Regional Fed Chairman Has A Plan To Break Up The Big Banks

The Chairman of the Minneapolis Fed, Neel Kashkari, has come out with a bold plan to eliminate the too big to fail banks. Mr. Kahskari was previously known as the man who oversaw TARP and was a right-hand man to Treasury Secretary Hank Paulson during the financial crisis. So he knows a thing or two about the big banks. Mr. Kashkari delivered a powerful indictment of current financial regulation to the Economic Club of New York, stating that there is still a nearly 2 out of 3 chance that big banks will need to be bailed out again some time in the future. His bold plan is basically to increase capital requirements to a such a level that the bank would either break itself up into smaller entities or almost be full protected from a crisis such as 2008. Specifically, he would force banks with over $250 billion in assets to nearly double the amount of equity issued to 23.5% from the existing requirement of 13%. His plan also eliminates the use of long-term debt as a capital cushion as the financial crisis showed that was not necessarily an effective buffer. Mr. Kashkari’s also provided a subtle explanation of the success of Donald Trump when he said, “The bailouts violated a core belief that has been handed down from generation to generation in our society that if you take a risk you bear the rewards and consequences of that risk. We had to tear that up during the crisis because the biggest banks were going to fail and bring down the U.S. economy. And when you violate the core beliefs of society it does lead to anger and a feeling that this wasn’t fair.”

There must be something in the water at the Minneapolis Fed. Mr. Kashkari’s predecessor, Naryana Kocherlakota, began his tenure actually opposing the 2008 stimulus plan and was a monetary hawk. But, shortly into his tenure, he shifted his position almost 180 degrees and became a real dove on interest rates and, after leaving the Fed, a vocal proponent of fiscal expansion, saying that the country was wasting a golden opportunity to rebuild our infrastructure virtually for free. Mr. Kashkari’s plan will probably go nowhere in the Republican-controlled Congress and a Trump presidency. But it is a bold solution to the problem of the too-big-to-fail banks, a problem which is not only just the risk of another bailout but also the impunity with which the big banks break the law because they know they can not be shut down, as illustrated by the JPMorgan Chase bribery settlement today. It is a plan that the Democrats should support and run with. Not only it is a plan endorsed by a chairman of a regional Federal Reserve Bank but it will be provide a real counterpoint to the predicted Wall Street friendly actions of the Republican Congress.