A Federal Reserve president is calling on his colleagues and members of Congress to increase the authority of the Dodd-Frank regulatory overhaul and take legislative steps to break up Wall Street’s big banks.
Federal Reserve Bank of Minneapolis President Neel Kashkari, who oversaw the implementation of the Troubled Asset Relief Program (TARP) during the 2008 recession, implored lawmakers to act on banking regulation before the next crisis hits in his first speech as branch president Tuesday. Kashkari argued government policies used during the last downturn will not be enough to save the economy and an expansion of the Dodd-Frank regulatory law is needed to save the system, reports Reuters.
“The biggest banks are still too big to fail and continue to pose a significant risk to our economy,” Kashkari said Tuesday. “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.”
Kashkari is a former Goldman Sachs banker who joined the Department of the Treasury with Henry Paulson under former President George W. Bush where he helped administer the bailout programs. Kashkari joins the Federal Reserve System following an unsuccessful bid for governor of California as a Republican in 2014. He likens the banking sector to a nuclear reactor in meltdown, saying that his experience at the Treasury left him wary of the current state of finance, reports Bloomberg.
“The cost to society of letting a reactor melt down is astronomical,” said Kashkari in his speech. “Given that cost, governments will do whatever they can to stabilize the reactor before they lose control.”
Kashkari’s message of urgent reform in the baking sector runs counter to current wisdom coming from the Federal Reserve. In her February address to the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Federal Reserve Chair Janet Yellen spoke reassuringly about the outlook for the U.S. economy despite the chaotic start to the year for global stocks. She also spoke positively about the banking sector and the measures U.S. policymakers have taken since the recession to bolster the resilience of the financial sector, reports Reuters.
“I think the steps that we have taken over the last seven years have had very substantial payoffs in the form of a much more resilient and stronger, better capitalized, more liquid banking system,” Yellen said. “I think we do have a strong banking system and we’ve seen marked improvement.”
Kashkari will become a voting member of the Federal Open Market Committee in 2017, which sets interest rate policy. His goal is to break up the large institutions which he argues have grown even more untouchable in the years following the recession, into smaller, more localized banks that can be better controlled. Kashkari says he has generally lost faith in the ability of the government to ease the collapse of a major U.S. banking institution.
“I am far more skeptical that these tools will be useful,” said Kashkari. “We won’t see the next crisis coming.”
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