“Break Up the Banks”

Minneapolis Fed president Neel Kashkari, a former Goldman Sachs banker,  says “Break Up the Banks“.

Kashkari helped oversee the rescue of the US financial system during the Great Financial Crisis. He was with the US Treasury from 2006 to 2009 where his duties included overseeing the Troubled Asset Relief Program (TARP).

TARP pumped $700 billion into US banks during the 2007-2009 financial meltdown.

New Tune for Kashkari

After having bailed out the banks in the great financial crisis, Kashkari’s new tune is Break Up the Banks.

America’s biggest banks pose a potentially “nuclear” threat to the US economy and regulators should consider breaking them up, according to the new head of the Minneapolis Federal Reserve.

Neel Kashkari, who was a key architect of Wall Street’s 2008 bailout, said the largest US lenders remain “too big too fail”. He said in his first public comments since becoming the head of the Minneapolis Fed at the start of the year that efforts to regulate the big banks since the financial crisis had not gone far enough.

A break-up should be on the table, alongside a plan to turn the largest into public utilities by “forcing them to hold so much capital that they virtually can’t fail”, he said. Taxing leverage throughout the financial system to “reduce systemic risks wherever they lie” should be considered as well, he added.

Banks must be allowed to make mistakes, “even very big mistakes”, Mr Kashkari said in a speech at the Brookings Institution in Washington. But when they do, they should not require taxpayer bailouts or trigger “widespread economic damage”.

The Minneapolis Fed will deliver a plan on how to end “too big to fail” by the end of the year. However, on its own, the regional bank will not be able to implement its proposals.

Contradiction

It seems a bit contradictory to propose letting banks make “very big mistakes” while also proposing “forcing banks to hold so much capital that they virtually can’t fail“.

Nonetheless, Kashkari’s ideas, especially the latter, are a step in the right direction.

The proper way to force banks to hold so much capital they cannot fail is actually easy enough.

  1. End fractional reserve lending
  2. End duration mismatches
  3. Prohibit banks from lending demand deposits
  4. End FDIC on all time deposits

On all time deposits, including open-ended ones like savings accounts, there would be no guarantees. The higher the interest rates banks offer, the greater the risk. Bail-ins can happen. Banks will have to notify customers of this change.

Under my duration mismatch proposal, banks cannot issue 5-year CDs then lend the money for a 30-year mortgage. Indeed, 30-year mortgages might even vanish. If so, prices will be far more stable, and that’s a good thing.

Also under my proposal, banks would not be able to lend checking accounts, ever, under penalty of law punishable by imprisonment. This essentially negates the need for FDIC. Private insurance would be available extremely cheaply for those who want it.

That’s all it takes. There is no need to study anything. Curiously, there would be no need to break up anything.

Mike “Mish” Shedlock