things that need to be said from a position of relative power. I’m willing to take him at face value until proven otherwise.

  14. C

    He is a career politician who has not in any way taken responsibility for his prior actions (or rather non-actions in failing to manage TARP effectively). The closest he has come was in an interview where he blamed Congress for being mean to him in public about things they privately supported. Basically claiming that he didn’t know any better therefore it wasn’t his fault.

    When he ran for governor it was as a guy who would tackle homelessness, something he knew little about so he spent a week pretending to be homeless during the day and then going home at night to find out. This led to an asanine editorial in the WSJ.

    Given that past history I feel that there are only two ways to read this: he is saying what he thinks people want to hear to advance his own career; and this represents an effort by some to ride on, and perhaps take over and co-opt, the Warren/Sanders groundswell.

    If … if, any actual proposals come from him beyond this speechifying or from the Fed they should be treated as a poison pill for real reform.

  15. RUKidding

    I live in CA, and I don’t trust CASH CARRY. Other comments have pretty much summed up some of my feelings about him. Everyone out here was pretty skeptical about his move to the Fed in Minneapolis. I’m way too lazy to look it up, but I *think* CASH CARRY blathered on during his failed Gov. run about how California was the “place to be,” and that he was gonna be around forevah! Yet… not so much.

    I see him as very ambitious, which is ok, but I don’t see him as honest At. All.

    Yes, what he’s saying NOW has some merit, but how much does it hurt him to say it? Given that there’s some attention NOW being paid to these issues, he makes himself look good by echoing some of the more salient (and, really: obvious) points.

    But then what? Color me utterly skeptical. I don’t expect much to come of this, frankly. CASH CARRY is strictly all about: what’s in it for ME???? Bank on that.

  16. alex morfesis

    Kneel cash and carry brand is on the move…hard to see how from his background this can be considered serious..but then again the evil bernie fried became my cover in chicago, calling me his mensch and how he wished he had stayed as foolish as me…zebras do envy Clydesdales at times…change can happen…just hope the change is not just a diversion or distraction…

  17. TMock

    What to Make of Kashkari’s Plan to Develop a “Bold” Plan?

    State of the World Economy: The Emperor Has No Clothes
    by Sustainable Land Development Initiative, Sep 1st, 2011

    In Hans Christian Anderson’s iconic fairy tale, The Emperor’s New Clothes, two swindling weavers promise an Emperor a “new suit” that they tell everyone will be invisible only to those who are unfit for their positions. So, when the Emperor parades before his subjects, the spellbound people laud his beautiful new clothes in fear of being exposed as unsophisticated or stupid. Eventually, it took a child to cry out, “But he isn’t wearing anything at all!” before the king’s subjects could muster enough confidence to admit the obvious reality…

    Developing a Sustainable Endgame For the Global Economy

  18. griffen

    Post Treasury and TARP, his movements and career choices have been, interesting. Didn’t set the world on fire at PIMCO (which without knowing more, looks curious given index performance since April 2009).

    That run for governor of CA just speaks to an intense need to find a (any) direction to go. Must have powerful friends and powerful connections.

  19. vlade

    while cynicism may be in place, it’d be remembered, that some of the largest progressive changes in the us in last 50 years came from lb johnson. who was a warmonger as power hungry as they come – to observe with his biographer “unencumbered by even he slightess excess weight of ideology, philosophy, principles or beliefs”. sometimes it takes a bastard to get things done (as opposed to folding even before start, as hillary and likely obama did).

    so, if he follows through, I don’t care whether its because he had real paulian conversion moment, or seeks personal glory or whatever.

    so far it’s significant that a fed official said something like this – but lets see whether there’s more

  20. susan the other

    In a time of european austerity and bail-ins; in a time of the breakdown of our global reach; in a time of deep resentment politically; in a time of Fed failure; not to mention global warming… There’s something about Kashkari that reminds me of tony blair. Opportunist. Using populism. Whether to advance his own career or the interests of people who control him. He seems like a smooth operator. Young and personable. And glib. He’s clever too because he used a great metaphor – he wants to regulate banking like a nuclear power plant… because debt always tends toward critical mass. Let us all remember what happened to Rockefeller after they busted Standard Oil: he became exponentially richer and more powerful. Kashkari might be observing the mistake going on in the EU like the US’s greatest banking opportunity ever, … in the history of the world.

  21. Helmholtz Watson

    Fascinating! And thanks Yves for the analysis of possible intentions and motives. On its face you have to like what he said. Let’s not dismiss the possibility that Kashkari wants to do the right thing. I know a lot of people who did very well in finance and who are disgusted with the system. They are grateful for the money they made, but honest enough to know that something isn’t right. Many of these people have family and friends who didn’t make it big on Wall Street and the disconnect eventually hits home with them. Others live in a bubble and maintain their deluded grandiosity.

    By the way do we know who it was on little Timmy’s staff who went to Neal Barofsky and told him not to do his job as the TARP inspector general too well?

  22. The Heretic

    Game of Thrones is a basically a drama of swords and soap opera drama; however,’instead of focussing on magic, monsters and fighting, it does explore and develop many different character types. It is especially good and depicitng the differing shades of evil that some people posses, their different motivations and justifications of their actions, their different tactics, (some cruel and vulgar and easily recognizable like Ramsay Bolton, some are controlling and disciplined, motivated by a higher cause with a high regard for protocol and tradition masking their personal ambition, but with no consideration compassion for those who suffer the consequences, like Lord Tywinn)). Perhaps the i-bankers of the modern age, who only desire to increase their own personal power and prestige and are able to associate and cooperate with many different faction, and can backstab proficiently, can be viewed as a Roose Bolton or Pietyr Baelish.

  23. Andrew Watts

    The economists might be beginning to realize the limitations of monetary policy in combating the effects and aftermath of a financial crisis. It would be in line with White’s (OCED) recent call for wage growth and a more flexible fiscal policy in countries disposed to act as such. I have no idea whether these events represent a systemic change or even the possibility of such. It cannot be ruled out that this incident might’ve been the result of an internal shift in thinking at the Fed though.

  24. readerOfTeaLeaves

    A whole new, vibrant discussion of economics is unfolding.

    Part of that new discussion centers on the basic question: what creates value?
    The neoliberal answer has always been “money”.
    Consequently, neoliberalism exalted bankers, central banking, and finance.
    Kashkari clearly bought into that false ideology: he was ECONned.

    Then 2008 happened, and it became obvious that ‘money’ did not create wealth.
    This fact called neoliberalism into question, and it appears that even Kashkari finally got that memo.

    It turns out that, on it’s own, ‘money’ is NOT the key ingredient in creating wealth and prosperity.
    Handling money does not make bankers innovators.
    Never has; never will.

    The question of “what creates wealth” is clearly one of the critical questions at this moment in human history. Kashkari is at least pondering it. For more on this topic, apart from today’s NC links to Randall Wray and Michael Hudson, there’s one more sign that smart thinkers are coming up with excitingly new ways to think about what creates wealth:

  25. kevinearick

    Dross, what a wonderful word! And so apt.

    Premotor Cortex

    Out in the ballroom, you have partners with daggers, slicing each other on the margin as they pass on the floor. In the antichamber just adjacent, called the premotor cortex room, combatants have their swords drawn and are cutting off limbs. In the war room, you have psychologists waiting, for the next weapon, to be presented as the latest and greatest means to extend and pretend, RE feudal control.

    It’s all a giant waste of time, but humanity has become so efficient at natural resource exploitation that most have nothing really to do, other than watch the show or one of its derivatives, calling the preoccupation work, adding pieces of paper called contracts into the growing circle of make-work. But we have systematically removed all the supports, leaving $US RE as the only remaining support for the house of cards, the accumulation of debt driving human resource exploitation to the tipping point. And once again we have reached the crux of the matter, relative to the majority, money, another false promise travelling in circles.

    The problem / solution of a competition for knowledge advantage is that it is an illusion, and the only question is when you are going to wake up and see the damage – in the case of war, how many lives have been throw into the furnace to satisfy the bandits in this iteration, on the alter of modern medicine, which is always expanding the frontier of genetic, financial and infrastructure war, over the illusion.

    DNA protects itself by not knowing, shuffling the deck. You go into the forest and harvest a tree to build a house for your family, and take your brother. Your brother gets the bright idea to cut a road into the center of the forest, hollow it out, and build an industry on natural resource exploitation, one of many in a global portfolio, some reaching the end of their ‘useful’ lives and some just beginning, with the associated demographic booms and busts, financial implosion and war, to shuffle the deck with more misdirection.

    In the premotor cortex, the exact location depending upon the individual, you have complex signals entering for evaluation, a menu of motor action responses, selection and execution. Stimulus preference leads to efficient execution in a positive feedback loop, knowledge, ruling out sensory perception and response choice. Effective preference for unexpected stimulus adds sensory perception and motor action response at the edge of environment, a positive feedback of learning as the negative feedback for knowledge. It’s a trade-off, or balance.

    Physics tells you that you cannot have both temporal (when) and spatial resolution (where) – you know the S&P is going through 1800, but you don’t know when, unless you are the market maker of illusions – but your eyes and ears not only create the illusion, but they record it as reality as well, upon which the efficient premotor cortex is based, linear spacetime. Between the market maker, indexing and EFT, you are wasting your time in the market, which all goes to RE inflation in any case. Despite all the damage we have done with this illusion, we have as yet to begin to appreciate the potential of this planet, but rather hung ourselves, so what is the case for money, other than more of the same, deficits and debt to nowhere.

    Money grows the middle class, and war shuffles the deck. Rinse and repeat.

    If you back yourself out of that war of knowledge, you will see that a human is an I/O tuner, and humanity alone has many frequencies. The whole point of a peer, special interest group is to protect the illusion of knowledge advantage, and so it adopts increasingly irrational behavior to maintain it. And it is in this vortex which the psychologist provides the product, drugs and a selfie stick, a bait and swap for life, which works out quite well for the Neanderthals recycling nature with a RE ponzi.

    Urban area is a relatively insignificant percentage of this planet’s surface, and a tiny percentage of the population does all the farming, so why is the rent/income ratio and resulting income disparity so high, at the cost of economic mobility and war, in an environment of massive excess capacity, producing pollution?

    Didn’t the salary data and location of psychologists in the California State pecking order just jump out at you?

  26. csissoko

    Note that while Kashkari deliberately makes a splash with aggressive policy ideas, he also deliberately leaves out the reform that would be most harmful to Goldman Sachs’ business model: the separation of commercial and investment banking — or more precisely strictly circumscribing investment bank access to commercial bank lending and liquidity. That is, there’s a strong argument that stability will be best served by forcing JPM and BoNY out of the tri-party repo market and all commercial banks out of the business of providing liquidity support to commercial paper issued by shadow banks.

    Since a new “Glass-Steagall Act” has been front and center of reform proposals for the past few weeks due Sanders’ support for Warren’s approach, Kashkari’s omission of this idea from his list has to be deliberate. In short, the purpose of this splashy policy agenda may be to dismiss out-of-hand one of the most important reform agendas.

    1. Yves Smith Post author

      I don’t agree. His first specific idea is breaking up the banks, and the most obvious and comparatively easy split is investment banking v. commercial banking. Moreover, ti’s defensible now because the Bank of England and FSA backed it and it is being implemented in watered-down fashion in the Vickers reforms.

      Moreover, of all the US TBTF, Goldman would be hurt least by this move. Bank of America and JP Morgan would be inconvenienced in the extreme. It would really tie up senior management and work to Goldman’s relative advantage.

      1. csissoko

        Our difference lies in the fact that I think Glass-Steagall based reforms are only incidentally about breaking up the banks and that the real force of Glass-Steagall reforms is that they close the tri-party repo market — and an important source of funding for modern investment banking.

        In short, while Glass Steagall implies some measure of breaking up the banks. a policy of breaking up the banks does not imply the implementation of Glass-Steagall-based reform.

  27. Lune

    I’m as cynical as they come in politics, but I think Kashkari deserves the benefit of the doubt and see where this leads. Obviously he’s interested in politics, and may want to run again in the future, but so what? If he does the right thing and actually implements half of what he’s talked about here, quite frankly, this Yellow Dog Democrat will be the first to vote him in for President!

    Yes, this is just a speech, but this was his first speech as Fed Pres. Most people, especially one with relatively thin credentials and reputation in the field, are content to spend a few years doing nothing controversial and currying favor with the real bosses in DC and NY. It takes guts to come out and essentially go against Fed orthodoxy in your very first public outing. None of that will matter if it just remains a speech, but IMHO, even the fact that he wants to hold *public* hearings about this speaks favorably. If all he wanted was a little publicity for a future political run, he could have given his speech, take the free publicity, then go back to business as usual, secure in the knowledge that if/when the next banking crisis comes, he’ll be looked on as an oracle.

    More interesting, the Minneapolis Fed will be a voting member of the FOMC in 2017. We can see then if he really means what he says…

  28. DDF

    Mmmm…. kashkari is likely running for kashkari. Asset management didn’t work out and he likely sees himself more successful as policy maker than as PM. This is a great issue on which to build a political/policy career: it makes sense, it can be bi-partisan and it is positioning him on the winning side of what appears to be a forthcoming, major realignment of US politics against larger corporations/banks. Most importantly, it puts him in the national rather than Minneapolis limelight. Let’s give it to the guy: these are important and valid points. And a bit of intellectual competition from the provinces won’t hurt the Board. Yellen beware.

  29. craazyman

    so much cynicism in one place. my oh my how jaded we are.

    there are probably rest stops on interstate highways in Minnesota that have no names. The New Jersey turnpike has rest stops and all of them have names. The one I’m most amazed by is the Joyce Kilmer rest stop. You can go to the bathroom there and you can buy fast food and T-shirts that say “New Jersey” and other things like that. You can also buy gasoline for your car,

    Joyce Kilmer was not a woman, as I had always thought. In fact, he was about as manly a man as you can get. He was a WWI demolitions expert, a soldier and a fighter who got blown up. That’s pretty manly. He wrote a poem about a tree that I had to read in grade school. It seemed like a Victorian woman wrote it, but no. It was only recently I realized he was a man.

    It’s hard to understand the reasons for human actions. There’s a Walt Whitman rest stop on the New Jersey turnpike and there are rest stops named after several other famous people. It’s not inconceivable that Minnesota is, as yet, a rest stop frontier.

    Why not go for it? Nobody will remember you if you’re just another Fed Governor or a rich dude. How many rich dudes are there? After TBTF and QE3 there’s so many you can’t count them all. But how many dudes have a rest stop named after them? Those are the dots and you can connect them as you see fit.

    If he’s indeed serious, there should be some questions the peanut gallery can come up with, which he should be asked to answer. This isn’t trivial stuff. If people are going to your rest stop 200 years from now, you have to earn it. You have to really stand out. No messing around like a PR-firm managed flack.

  30. Paul Tioxon

    AP picked up this story and it was published on philly dot com. I thought about forwarding, but maybe it was just a small potatoes story, one without national or global market consequence. But 2 facts, that AP covered it and someone at Philly thought enough about it to publish it gives credence to this analysis that his push to make waves is more consequential and has hit some nerves outside of the biz news channels, like Bloomberg.


    This link has the AP article and Philly listed 4 links about Kashkari radical overhaul of Wall St banking! Including a brief Reuters interview.

    Don’t be too surprised that career moves, savy politics or whatever else is motivating him to move in the direction of a Liz Warren world view. Recall the Post WWII Era, JFK, fresh from the triumphant victory over Japan and Germany, saw the national politics of America remade by massive federal government command over the entire lives of all of America, business, personal and local governments as well. In Dallek’s bio, Kennedy decided to run for congress, to go into public service because he saw that the world was going to be shaped, not by the wealthy as a group or by the great men of wealth, like Rockefeller, but instead by the government leaders using the vastly enlarged federal bureaucracy that transformed Washington DC from the depression era and WWII into a power center such as the world had never seen before.

    The right wing sees Obama as someone who transformed America by using the government as the instrument of transformation, mainly because that was his only instrument. The fact that he is neoliberal is irrelevant, because if the only way to carry out neo-liberalism is via the federal government, that is an overthrow of the Reagan Revolution, which was built upon getting the government out of the way by taking it apart and making it smaller. Kashkari may realize, much as Kennedy has, that power is shifting to the governing bodies and not so much the market based corporations. Watch how long Apple can resist the FBI demand for the skeleton key for iPhones. Will the power move to the governing agencies, enough to compel the richest corporation in history to do its bidding on demand?

    And Wall St banks, which had more money than god, the investment banks, the conglomerates such such as BoA, altogether could not save themselves, the money had to come from the Federal government. And what’s worse, the credit formation power to issue money by the government and only the government was transparent for all to see, even Michele Bachman could say so in public. So banks, which were supposed to have the pile of savings of all of society ready to be loaned were saved not by a pile of accumulated profits, savings sitting around in the bank vaults of America, but by the money spent into existence by the government. When corporate America comes apart at the seams, best to be a Fed official with power, than a CEO presiding over the liquidation of your company, better to be a Federal bureaucrat sustaining the social order by government policy.

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