Lessons From the Financial Crisis: Neel Kashkari

The federal bailout of financial institutions in the midst of the 2008-09 financial crisis was one of the most critical and controversial government led interventions in history. Unprecedented policy moves were enacted that granted the government the ability to pump hundreds of billions of dollars into the banking system by purchasing troubled companies’ assets and equity, take preferred equity stakes in financial institutions, buy up failing mortgages and bail out U.S. automakers.

The Troubled Asset Relief Program, TARP, as it is known, was enacted by President George Bush on October 3, 2008, with the signing of the Emergency Stabilization Act. While controversial, many credit TARP as a key component in stabilizing the crisis and preventing more bank failures and foreclosures. Neel Kashkari, who has served in the U.S. Treasury since 2006, was confirmed as Assistant Secretary of the Treasury in 2008, and put in charge of overseeing TARP.

Today, Kashkari is President of the Minneapolis Federal Reserve Bank where he continues to reiterate that banks are still ‘too big to fail’, and should be subject to higher capital requirements. At the same time, he has vied for less regulation on smaller banks and credit unions so that they may play a bigger role in the communities they serve and compete more evenly with global banking giants. While the current administration is pushing for less overall regulation of financial institutions, Kashkari maintains that more protection is necessary to insure investors and consumers do not face the same threats of a decade ago.

Investopedia spoke with Kashkari to reflect on lessons learned and not learned a decade after the financial crisis.

Investopedia:  What was the biggest lesson learned or most significant change that came about from the financial crisis?

Neel Kashkari:  "While free markets are preferable, markets can make big, costly mistakes. We need guardrails to protect against such excesses."

Investopedia:   What lesson or lessons did not we not learn or fail to adhere to since the financial crisis?

Neel Kashkari:  "Financial crises have happened throughout history; inevitably, we forget the lessons and repeat the same mistakes. Right now, the pendulum is swinging against increased regulation, but the fact is we need to be tougher on the biggest banks that still pose risks to our economy."

Investopedia:   Are investors and consumers safer today than they were 10 years ago?

Neel Kashkari: " Yes, they are safer, but taxpayers are still at risk. The biggest banks have more capital but it’s not enough; our analysis at the Minneapolis Fed shows that big banks need to double their equity to truly mitigate the threat of another collapse."

The Minneapolis Federal Reserve released a report in November of 2016 entitled “The Minneapolis Plan to End “Too Big to Fail”. In it, the Minneapolis Plan calls for big banks with at least $250 billion in assets to double their capital requirements to absorb losses. It also outlines more protection for retail investors and taxpayers that would mitigate their losses in the event of another crisis. It’s a dense but worthwhile read for those who care about protecting investors, the risks that big banks still pose to the global economy, and students of economic history.

Kashkari had taken an unusual path to Treasury that included a stint at Goldman Sachs as an investment banker its technology team in San Francisco after beginning his career as an aerospace engineer at TRW in Redondo Beach, Calif. He has been the President of the Minneapolis Federal Reserve Bank since January 2016. Kashkari came to the Minneapolis Fed after 4 years as a managing director at PIMCO where he left in 2013 to pursue a run for Governor of California.

His split track between the public and private sectors and his key role in overseeing TARP during a time of economic crisis has given him a unique and powerful perspective on the lessons both learned and ignored from 2009. He has used his positions in banking and politics to bring those issues into the spotlight and push for reform.