Newspaper article International New York Times

An Insider Takes on 'Too Big to Fail'

Newspaper article International New York Times

An Insider Takes on 'Too Big to Fail'

Article excerpt

Neel Kashkari, head of the Federal Reserve Bank of Minneapolis, was once a free-market ideologue. Now he fears that the financial sector is too large.

When he left Goldman Sachs to join the Treasury Department in 2006, Neel Kashkari held a worldview that played to type.

"I was a free-market ideologue," he said.

Then came a severe, sudden financial crisis, and the free-market ideologue found himself sending bailouts to Wall Street in hopes of averting a second Great Depression. Later, Mr. Kashkari ran an improbable (and unsuccessful) race for governor of California, in which he felt up close the fear, anxiety and anger of financially squeezed voters.

Now president of the Federal Reserve Bank of Minneapolis, Mr. Kashkari is no longer a free-market ideologue.

"Maybe a humbled pragmatist," he said. "Markets can make mistakes, and sometimes those mistakes can be incredibly costly."

That's why Mr. Kashkari these days sounds a little like Bernie Sanders, the Democratic presidential candidate. He, too, believes that the Dodd-Frank regulatory overhaul enacted under President Obama didn't go far enough -- and that the biggest banks may need to be broken up.

That led him to create the "Ending Too Big to Fail" initiative. It hasn't settled on recommendations for reducing the risk that bailouts would be needed during the next financial crisis, whenever it occurs, but the initiative has unsettled and confused some erstwhile Republican allies.

"I've had people call me up and say, 'What the hell are you doing?' -- friends of mine," he said with a grin.

His answer, grounded in those harrowing days at the Treasury Department: "We're supposed to look out for big risks."

Mr. Kashkari fears the financial sector has grown too large as a share of the economy as middle-class incomes have stagnated, but the shift in Mr. Kashkari's outlook goes only so far.

He defends the sector's essential role in the efficient "allocation of capital" and rejects Mr. Sanders's flamboyant assertion that "the business model of Wall Street is fraud."

The central cause of the 2008 crisis, he argues, was not fraud but rather "mass delusion" among lenders, borrowers and investors that home prices would keep rising. …

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