The new head of the Minneapolis Federal Reserve Bank, Neel Kashkari, made an interesting speech.  He gave it in Washington, presumably, because it was intended more for a national audience than for the people living in the District of the Minneapolis Fed.  He proposed in his speech that “big banks” (undefined) should be broken up and turned into utilities.  And for good measure, a general tax of some kind “throughout the financial system” should be assessed on financial leverage “to reduce systemic risks wherever they lie.”

MFRB President Kashkari admitted that his ideas were not really new, but they were certainly new from him in his new job.  The systemic risk leverage tax seems novel.  I cannot recall a policymaker who has ever recommended it, not in the United States.  The idea of converting banks into utilities has been the direction of federal regulation for some decades, but the only other government official I am aware of who has been blunt about banks being utilities is current FDIC Vice Chairman Thomas Hoenig, when he was the President of the Kansas City Federal Reserve Bank.  Nearly all bankers, for very good reasons, hate the idea of converting their institutions into utilities, more beholden to government than to their customers.  The “break up the big banks” (BUBBA) theme is certainly not original, having Depression era roots.  It has also become trite in recent political campaigns, almost to the point of being trivialized, if it were not for the seriousness of the potential consequences of following the advice.

And that is where profitable attention may be focused on Kashkari’s remarks.  Toward the end of his speech he itemizes several essential and serious questions that must be answered before arriving at such serious recommendations.  They are, essentially—

  • Which banks are we talking about and how would we identify them?
  • How can this plan adapt as the financial system evolves?
  • What if this plan just shifts risks out of banks and into nonbanks?
  • How will this plan affect access to financial services by families and businesses?
  • And what would it all mean for jobs and economic growth?

While Kashkari posits these questions, he does not answer them.  He dismisses them, even while acknowledging that they are important.  He calls them “shortcomings” and notes that any plan will be “imperfect”.  He urges us to press on before the answers might tell us where we are going, “we cannot let them paralyze us.”

Yet these questions are serious.  Their answers affect us all in powerful ways.  Rather than paralyzing us, asking these questions and understanding their answers may prevent us from embarking on plans that may do more than paralyze us.  If we have learned anything from financial and economic experiments, throwing caution to the wind is a departure from wisdom—and even from good policymaking.  Some questions are too big to go unanswered.