Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, discusses Neel Kashkari’s new initiative to break-up big banks.
Minneapolis Fed Sets Course
The Federal Bank of Minneapolis is one of the 12 Federal Reserve District banks in the United States. It is owned by the banks that have headquarters in the states of Minnesota, Montana, North and South Dakota, and the northern portions of Wisconsin and Michigan. It is by far the smallest of the nation’s Federal Reserve District banks serving a U.S. population of less than 9 million people. The bank’s assets are believed to be $33 billion or 0.7% of the total aggregate assets in the Federal Reserve District bank system.
While U.S. Bancorp is a member of the Federal Reserve of Minneapolis it is not represented on the Board. The Board is chaired by MayKao Y. Hang the president of a local non-profit organization, who has an unusually impressive resume. Of the other 8 members only one may be designated as coming from a large corporation. The Board fairly represents its constituency of small bankers and business people.
On January 1, 2016, Neel Kaskari was elected by the Board to be the President of the Bank. His election was approved by the Federal Reserve Board in Washington. Neel Kashkari never lived in the Minneapolis District. He is an Ohioan who worked for Goldman Sachs and in the Treasury Department under Secretary Paulson. For a brief period, he headed TARP, the bank relief program in Treasury. Two years ago he ran for governor of California as the Republican candidate and subsequent to his loss ultimately wound up as President of the Minneapolis Fed.
Given the ownership and structure of this 9th District Federal Reserve, Mr. Kashkari’s function will be to function as an advocate of small banks. He implicitly stated this in a speech delivered at the Brooking Institute yesterday. Mr. Kashkari laid out his plans as President of the Minneapolis bank. He wants to break up the “Too Big to Fail” (TBTF) banks.
Goal
Neel Kashkari stated:
“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.”
In addition, Mr. Kashkari said:
“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 … .”
Mr. Kashkari promises that he will release memos concerning his progress to break up these banks. Therefore, the media will have a rich fount of continuing anti-bank information that they will publish aggressively. This will presumably benefit the Minneapolis Fed’s small bank constituency and possibly Mr. Kashkari, himself, should he desire to run for another governorship somewhere in the United States. Presidential candidate Senator Bernie Sanders (D.; VT), who publically has indicated an unwillingness to ever support anyone from “Wall Street,” has already indicated his support of ex-Goldman Sachs employee Neel Kashkari’s efforts.
Reasoning
Neel Kashkari states that the need for his actions is basically threefold:
- One cannot know which banks are systemic risks;
- One cannot see where economic and financial risks are developing; and
- If a big bank fails the results can be disastrous.
In these statements, Mr. Kashkari basically is stating that the Federal Reserve cannot do its job because it cannot understand risk and it is not capable to deal with it. He says:
“… we must acknowledge that the largest banks are still too big to fail,. And even then, we won’t know how effective these tools [regulations] are until we have actually used them. Unfortunately, I am far more skeptical that these tools will be useful to policymakers in the second scenario of a stressed economic environment.”
Neel Kashkari: Hack Politician or Seminal Thinker?
Simply stated, Neel Kashkari’s solution to all of these uncertainties is not to have big banks. If there are no big banks then one will never have to worry about big banks failing. He advocates:
“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.”
Some Contrary Thoughts
My assessment of Mr. Kashkari’s program is that it will create a recession. Consider the following:
- There is no evidence in U.S. history indicating that heavily capitalized banks are not prone to failure. There is ample evidence that these banks cannot lend much money and this weakens economic activity.
- By forcing the banks to take on large amounts of capital, one forces them to shrink lending. This reduces money supply and weakens the economy.
- Turning banks into public utilities eliminates their freedom to take risk and this also reduces lending, the money supply, and economic activity.
- Taxing leverage throughout the financial system is a Bernie Sanders idea and it is a value-added tax.
- Shrinking the big banks will effectively eliminate the United States role in guiding the global financial system. U.S. banks area already withdrawing from the international markets. Citigroup has exited 30 countries on the ground including Japan, Germany, and Turkey. JPMorgan Chase is unilaterally closing accounts everywhere in the world.
It is unusual for a stated Republican to advocate this. It is also unusual for a Republican to advocate increased government control of industry. However, what is most unusual is for a Federal Reserve District bank president to state that the Federal Reserve is incapable of regulating the bulk of the U.S. banking system – i.e.; big banks — so get rid of the banks it cannot regulate.
Conclusion
Neel Kashkari has launched a program that will benefit the small banks that he is representing and keep him in the public eye for another possible electioneering bid. The media will blindly follow him as they have done in the past few days without questioning his proposals. Assuming the ideas ever get enacted by either the Fed or Congress, the American public will pay a heavy price.
