FED'S KASHKARI: Wall Street is 'forgetting the lessons of the 2008 financial crisis'

Thomson Reuters

Minneapolis Fed President Neel Kashkari speaks during an interview at Reuters in New York

• Minneapolis Fed President Neel Kashkari says regulators have not done enough to solve the problem of "too big to fail" banks, and they therefore might require taxpayer bailouts during a crisis.
• "We are forgetting the lessons of the 2008 crisis," Kashari told a group at Howard University.
• "The shareholders got bailed out. The boards of directors got bailed out. Management got bailed out. So from their perspective, there was no crisis," he said.

A top Federal Reserve official said Monday that Wall Street and bank regulators run the risk of allowing another financial crisis to occur because many have forgotten the pain from the 2008 meltdown.

"The shareholders got bailed out," Neel Kashkari, president of the Minneapolis Fed said. "The boards of directors got bailed out. Management got bailed out. So from their perspective, there was no crisis."

Kashkari, long an advocate of more stringent regulations to rein in major banks, told an event at Howard University that US labor groups, whose pension funds took major hits during the crisis, may have a role to play in countering the political influence of the nation's largest banks.

They have been campaigning, fairly successfully, to roll back many of the post-crisis regulations known as Dodd-Frank, which President Donald Trump has vowed to largely repeal.

"We are forgetting the lessons of the 2008 crisis," Kashkari said. "The bailouts worked too well."

Financial crises keep happening "because we forget how bad they were," he added.

What's the solution? Making banks raise more equity to fund their investment rather than rely so heavily on debt.

"No other industry is levered likely the banking industry," Kashkari said. "If we double the amount of equity banks have we could go a long way toward resolve the problem that too big to fail banks pose. If it were up to me we'd be increasing banks' leverage ratio, not decreasing it."

Short of full employment

Asked about the labor market during a question and answer session, Kashkari said the 4.1% jobless rate, which is at a 17-year low, may not be as good an indicator of the full state of the job market because of the damage wrought by the 2008 crisis.

Kashkari said as many as 1 million workers who are currently not looking for work might be lured back into the labor market by further improvements.

As for inflation, he said "there are now indications" consumer prices are going to hit the Fed's 2% target, but sees no sign of overheating that requires some kind of acceleration in monetary policy tightening.

Kashkari is arguably the most dovish member of the Federal Open Market Committee, dissenting against all of the Fed's rate hikes last year on the grounds that both inflation and wages continue to underwhelm.