Neel Kashkari had as good an up-close view of the 2008 economic crisis as anyone on earth. As a top-ranking staffer in Hank Paulson's Treasury Department, Kashkari helped design and implement the last-minute financial bailouts that kept American banks — and the national economy they fund — up and running. It was touch-and-go for a bit there.
That experience had a deep effect on Kashkari. Seems to have scared the shit out of him. On Tuesday, the newly named president of the Federal Reserve Bank of Minneapolis gave what was instantly hailed as a major speech on the troubled national banking system. Those banks Kashkari and the American taxpayer bailed out in 2008 and 2009 are still "too big to fail," Kashkari says, and the only sound course of action is breaking them apart.
It's one thing when this message comes from a hippie neighbor who's on his way to an Occupy Wall Street reunion. It's something else when the speaker is a former Goldman Sachs man, and happens to have his hands close to the levers of the central nervous system of American banking.
Kashkari defended the government's actions during the 2008 crisis. He doesn't regret the $426 billion Troubled Asset Relief Program (TARP) banking bailouts. He regrets that we had to do them in the first place, and he's worried we haven't done enough to prevent doing it all over again.
At one point in Kashkari's speech to the Brooking Institute, a Washington, D.C., think tank, he compared the necessary safety measures and regulation for banks to the way the country monitors its nuclear power plants. It's a useful metaphor. Both have the potential for a devastating meltdown.
“The cost to society of letting a reactor melt down is astronomical," Kashkari told his audience. "Given that cost, governments will do whatever they can to stabilize the reactor before they lose control.”
Government regulators are slightly more empowered to handle another banking crisis, and a lot more alert to its risks, Kashkari said, but the underlying problems that landed us in the mess are still there. Kashkari also announced that the local federal reserve chapter, one of 12 across the country, had undertaken a "major initiative" to study alternatives to the current system of banking, and plans to make its recommendations public by the end of this year.
"We know markets make mistakes," Kashkari said. "That is unavoidable in an innovative economy. But those mistakes cannot be allowed to endanger the rest of the economy."
Kashkari said the true test of big banks' ability to survive a sudden downturn comes in a review of "living wills," the emergency plans those institutions would employ to rapidly dissolve in the face of a sudden stock price crash.
Most banks still have "significant shortcomings" there, he said. Meaning, if it all goes pear-shaped again, the government will have no choice but to step in to shore up failing banks before they drag down the rest of the economy. As always happens in this situation, the taxpayer winds up paying the tab.
"We had a choice in 2008," Kashkari said, recalling the heady days when he and Henry Paulson, U.S. Treasury Secretary under George W. Bush, looked out over the financial precipice. "Spend taxpayer money to stabilize large banks, or don't, and potentially trigger many trillions of additional costs to society."
Moderator David Wessel noted that Kashkari was starting to sound less like a "Goldman Sachs Republican" and more like U.S. Sen Elizabeth Warren, D-Massachusetts.
Or Bernie Sanders. In fact, the Vermont senator and socialist immediately gave Kashkari's speech his stamp of approval, calling it a "must read" on his website.
"If a bank is too big to fail," Sanders tweeted, "it's too big to exist."
Kashkari's speech coincided with a big rollout of a new "TBTF" ("too big to fail") campaign online, with the Minneapolis Fed asking people to communicate their ideas directly to the agency using a Twitter hashtag, #EndingTBTF, or by filling out a forum with responses and suggestions. (The public appeal does not state whether profanity is encouraged.)
He followed the speech with an appearance on CNBC Wednesday morning, explaining that the local office was driven into action by the general inaction elsewhere in the world of financial regulation.
"If I didn’t step forward or my colleagues in Minneapolis did not step forward and say we have a problem, and we’re going to have to take some responsibility and try and do something about it, who’s going to do it?" Kashkari asked. "Who’s going to step forward?"
Probably no one, Neel. Maybe Bernie Sanders.