Part of the fun of going every year to the Minnesota State Fair is seeing what’s new — and this year that included Federal Reserve Bank of Minneapolis President Neel Kashkari talking about the Federal Reserve and economic issues up on the Star Tribune stage.
Kashkari followed an appearance by Minnesota Wild coach Bruce Boudreau, as newsmakers have long dropped by media-company booths like the Star Tribune’s. He cheerfully volunteered to hold a big umbrella over both of us as he answered questions.
We had hoped Kashkari might accept an invitation to come by, given his commitment to the idea that the Federal Reserve could be more transparent about what it does and more helpful to the public on some of the biggest challenges in our economy.
“Historically the Fed was very walled off,” he explained this week. “It was a little bit like the Wizard of Oz, ‘Don’t look back here, don’t ask any questions, just leave us alone.’ Well, that wasn’t the right thing to do.”
He also came to the fair to promote the opening in Minneapolis of the musical “Hamilton,” although it’s more accurate to say the Minneapolis Fed is promoting the historical figure Alexander Hamilton. As the first treasury secretary, he was the early champion of a unified American economic system.
Alexander Hamilton doesn’t seem to need any more good press, but the Fed sure can still use it. By far most of what gets written about this organization is about its role in influencing short-term interest rates, but that doesn’t come close to fully describing all it does.
The 50 or so fairgoers who gathered in a gentle rain this week to hear Kashkari might have been surprised to hear about the Minneapolis Fed’s research interest in wealth and income inequality as part of its new Opportunity & Inclusive Growth Institute.
Employment for everyone who wants a job is one of the two main things Congress asked the Fed to care about, but as Kashkari explained, the opportunities for everybody to get good paying work just aren’t the same. So the Fed needs to look carefully at the reasons why.
“I’ll give you an example,” Kashkari said. “In America, it’s a curious, really troubling fact that African-American unemployment is always twice white unemployment. So if you have a booming economy and white unemployment is 3 [percent], African-American will be 6. If you have a recession, and white unemployment is 8, African-American unemployment will be 16 percent. Well, what drives those different outcomes?”
If you consider things such as educational attainment, maybe comparing only college graduates, the ratio still holds up, he added.
Wealth inequality is an even more complicated problem than income inequality, Kashkari said, as wealth can reflect what’s happened to a family over multiple generations.
If there were structural problems in the labor market that hampered grandma and grandpa’s opportunity, those problems might help explain why the adult grandkids are having trouble pulling together the money for a mortgage down payment.
Nobody does this kind of economic research work hoping for an immediate change in policy. The institute may be new, but its work resembles past Minneapolis Fed research priorities, such as the economic benefits of providing early childhood education.
Only recently has that begun shaping Minnesota education policy, Kashkari added, even though Minneapolis Fed officials have been publishing research and talking about the significance of early childhood education going back at least 15 years.
Too big to fail
Patience also seems to be required for another Minneapolis Fed priority: a proposal to solve the problem of having banks too big to fail, meaning banks so big and important to the economy that the taxpayers have no choice but to bail them out if they got themselves into trouble.
Not that many people know as much about this topic as Kashkari, who 10 years ago this week was at the U.S. Department of the Treasury and on the front line of trying to contain the damage of the unfolding financial crisis.
In late August 2008, the big mortgage lender IndyMac had already gone bust, having gotten stuck with too many of its own shaky mortgage loans when Wall Street stopped buying them. The Fannie Mae and Freddie Mac government-sponsored housing finance companies were about to be taken over, and the investment bank Lehman Brothers was a couple of weeks away from collapse.
By October, Kashkari had emerged as the head of a $700 billion emergency federal bailout program.
Kashkari this week called the financial crisis a “massive heart attack” at the heart of the economy, the financial sector that was supposed to pump credit through the system. Back then, Kashkari said, he and other public officials consistently underestimated the severity of the crisis.
Regulations enacted after the crisis passed was supposed to have fixed the problem. Yet the first big policy and research project undertaken once Kashkari came to Minneapolis at the start of 2016 was on the continuing problem of “too big to fail.”
Kashkari has said, and repeated this week at the fair, that the idea to pursue this is a research project came from colleagues at the Minneapolis Fed, who had been working on the problem of too big to fail for years.
Their solution, dubbed the Minneapolis Plan, includes requiring the biggest banking companies to hold a lot more equity capital to absorb losses. Kashkari likened it to the way mortgage companies reduce their risk by requiring a 20-percent down payment to get a mortgage.
“The banks are safer than they were 10 years ago,” Kashkari said. “So I use that 20 percent as the number we want to get too, for their skin in the game. They are at about 10 percent today. Ten, 12 years ago there were at about half that. So they are safer. But by our analysis, they’re not nearly safe enough.
“And we are still at risk.”
Not sure visitors to our State Fair booth were expecting such sobering words. But no one seemed to drift away.