Neel Kashkari

Kashkari on quantitative easing before joining the FOMC:

• On CNBC in 2012: At the end of the day, this is not going to lead to real economic growth. Unfortunately, it likely leads to an inflationary outcome.
  
  
• On Twitter in 2013: Printing money is morphine. Makes u feel better but doesn’t cure.

Mr. Kashkari is undeterred by the criticism. “The Wall Street critics and the lobbyists are reduced to trying to criticize the process or criticize my intentions because they can’t argue with me on the substance,” he said.

More than anything, I just don't want the American people to have a false sense of security that we've addressed too big to fail, that this can't happen again. I think some of those risks remain and we need to consider more transformational solutions to deal with this problem once and for all.

Tausche: So do you think the system really would be more secure if you broke up the banks and gave the Fed and the U.S. economy three or more new pure play investment banks that they would have to hold capital against and would still have inherent risk in the business model but not cushioned by other business units? Would that really be the ideal outcome for you for the economy?

Kashkari: Well, we haven't decided what the ideal structure looks like. What I’m saying is and what we in Minneapolis are saying is a bunch of these transformational solutions were taken off the table in 2010. It was too – they are too bold coming out of the crisis. I'm saying now is the time to reflect on the last seven or eight years. What have we learned, what progress has been made, what gaps remain? Breaking up the banks is one of the options that we looked at yesterday, Professor Johnson at MIT talked about it. Professor Admati from Stanford talked about increasing the capital requirements so banks are so strong they virtually can't fail. You can never eliminate all risk and I don't think we would want to, but I think we can go further than we've gone today. And it's all about cost benefit analysis. Where's the optimal safety versus cost versus risk for the economy and for the country?

As I listened to the wide range of views on the merits and costs of higher capital, it struck me that we could increase capital requirements in a straightforward way to address TBTF. As we saw in my earlier comments about the behavior of legal structures in a crisis, there is a strong argument that simpler solutions are more likely to be effective than complex ones, so I see virtue in focusing on increasing common equity to assets, which seems the simplest and potentially the most powerful in terms of safety and soundness.

More capital has another advantage. We have seen extraordinary structural changes in our financial system over the past several decades. We have to be prepared for more change. More capital will absorb losses even from activities we cannot anticipate today.

Thinking back to my earlier comments about risk spreading between banks in the 2008 crisis, I realize that capital by itself is not a direct firewall to contain risk, but at a minimum, it does not intensify the spreading of risk from bank to bank. If all of the largest banks had enough capital that investors were confident in their strength, even during an economic shock, such concerns about shared risks could be substantially reduced.

“If we [raised rates] aggressively, we would be setting the brakes on the economy,” he said. “You will see us move when the data allows.”

He believes the Fed is doing whatever it can to get the economy moving and called the current stance of monetary policy appropriate.

"We are coming up short on both inflation and I think there is still slack in the labor market," said Kashkari.

As you can probably tell from our initiative to end too big to fail (TBTF), I am not shy about speaking my mind and advocating for policies I believe are in the best interest of the country. But I give careful consideration to whether drawing attention to an issue is the best way to positively influence that issue. In the case of TBTF, I believe we need to have a serious national conversation about whether we have done enough to address large bank failures. This is why we are having public symposiums to raise awareness and educate the American people while we educate ourselves.

But not every issue will be advanced by drawing more attention to it, and this is why I have been more hesitant to speak out about monetary policy, even though I do have views about the right course of action. I think market participants are too focused on the Fed, and I am reluctant to draw even more attention to short-term monetary policy decisions, when attention should be focused on solutions to longer-term issues.

In short, given the lack of notable price and wage pressures and the possibility of drawing more people back into the labor market, I believe the current accommodative policy stance is appropriate.

Speaking in Bismarck, N.D. at an oil industry conference, Kashkari said he expects moderate growth for the U.S. economy ahead, and called incentives from negative rates "perverse" because they could scare households and businesses away from the making the very investments they are meant to encourage. The Fed has other tools at its disposal to help boost the economy, he said.

Minneapolis Fed President Neel Kashkari on Monday said Monday that the “base case” of the U.S. central bank is that there will be only “moderate direct effects” on the U.S. economy if Britain votes later this week to leave the European Union.

“If we’re wrong and it ends up being a much larger effect, then I think all policy options would be on the table in response to that."

Do we really believe that in the middle of economic distress when the public is looking for safety that the government will start imposing losses on debt holders, potentially increasing fear and panic among investors? Policymakers didn’t do that in 2008. There is no evidence that their response in a future crisis will be any different. When I heard experts describe the TLAC approach during our symposium, it sounded like a plan that requires everything to work out perfectly when we know that in a crisis, that simply does not happen.

A policy analyst recently asked me if we really could resolve a large bank during a crisis. I responded by asking him if he thought we could dismantle an aircraft carrier in the middle of a hurricane. It’s not a perfect analogy, but he got my point.

I’ve mentioned this before, but when I first went to Treasury in 2006, Treasury Secretary Henry Paulson directed his staff (including me) to work with financial regulators to look for what might trigger the next crisis. We looked at a number of scenarios, including an individual large bank running into trouble or a hedge fund suffering large losses, among others. We didn’t consider a nationwide housing downturn. It seems so obvious now, but we didn’t see it, and we were looking. We should design our regulatory framework to assume that, as in 2008, regulators won’t have better insights than market participants. We must assume they won’t see a future crisis coming until it is too late.