Idiot-proof finance sector with equity: Fed official
HOUGHTON — The housing market crash that led to the Great Recession of 2008 resulted from a mass “delusion” that what goes up does not come down, Minneapolis Federal Reserve Bank President Neel Kashkari explained last week during a town hall question-and-answer session at Michigan Technological University.
Pat Heiden, a chemistry professor at Tech, asked Kashkari what is being done in bank regulation to prevent another crash like 2008. With the lack of return on savings accounts, she said, she has investments in the stock market, but she remains wary.
“I really don’t want to retire, because I don’t trust that will be there on any given day,” she said.
Kashkari said the root cause of a 2008 crisis was a “nationwide delusion” that home prices would continue to go up. At no other time in American history had prices gone down everywhere around the country.
“All the regulators, and the bankers, and the rating agencies, and the home buyers, all said, ‘It’s a benefit of diversification, the system overall is going to be sound,'” he said. “When that ended up not being true, all those fancy models blew up, and then we had the terrible ’08 crisis.”
What is needed now is a regulatory framework that will work “even when we’re stupid,” he said. A member of the Treasury Department during the bank bailouts of 2008, Kashkari has pressed for requirements that would double the capital requirements for large banks from 10 percent to 20 percent.
“If we do that, that’s how we idiot-proof the financial system — by making sure the biggest banks have enough equity to protect the taxpayers so they don’t need a bailout again,” he said. “…We can’t make it zero risk, but we can do a lot better than we’re doing today.”
On a question from educator Ted Holmstrom about student loans, Kashkari said there had been an attitude after the economic crisis that student loans would be the outlet after states cut back on funding.
The cost of college is rising in part because of increased demand, he said. To ease that, he said, supply could rise through means such as expanded online courses. People can also explore paths other than four-year colleges, he said.
Kashkari said students also need to be more informed consumers.
“A lot of students are taking on a lot of debt and finding out, ‘This major that I found so inspiring, there’s no job,'” he said. “… I think universities need to do a better job of arming students with the information they need to to improve their chances of having a good job at the end, to be able to afford to pay off that student loan.”