Finding a way to protect the economy and taxpayers from the risk of financial industry collapse was never going to be easy.
Neel Kashkari admitted as much when he launched an initiative at the Federal Reserve Bank of Minneapolis to come up with a proposal by the end of the year.
But the depth of the challenge — the complexity of the problem, resistance from banks, widespread disagreement about whether there still is a problem, and the possibility that the pain of the financial crisis is receding from some policymakers' memory — was driven home hard on Monday at the first of several symposiums on the topic of ending the too-big-to-fail phenomenon in the financial sector.
Afterward, Kashkari reiterated that the financial crisis caused profound damage to many American lives and that he doesn't think financial reform in the wake of the crisis has done enough to prevent that from happening again. The Minneapolis Fed will "keep marching forward," he said, and deliver a clear proposal by the end of 2016.
"I look at a lot of the political anger in the country, again on both sides of the aisle, as directly stemming from the financial crisis," he said. "And that's a reminder to me that there are lingering costs to societies when they go through the intense crisis that we went through in 2008 and 2009. We need to move while we still remember."
Economists from across the country, as well as Federal Reserve Bank of St. Louis President Jim Bullard and General Mills Chief Executive Ken Powell — deputy chairman of the Minneapolis Fed's board of directors — were in the audience during the daylong symposium.
Notably absent were representatives from the large banks, with the exception of Gene Ludwig, a financial industry consultant in Washington, D.C. The major financial industry trade groups were all invited and declined to participate, Kashkari said.
"I think frankly the fact that this initiative is attracting this much anger from the banks indicates that they're worried, which gives me comfort that they are going to take this very seriously," he said.
Monday's forum in a room overlooking the Mississippi River was headlined by economists Anat Admati of Stanford, a fiery proponent for higher capital standards for banks, and Simon Johnson of MIT. He argues that a bank company's assets should be capped at a level that's equivalent to 2 percent of the U.S. economy, or around $350 billion. Several large banks have assets exceeding $1 trillion.
Both positions took a variety of criticism from other panelists, and conversation occasionally was combative.
Admati opened the day with a searing critique of banks for the small amount of capital they hold relative to their exposure to risk. Protecting creditors and preventing them from abandoning all financial companies at once was a key reason for the bailout during the financial crisis.
The largest banks are far too large, too opaque and too powerful in Washington for society's good, Admati said, and stress tests and living wills that purport to ensure their safety are a charade. "We're wasting a lot of time and money on these tests," she said.
She slammed banks for preferring debt over equity, and not raising more equity capital.
"Debt is best from the banker's perspective," Admati said. "From society's perspective, the reason equity is expensive for banks is because more equity would prevent them from passing social costs on to other people. That's it."
Johnson, who is also a former chief economist at the International Monetary Fund, led off the afternoon discussion by arguing for a cap on the size of banks, given that size is what exempted banks like Citigroup from being allowed to go bankrupt.
"I think an exemption from bankruptcy is a big problem. I don't think that's capitalism," Johnson said.
"I'm saying 2 percent of GDP hard size cap. If you're above 2 percent of GDP, then we put Anat in charge of your capital requirements," he quipped. "I'm sorry. Then we have a much higher capital requirement for you. Then you and your board decide how you want to proceed going forward."
Such a cap would force the breakup of Minneapolis-based U.S. Bancorp, which had $422 billion in assets at the end of 2015, and other large banks.
Over lunch, after former Federal Reserve Governor Randall Kroszner argued that any move on ending too-big-to-fail must carefully weigh the costs and benefits. Bullard, the St. Louis Fed president, said every time he talks about "too-big-to-fail" in other countries, everyone reaches for their phone because they take systemic banking risk as a given.
"I don't think I've even heard the words 'too-big-to- fail' outside U.S. borders," Bullard said.
That point was reinforced by Aaron Klein, an economist at Brookings, who said that if American banks are capped at a certain size, then global businesses might be forced to use global banks that aren't subject to American laws.
"Maybe that's good. It creates a more stable system, if you believe that somehow their banks won't export a financial crisis into our system," Klein said. "We certainly did a good job of exporting our financial problems overseas."
Kashkari held a town-hall meeting with the public at the Minneapolis Fed on Monday night. The next symposium will be May 16. The Fed will post a video of Monday's forum, and the speakers' presentations, to its website.
Adam Belz • 612-673-4405
