Former Republican candidate for California governor and current Federal Reserve Bank of Minnesota President Neel Kashkari gave a speech Feb. 16 advocating doubling-down on Obama’s disastrous Dodd–Frank law, which has made irresponsible “too big to fail” banks much bigger by crushing well-managed community banks.
Appointed by President Obama as the head of the Federal Reserve Bank of Minneapolis effective Jan. 1, 2016, Kashkari, in his remarks to the Brookings Institution, said: “I believe the Act did not go far enough. I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy.”
Kashkari has some impressive credentials to form an opinion regarding Obama’s Dodd–Frank Wall Street Reform and Consumer Protection Act. As a tech sector investment banker for Goldman Sachs, he and several of his colleagues were brought into government by Goldman’s former chairman and newly appointed Treasury Secretary Henry Paulson just before the September 2008 bankruptcy of Lehman Brothers and the beginning of the Global Financial Crisis.
During the crisis and in the early months of the Obama Administration, he served as head of the “Office of Financial Stability” and oversaw the $700 billion ‘Troubled Asset Relief Program’ (TARP), which allowed the Treasury to purchase “toxic sub-prime” collateralized debt obligations from financial institutions. The biggest purchases of toxic assets came from Ally Financial, the successor to GM Acceptance Corporation.
Kashkari states that in 2008-2010 with massive job losses, home foreclosures, lost savings and taxpayer cost that there was “widespread agreement among elected leaders, regulators and Main Street that we must solve the problem” of too big to fail banks (TBTF) at the time of passage of Dodd-Frank.
He argues that although “significant progress has been made to strengthen our financial system, I believe the Act did not go far enough.” Kashkari acknowledges that the current system can handle any single U.S. bank failure, no matter what size, but he believes that in a “stressed economic environment” of a global crisis that “no rational policymaker would risk restructuring large firms and forcing losses on creditors and counterparties using the new tools in a risky environment.”
Acknowledging Dodd-Frank failed to accomplish its goal, Kashkari uses the words “we must” seven times in his speech to emphasize that Dodd-Frank must go further. But what he does not say is that Dodd-Frank has successfully made TBTF banks like Goldman Sachs much bigger.
A new study published by Harvard’s Kennedy School of Business concludes that Dodd-Frank has accelerated the process of TBTF banks grabbing even more consolidation of the financial services industry. The researchers found that “community banks’ share of U.S. banking assets and lending markets has fallen from over 40 percent in 1994 to around 20 percent today.”
With Democrats in complete control of Washington after the 2008 election, the U.S. ended up taking an uber-progressive path for Dodd-Frank. The cover story for the legislation was preventing future bailouts because large banks had become TBTF and had to be restricted in size. But since the second quarter of 2010 – around the time of the passage of the Dodd-Frank – community banks’ “share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.”
During the financial crisis, from 2007 to 2009, community banks’ return on assets (ROA) remained positive, “while the ROA of large banks collapsed in 2007 to negative values in 2008 and 2009”, according to the U.S. Government Accountability Office.
Despite the financial failures of big banks and the outstanding performance of small community banks, Dodd-Frank’s new rules required a huge increase in financial reporting requirements that were not “scaled” for bank size. As a result, community banks have many of the same costs to comply with Dodd-Frank as do gigantic firms like Goldman Sachs.
In April 2011, an Office of the Controller of the Currency official testified that historically low net interest margins have played a major part in driving down community banks’ revenue. He added that because local banks focus on traditional lending and deposit-gathering, they derive 80 percent of revenue from net interest income, “compared with about two-thirds at non-community banks,”
The combination of Dodd-Frank costs and the Fed’s policy of “financial repression” to keep deposit yields and interest rates low saw small business loans as a share of total U.S loans shrivel from 40 percent in 2005 to 29 percent by 2012.
Kashkari finished his speech by stating the false narrative that “Congress created the Federal Reserve System to help prevent financial crises from inflicting widespread damage to the U.S. economy.” The Federal Reserve Act of 1913 actually was aimed at taking financial power away from Wall Street and delegating authority to set up 13 autonomous regional banks to support community banks lending to Main Street.
Dodd-Frank savaged the solvent community banks and spiked the size of the insolvent big banks. Kashkari’s doubling-down on Dodd-Frank will help “too big to fail” banks grow even bigger.