Kashkari: American financial system shouldn't need regular bailouts

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The American people deserve a resilient financial system that “doesn’t require a bailout every decade,” according to Neel Kashkari, president of the Federal Reserve Bank of Minneapolis.

He spoke Sept. 18 to the Conference of Institutional Investors about his thoughts on capital markets and banking regulation.

"The American people deserve a resilient financial system that doesn’t require a bailout every decade or so,” said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis.

Kashkari told his audience that the current system has “large, unacceptable risks” that remain.

“Congress considered financial system reform when it wrote the Dodd-Frank Act, and it chose not to be aggressive in reforming our financial system. Why not?” he said.

“So far, this financial crisis has been focused on funding markets, such as commercial paper and money markets, rather than large banks," he said. "You might not realize it, but the banks got a lot of help.”

Many borrowers were able to make loan payments to banks because Congress acted so quickly and aggressively to send money to people, including the $1,200 one-time checks many Americans received and the extra $600 a week in unemployment benefits that expired after July.

“Bank losses would have been much, much larger if the American people didn’t have this extra money to make payments on their loans,” he said. “I applaud Congress’ bold actions to support people affected by the COVID-19 crisis, but we need to be clear that families weren’t the only beneficiaries. This was also a banking bailout.”

Kashkari added that he is not suggesting that we could eliminate all financial crises if we aggressively address these flaws in our banking and financial system, but that “crises have happened throughout financial history and no doubt will continue to happen in the future.

“I do believe that with smart, aggressive regulation, the American economy could thrive on an efficient, competitive, and innovative financial system that was more resilient against shocks — one that required taxpayers to step in far less often and at lower cost,” he said. “The bailouts worked in 2008, and they worked again, so far, in 2020. Will they work next time? Will there be political will to backstop the financial system the next time there is a massive shock, such as a real estate bust or another pandemic? I don’t know.

“I believe your members and the American people deserve a resilient financial system that doesn’t require a bailout every decade or so,” Kashkari said.

Dallas Fed manufacturing
Manufacturing activity in the Texas region “expanded for the fourth month in a row in September,” according to the Federal Reserve Bank of Dallas’ manufacturing sector survey released on Monday.

Current conditions for the general business activity increased to 13.6 in September from 8.0 in August, while the company outlook index fell to 14.9 from 16.6.

The outlook uncertainty index dropped to 6.7 from 8.2.

The production index jumped to 22.3 from 13.1, new orders rose to 14.7 from 9.8, growth rate of new orders increased to 13.2 from 11.8 and delivery time gained to 10.1 from 7.1.

The six-months forward looking general business activity index grew to 28.0 from 20.4, while the forward looking company outlook index jumped up to 32.5 in September from 27.8 in August.

The forward looking production index increased to 47.8 from 43.0, new orders swelled to 49.3 from 42.5, growth rate of new orders slipped to 37.6 from 39.2 and delivery time dipped to 7.0 from 7.1.

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Economic indicators Neel Kashkari Federal Reserve Bank of Minneapolis Federal Reserve Bank of Dallas