America’s biggest banks present a “nuclear” threat to the US economy and should be broken up, a Federal Reserve policymaker and architect of the 2008 banking bailout said Tuesday.
Neel Kashkari, the head of the Minneapolis Federal Reserve, said the US’s biggest banks were still “too big too fail” and Congress should consider “bold transformational solutions to solve this problem once and for all”.
“I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy,” Kashkari said in his first public speechsince becoming a Fed policymaker in January. “A very crude analogy is that of a nuclear reactor. The cost to society of letting a reactor melt down is astronomical. Given that cost, governments will do whatever they can to stabilize the reactor before they lose control.”
Kashkari, who is best known for organising the $700bn government-funded bank bailout in 2008, said “serious consideration” should be given to “breaking up large banks into smaller, less connected, less important entities”. Another solution, he said, was to turn the big banks into public utilities by “forcing them to hold so much capital that they virtually can’t fail”.
He said existing measures under the 2010 Dodd-Frank financial reform law designed to prevent another banking system collapse do not go far enough and warned that “we won’t see the next crisis coming”.
“The financial sector has lobbied hard to preserve its current structure and thrown up endless objections to fundamental change,” said Kashkari, who was previous an executive at Goldman Sachs and former Republican politician. “The time has come to move past parochial interests and solve this problem. The risks of not doing so are just too great.”
Kashkari’s comments, in a speech to the Brookings Institution thinktank in Washington, come as presidential candidates battle over whom has the best solution to prevent another banking crisis, and prevent a repeat of the economic collapse.
Vermont senator Bernie Sanders, who is taking on Hillary Clinton for the Democratic presidential nomination,has called for a break-up of big banksand the introduction of a new financial transaction tax to pay for free college education.
“There are lines in your speech I can imagine a Bernie Sanders or Elizabeth Warren saying,” David Wessel, a former journalist who moderated the Brookings event, told Kashkari during a panel discussion after the speech. “It’s not what one expects.”
Kashkari responded that he was calling things as he saw them.
“If I’m not wiling to stand up and share my concerns, then I wouldn’t be doing my job,” he said.