Over the past few weeks, he’s argued for breaking up the biggest banks, like J.P. Morgan Chase and Citigroup Inc. He has a unique perspective, given that he administered the Troubled Asset Relief Program (TARP) in 2008. TARP was how the US government recapitalized banks that were on the brink of failure during the financial crisis.
If anyone knows anything about the “too big to fail” mantra, it’s Neel Kashkari. And he believes the largest banks in the US are still too big to fail. That’s why they need to be broken up.
Why does Mr. Kashakri sound like an alarmist? Because it’s Washington DC gospel that we have our banking system under control. The Dodd-Frank legislation fixed everything. We have no need to worry.
Also, the big bank ecosystem is sprawling, and includes the Federal Reserve. You’ll find tons of connections amongst people in big banks, the Federal Reserve, and Congress. It’s a nexus of power.
Of course you hear someone like Bernie Sanders complain about the big Wall Street banks. But he’s a democratic socialist. That kind of argument is in his wheelhouse. For a Fed president, it’s a different story. While you expect commentary about the risks of our financial system, Mr. Kashkari’s calls for sweeping change are rare.
As you might expect, Mr. Kashkari is getting some serious pushback. Here’s his response:
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.
Those kinds of comments let you know how contentious this discussion is. It’s an unexpected line of dialogue, frankly, in polite financial circles.
The issue, as you might imagine, is money. Wall Street occupies a central role in our imagination because of how much money it controls. When that many institutions, and that many people, make that much money, you get a fierce defense of the status quo.
The global financial crisis shook the cobwebs loose. However, as time passes, and the peak fear of the crisis fades, complacency builds. We assume we’re safe again. And the big banks sincerely hope we believe that.
That’s why I’m fascinated by Neel Kashkari’s advocacy for splitting up the banks. He worked at Goldman Sachs. He was pulled into the Treasury Department to run the TARP program by Hank Paulson, the former chairman and CEO of Goldman Sachs.
Mr. Kashkari has deep connections to Wall Street. It wouldn’t have been surprising for him to keep quiet and try not to rock the boat. But he’s done the opposite. And I really, really like that.
I’m writing this post because one of the themes here at STEM to Business is the cost of financial engineering. I don’t argue against the totality of financial engineering. I do argue, though, that financial trickery can quickly be taken to excess. It can become so complex, and so opaque, that it threatens whole social institutions.
STEM to Business is meant to be an antidote to the ills of financial engineering. Our economic system is desperate for innovation. If we’re not careful, we’ll take any innovation we can find, whether it creates real social value or not. In many cases, financial engineering is a way to enrich a small group at the expense of a much larger group.
This is why I’m so passionate about helping scientists and engineers become business leaders. A world of real, technology-driven innovation awaits us. We make progress every day. We can make even more progress, when more technical professionals sit at the intersection of technology and business.
It’s awesome that Mr. Kashkari speaks up, knowing the position and influence he has. I’m curious to see how his pitch to Congress goes. It’s one more data point showing we have a broken system the rewards the wrong king of innovation. We need to change that.