JACOB GOLDSTEIN, HOST:
In 2008, Neel Kashkari was working in the Treasury Department under George W. Bush. And he got what was kind of a promotion, but a promotion into a job that just sounds awful. It was the middle of the financial crisis, and Kashkari got picked to run the government bailout of the banks. How old were you at the time?
NEEL KASHKARI: I was 35 at the time.
GOLDSTEIN: And how much money were you sort of in charge of?
KASHKARI: The program's maximum size was $700 billion.
GOLDSTEIN: So Kashkari ran this massive bailout of the banks. The country made it through the financial crisis. And a few years later, Congress passed a law that changed the way banks are regulated. The law is called Dodd-Frank. And Kashkari says Dodd-Frank does have some good points, but when you get to the big question...
Is Dodd-Frank going to protect us from having to bail out the banks again?
KASHKARI: Unfortunately, no.
GOLDSTEIN: What do you think the backers of Dodd-Frank are basing their belief on?
KASHKARI: Hope and prayer.
KASHKARI: Yes. They don't want to do anything to fundamentally restructure the financial system. And instead, they will hope and pray that next time will be different.
GOLDSTEIN: So last month, Kashkari came out with his own plan, a plan he says does more to address the too-big-to-fail problem than anything we've done so far. And he says the initial response has been promising.
KASHKARI: I was pleased that Bernie Sanders came out and supported us strongly with our process. We even - The Wall Street Journal editorial page put out a very nice editorial on our plan. If we can unite Bernie Sanders and The Wall Street Journal editorial page, I think we're on intellectually solid ground.
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GOLDSTEIN: Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
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GOLDSTEIN: Republicans have said for years that they want to change the way banks are regulated. And next year, they're going to get their chance to do something about it. So on today's show, we talk about a big idea for how to change the rules for banks. It comes from the man who ran the last big bailout. And he says his proposed rules would make another big bailout much less likely.
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GOLDSTEIN: Before he went to Washington, Neel Kashkari worked at Goldman Sachs. And his worldview at the time was what you might expect from a young Goldman banker.
KASHKARI: Coming into Treasury, I considered myself to be a free market ideologue. I believe in markets. I believe that if you take a risk, you get the benefits and you bear the consequences. I assume that successful people were successful because they were, you know, more clever.
GOLDSTEIN: So when you're bailing out the banks with hundreds of billions of dollars of taxpayer money, are you thinking about that at all? I mean, are you sort of (laughter) revising your views?
KASHKARI: Not in the moment. In the moment, all we were thinking about was, how do we prevent the Great Depression?
GOLDSTEIN: Yeah. So Kashkari's is trying to prevent the Great Depression and he becomes the face of the bailout, of this program called TARP. He now represents 700 billion taxpayer dollars given to banks at a moment when taxpayers are losing their houses, getting fired from their jobs.
KASHKARI: Probably the toughest moment for me was when I had to go testify in front of Congress.
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DENNIS KUCINICH: Mr. Kashkari, we told you in there that we wanted Treasury to safeguard the TARP monies from waste and abuse.
KASHKARI: My longest hearing was almost six hours.
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DAN BURTON: I tell you, Mr. Kashkari...
KASHKARI: Forty angry members of Congress - both parties - basically yelling at me.
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PATRICK KENNEDY: The people that don't have savings are bailing out the very wealthiest in this country. There's something inherently wrong in this picture.
KASHKARI: I felt like, hey, wait a second. I'm one of the people here that's trying to stabilize the situation, and we need your help. And so it was very tough for me in the moment.
GOLDSTEIN: By the spring of 2009, Kashkari had given out the bailout money. He'd taken that beating from Congress. And the country was still in bad shape, but by that point we had avoided another Great Depression. Kashkari decided to leave the Treasury Department and get as far away from Washington as possible.
KASHKARI: I just needed to detox. My three years in Washington were grueling. I just wanted to get away from it as far as possible. And so I basically moved into the woods, just work with my hands, do something real, something physical to just remove myself from Washington as far as I could.
GOLDSTEIN: He lived outside Lake Tahoe in these big beautiful mountains. He had a couple of dogs. He built a shed. And now he did have time to reflect.
KASHKARI: One of the things I liked to do when I was in the woods was chop wood. It was a great stress reliever. And so trust me, when I was sitting there chopping wood, I was reliving some of my moments taking my beatings on Capitol Hill. And so part of the time was just reflecting on understanding their anger, understanding, you know, could I have done something different, could I have done something better? But at the end of the day, what I realized is when you violate the core beliefs of a society, it leads to great anger in that society. And so as a society, we have a core belief that's been passed down from generation to generation in free markets. If you take a risk, you get the upside, you get the downside. Well, we violated that fundamentally when we bailed out the banks.
GOLDSTEIN: Kashkari left the woods after about a year. He went back to work in finance for a few years. Then he ran for governor of California as a Republican.
KASHKARI: I came in second.
KASHKARI: There's no prize for coming in second in an election.
GOLDSTEIN: Not long after that, he got a call from the Federal Reserve Bank of Minneapolis - the Minneapolis Fed. They were looking for someone to be their new president. He got the job, started at the beginning of 2016. As part of the job, he's one of the dozen or so people who decides what interest rates are going to be for the whole country. He's also in charge of about a thousand people who work at the Minneapolis Fed. And a big part of his job is traveling around the upper Midwest, talking to people, listening to them. And as he's doing this, people are telling him those bank bailouts that he led, they are still a big deal today. People are still very upset about the bailouts.
KASHKARI: Here we are eight years later, and I think a lot of the anger and the polarization that we see in the country today is directly tied back to the financial crisis and the feeling that a lot of people say, hey, this was not fair.
GOLDSTEIN: Kashkari looks at Dodd-Frank, the law Congress passed in 2010 to fix the financial system. It's this sprawling complex law, has all these different rules. And Kashkari says there are some useful parts to Dodd-Frank. But overall, he says, it is not going to solve the bailout problem.
KASHKARI: Dodd-Frank has a lot of moving pieces that in theory, if they all move like an orchestra in perfect coordination, perhaps it'll work. Having lived in the frontline of a crisis, that's not how it really happens.
GOLDSTEIN: As an example, Kashkari points to these documents that are required under Dodd-Frank, they're called living wills. The idea is they force banks to come up with a detailed plan for how they could be broken up if they got into trouble. They're sort of like a user's manual for breaking up a big bank.
KASHKARI: Well, these living wills, these guides are some 10,000 pages long.
GOLDSTEIN: (Laughter) Wait, just for one bank?
KASHKARI: For one bank.
GOLDSTEIN: To go back to 2008, I mean, these decisions about is this bank going to live or die would literally happen over the course of a weekend.
GOLDSTEIN: Are people going - like, what is it 10,000-page book going to do for you in that setting?
KASHKARI: Now in a, you know, philosophy class...
KASHKARI: ...Or in a legal class, I'm sure it's a very interesting intellectual exercise. In the middle of a crisis, from what I can tell it's utterly useless.
GOLDSTEIN: So Kashkari thinks that Dodd-Frank, with its 10,000-page user's manual for breaking up banks, he thinks that is not going to end the bailout problem. And he decides his first big project with the Minneapolis Fed will be to come up with a plan to solve that problem, to finally make the banks crash-proof. He and his team, they start having all these public meetings. They bring in Ben Bernanke and lots of professors, some Wall Street types.
KASHKARI: Some of those people said break up the banks. Some said don't do anything, Dodd-Frank is just fine. This is the right solution. And we wanted to learn from everybody. Now, the only people who refused to participate were the big banks themselves. But we didn't let that stop us.
GOLDSTEIN: You invited them?
KASHKARI: We invited them every time and they basically through back channels told us if we participate, we're going to be acknowledging that the too big-to-fail problem still exists so we're not going to participate.
GOLDSTEIN: Say more about that.
KASHKARI: They want to pretend that the problem has been solved. They - the big banks want to pretend that, you know, they've paid their debt back to society, that they're more regulated now, they should be left alone and there's no more risk. And that's just not true.
GOLDSTEIN: Part of it is true. They have paid back the literal debt.
KASHKARI: That's correct.
GOLDSTEIN: They are more regulated now.
KASHKARI: But they're still too big to fail. And one of the things that came out - there was not unanimous consensus but there was wide consensus amongst all the experts who came to Minneapolis that if one of those big banks ran into trouble today, they would still get bailed out.
GOLDSTEIN: They are still too big to fail. Now, I'm just going to leave Kashkari for just like a minute here to talk about what that means. You know, like, why don't people talk about other big companies like Google or Johnson & Johnson and say they are too big to fail? Why is this just about banks? And the answer, in a word, is debt. You know, we think of banks as lending out money, but banks also borrow money. They borrow tons and tons of money.
They borrow from ordinary people, from businesses, they borrow from other banks. And when a bank gets into financial trouble, it can't pay back all that money that it borrowed. That is a problem for everybody who loaned that money to the troubled bank. You know, those people, those businesses, those banks don't get their money back so they can't pay their debts. In the case of a really big bank, this sets off like a chain reaction that goes through the entire economy.
Give me a simple definition of too big to fail.
KASHKARI: A simple definition is if a bank goes into bankruptcy, it could lead to a recession. It could have spillovers onto Main Street, not simply on to the customers of that bank.
GOLDSTEIN: So Kashkari's solution to the too-big-to-fail problem is don't let the banks use so much borrowed money. Force them to rely less on debt. Force them to use more of their own money, money they haven't borrowed from anyone, don't have to pay back. That way if a bank gets into financial trouble, it can take the losses out of its own money and still have enough to pay back the people it borrowed from.
KASHKARI: We decide that banks need much higher buffer so that if they make mistakes, they have enough buffer to absorb those losses.
GOLDSTEIN: If you go back to before the crisis and look at all the money banks were lending out or were using to invest, 97% of that money was money they had borrowed. Only 3 percent was their own money. Only 3 percent was their capital is the way you say that in the jargon. Today, banks are using more of their own money. It's about 7 percent of the money they're lending out. Kashkari says for the biggest banks, that number should be twice as high.
KASHKARI: Out of our plan, the rough measure is 15 percent will have to come out of their own money, their capital as we call it.
GOLDSTEIN: The rest, the other 85 percent, the banks will still be able to borrow. There are other details in Kashkari's plan. Banks that are still deemed too big to fail would see their capital requirements go up even more. They'd have to rely even more on their own money. There are also new rules for big finance companies that are not banks. But forcing banks to use more of their own money, increasing capital requirements to 15 percent, that is the essential first step.
And it sounds so simple. I mean, it even sounds kind of like small or trivial, but Kashkari says it would make a huge difference. If you go back to 2008 and imagine that banks, you know, had in fact made all these dumb investments, you know, giving out all these subprime mortgages, but instead of doing it with 3 percent capital done it with 15 percent capital. How would the world have been different?
KASHKARI: Even if there was a bubble and it still popped, the banks would have been able to withstand it. They would not have had these massive failures. We would not have had to go to Congress to ask for a taxpayer bailout. And as a result, the recession we had would have been much, much milder. We had the deepest recession since the Great Depression. We would have had a normal recession if this plan had been in place.
GOLDSTEIN: And just - that's - just - they could still borrow 85 percent of the money they're lending out, that just 15 percent would have solved all that?
GOLDSTEIN: So that is his plan. Now, there is one last question of course, which is, is this going to happen in the world? You know, we know that Donald Trump and Republicans in Congress have said they want to change the rules for banks. What are the chances they'll adopt something like Kashkari's plan?
KASHKARI: I think elements of it absolutely have a good chance. I mean, I've talked to people on both sides of the aisle - senators and representatives - who are strongly in favor of something in this direction.
GOLDSTEIN: In particular, this idea of higher capital requirements is pretty popular with people who tend to be into free markets, who tend to be wary of a lot of kinds of regulation. This is for a few reasons. For one thing, people recognize that banks are not operating in the free market now. You know, big banks have the implicit backing of the government. Also, capital rules are relatively simple. You know, they don't rely that much on the wisdom and discretion of regulators and that appeals to people who are skeptical of regulators.
There is one group that pretty clearly does not like Kashkari's idea - big banks. For this story, I reached out to the two trade groups that represent the biggest banks in the country, neither one of them got back to me. But when Kashkari's plan was released, a spokeswoman for one of the groups - it's called the Financial Services Forum - put out this statement. For those looking to accelerate economic growth and job creation, tripling bank capital levels - already double from pre-crisis levels - will make it much harder to meet those goals. In other words, Kashkari's plan would hurt economic growth. And Kashkari more or less agrees with this.
KASHKARI: Well, safety isn't free. If we raise capital requirements, make the banks fund themselves with their own money instead of borrowed money, there will be an economic cost.
GOLDSTEIN: Specifically, Kashkari says, his rules would make it more expensive for ordinary people and for businesses to borrow money. Interest rates will be higher. Economic growth, he says, will be a little slower.
KASHKARI: So this is exactly like the risk of terrorism. You and I and your listeners know we cannot eliminate all risk of terrorism. And we know that more safety means more law enforcement officers. We have to pay for that. There's a cost to more safety. So as a society, we decide how much safety we want and what we're willing to pay for that safety. The same thing is true in the banking system and financial stability.
GOLDSTEIN: Kashkari looks at this trade off - higher interest rates, lower economic growth in exchange for a much lower risk of a financial crisis - and he says it's worth it.
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GOLDSTEIN: Email us at firstname.lastname@example.org. Find us on Facebook or Twitter. Our show today was produced by Sally Helm. Special thanks to Ahnad Ahmadi (ph), John Cochrane and Mark Calabria, all of whom talked to me at great length about capital requirements. If you're looking for something else to listen to, NPR has lots and lots of other shows. There's Embedded, that's a podcast with all this deep reporting. There's Code Switch, a podcast about race in America. There's Hidden Brain, a sort of psychology science podcasts, lots of good things to listen to. You can find them all on the NPR One app or at npr.org/podcasts.
And one last thing - if you are a fan of PLANET MONEY, the best way to support us is donate to your local NPR station. That support helps PLANET MONEY and all of the other NPR shows to keep going. Go to stations.npr.org - that's stations.npr.org - find your local station, donate whatever you want and tell them we sent you. Say you're a fan of PLANET MONEY. Thank you if you're doing this already. Thank you if you're going to do it in the future - stations.npr.org. I'm Jacob Goldstein. Thanks for listening.
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