In this photo taken September 26, 2014, Neel Kashkari, the Republican candidate for governor answers a question posed by eight grader Jonathan Silva, 12, left, during his visit to the Westside Preparatory Charter School-Eastside Campus, in Sacramento.
Rich Pedroncelli—AP
By Ethan Wolff-Mann
February 18, 2016

Neel Kashkari is about as establishment as they come. He ran for governor of California as a moderate Republican, was an investment banker for Goldman Sachs, and served as the top aide to former Treasury Secretary Hank Paulson overseeing the federal government’s bank bailout in 2008. But in his first official remarks as president of the Minneapolis Federal Reserve Bank, Kashkari caught Wall Street off guard.

In a speech on Tuesday at the Brookings Institution in Washington, D.C. (there’s a video too), Kashkari took a surprisingly aggressive, pro-regulation stance. “I believe we must seriously consider bolder, transformational options” to recent reforms, he said. That includes:

*Breaking up large banks into smaller, less connected ones.

*Turning large banks into public utilities by forcing them to hold so much capital that they can’t fail.

* Taxing leverage, the very tool that banks use to boost profits but that exposes them to risks, especially in bad economies.

Those sound like policies espoused by Elizabeth Warren or Bernie Sanders, not a self-described “pro-growth Republican.”

He began his speech by echoing his strong support for post-crisis financial reform. But after seeing the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Kashkari said he decided the continued reliance on “Too Big to Fail” banks (TBTF) poses a massive risk to the U.S. economy.

“While significant progress has been made to strengthen our financial system, I believe the Act did not go far enough,” Kashkari said. “I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy.”

According to Kashkari, reforms have helped the big banks restore their strength and gain importance in a healthy economy. But he doesn’t think that the current situation would allow much of an option besides another bailout if things were to go bad again.

Coming from a Republican, these are very strong words — especially given the fact that every GOP presidential candidate has complained that Dodd-Frank has gone too far and must be repealed.

In Kashkari’s view, mistakes are part of the economy and necessary for a market to be efficient. “Markets can make mistakes; that is unavoidable in an innovative economy,” he said, simultaneously echoing a common pro-regulatory sentiment and tipping his cap to the complex gambits of today’s banking industry. “But these mistakes cannot be allowed to endanger the rest of the country.”

Kashkari extolled the advantages of smaller banks. “When roughly 1,000 savings & loans failed in the late 1980s, there was no risk of an economic collapse. When the technology bubble burst in 2000, it was very painful for Silicon Valley and for technology investors, but it did not represent a systemic risk to our economy.”

The Minneapolis Fed president understands that his remarks will cause a stir. But he says he doesn’t think the global economy will have any major problems dealing with a larger number of smaller banks than a few big ones.

Kashkari has given the Minneapolis Fed until the end of the year to weigh options and deliver a plan. It will be interesting to see what he comes up with.

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