The Treasury Department official who oversaw the Troubled Asset Relief Program (TARP) said Tuesday that serious consideration needs to be given to breaking up the big banks to protect the economy.
In a talk to the Brookings Institution, Neel Kashkari, formerly of the Treasury Department and now the president and CEO of the Federal Reserve Bank of Minneapolis, said that the problem of “too big to fail” exists and is likely to remain for years.
TARP was a nearly $500 billion infusion of loans and ownership purchases into the nation’s largest financial institutions and automakers to keep the financial system afloat in the wake of the 2008 financial crisis.
The savings and loan industry collapse in the late 1980s, by comparison, and the tech stock bubble burst of 2000, did not imperil the economy in the same way, Kashkari said. When large banks make very large mistakes, it leads to taxpayer bailouts and causes widespread economic damage.
The nation’s policymakers cannot foresee future financial crises, he warned; they were caught off guard by the economic calamity in 2008.
“We need to be humble [about] what we can predict,” he said.
The Dodd-Frank Act, he added, gave regulators the tools to deal with a lone big financial institution failing in an otherwise healthy economy without triggering a bailout or wide-scale financial damages. But the implementation of the rules is slow-moving, and Congress needs to go beyond Dodd-Frank to prevent another financial crisis, though he is not supporting specific fixes.
He added that the tighter regulation of major financial institutions could lead to lesser restrictions on small banks, which would allow them to lend more money to consumers.