Interview with Neel Kashkari
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Published April 18, 2016 | April 2016 issue
Region: Perhaps you could start by telling us a bit about your background and the path that brought you to the Minneapolis Fed?
Neel Kashkari: Sure. I was born in Ohio. My parents came here about 50 years ago from India. I was a normal, middle class kid; the son of immigrants. And honestly, I feel like I’ve lived the American dream. I got a good education; I was able to get a good job. I became an aerospace engineer, then went to business school and entered banking. Eventually, I got to work at the Treasury Department for the Treasury Secretary during the financial crisis.
That was my first exposure to the Federal Reserve. I worked with policymakers at the Fed to help stabilize the economy during the terrible crisis of 2008-2009. I returned to the private sector in 2009 and ran, but unsuccessfully, for governor of California in 2014.
Ultimately, I joined the Fed here in Minneapolis because I care a great deal about policymaking. I learned in the crisis that policymaking can be really important to help millions of people. In that case, it was to avert a terrible outcome, but good policy is also essential in creating an environment where people have a real chance to get ahead. Given my background as the son of immigrants and leading a successful life, I want to give every American the same chances that I’ve had. I think the Federal Reserve plays a big part in creating an economic environment where people can really reach for the future.
Region: The composition of the Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC), has trended in recent decades toward Ph.D. economists. Your background, as you’ve just mentioned, is aeronautic engineering, finance and public service.
Given that difference, what skills and perspective do you bring to the table that may be valuable there? In the jargon of economics, what’s your comparative advantage? And are there also particular challenges to be being on the FOMC as, well, a rocket scientist rather than an economist?
Kashkari: When I was at the U.S. Treasury in Washington, I think I learned how to work with economists and apply economic ideas in ways to really get things done. So one of the things I think I bring to the FOMC is my experience during the financial crisis—being able to look at what it takes to stabilize a financial system.
Now the question is, how do we try to prevent crises from happening? Working with some of the best economists in the world, I think we can tap into their expertise and bring their tools to bear. So I feel that my diverse set of experiences is going to be a valuable addition to the FOMC. I don’t think we’d want to have 100 percent economists at the FOMC, and I also don’t think we’d want 100 percent non-economists. Having a good blend is the optimal situation for the country.
Changes to policy framework
Region: Congress has been scrutinizing the Fed quite closely lately, particularly its monetary policy decisions and strategy. There are several proposals under consideration for changing the monetary policy framework. Do you feel the existing structure is working, or is reform needed?
Kashkari: I think the existing structure is working quite well. We as a country should be very proud that our central bank, the Federal Reserve, was able to respond to the financial crisis with such creativity and nimbleness. The Fed is, by nature, a very conservative institution; it’s based on deep traditions. Yet when the time called for it, the Fed was willing to be bold and creative and to adapt.
Even now, with the current economic environment, we’re still in somewhat uncharted waters, and Chair Yellen has been bringing real creativity and real open-mindedness to how we approach monetary policy. That’s the right thing for the country. I think the current structure is working well.
National and global economic challenges
Region: As you observe, you’ve joined the Fed at a challenging time in terms of the current economic environment. Britain may leave the European Union. China’s economy is slowing down, and that’s triggering shocks around the world. Here in the United States, inflation continues to run below target. Financial markets are jumpy; commodity markets are down. The United States faces longer-term challenges as well with high inequality and particularly persistent joblessness among certain segments of the population.
Which of these issues should the Fed be working on, and what can it do about them?
Kashkari: We always have to remind ourselves about the dual mandate given to us by Congress. That’s our first priority: stable prices and maximum employment.
All of the issues that you list are different inputs into the U.S. economy, and we need to be thinking about them as we decide on the optimal monetary policy to achieve our dual mandate.
Having said that, we have a great deal of expertise around the Federal Reserve System on a broad range of economic issues. At the Minneapolis Fed, as president of the Bank, I’m challenging our experts to look at those issues that you mention and ask, which ones do we think we can make a contribution to?
We have a lot of expertise here, and while some solutions may require fiscal policy over which the Fed has no influence, to the extent that we can help analyze the problem and put forth reasonable, thoughtful approaches to tackling them, I think we should do so. We’re casting a wide net and looking at where we can make our biggest contribution. I think we have a big role to play—in monetary policy, but also beyond.
Region: The Fed has, de facto, a huge global influence. Its policy focus is the United States, of course, but what the Fed does here has significant international repercussions. Is that part of the calculus of monetary policymaking at the Fed?
Kashkari: Yes, I think it is and it needs to be. Clearly what happens in global financial markets, as an example, will affect the U.S. economy. We can’t be blind to the fact that actions we take could affect global economic developments, which in turn will have an effect on our economy. We need to think about those feedback loops, and I believe that we do. It is one of the many inputs that we look at as we decide the optimum course of monetary policy.
Fed reputation and communication
Region: Many have noted the Fed’s difficulty in communicating its policy goals. The institution itself remains a somewhat nebulous, even nefarious, entity in the minds of many Americans.
What can be done to improve the communication process and, perhaps first, to improve the Fed’s reputation?
Kashkari: I think Chair Yellen is leading by example and doing the right thing by trying to be more transparent. She speaks in a plain-spoken, easy-to-understand manner. That in itself is a big change for the Federal Reserve, and it’s a positive change. The fact that she’s holding regular press conferences is also very good. She’s giving people more access to the Fed, to our thought-making process and to the people of the Fed.
We need to show the public who we are. This is an amazing institution with wonderful, talented people who care about their communities, who care about the country. Yet most Americans don’t get to see that. If they saw who we really are, I think they would be very proud of the Federal Reserve. So we have to work harder to let them see in, to let them get to know us. Because when we build that trust and that credibility with the public, they will then give us the benefit of the doubt on some of the complex issues we’re dealing with, which can sometimes be hard for the public to understand.
Region: How does that transparency, that visibility, come about? What are the avenues for making that happen?
Kashkari: Well, everything from what the Chair is doing with her press conferences and the way she approaches public speaking to things that I’m doing. I’m trying to get out in the community as much as I can, to meet with community groups, to let people get to know me as a person.
But every employee at the bank has a role to play. You know, we have staff here who tutor high school students. That’s a great thing; we should do more of that. We have staff who go and feed people at homeless shelters a couple of times a month. That’s a great thing. Here at the Minneapolis Fed, we have potentially a thousand ambassadors who could be out in the community showing the public who we are as a Bank and who we are as a System. The more people across the Bank and the System do that, the more we’re going to rebuild that trust with the public.
Origin of the TBTF policy initiative
Region: You’ve just launched a major policy initiative to address the too-big-to-fail problem. Could you tell us something about its genesis for you? You’ve spoken about this issue in the past, I know, at a Chicago Fed conference in 2011. And I believe you wrote up some of your thoughts on the problem last December, even before you started the job here at the Minneapolis Fed.
What motivated you to push this to the forefront of the Fed agenda? Was it specifically the Minneapolis Fed’s thought leadership and policy leadership on this issue since the 1970s? Why this issue, why now and why you?
Kashkari: Well, in November after I was announced for this job, I immediately started talking to the experts here at the bank in research and banking supervision, asking them: What do you think are the big issues that we as a country need to address?
One of the issues they raised was too big to fail. I said, “It’s interesting that you think that more work needs to be done. Let me understand that.” Because I already held that view. As we started comparing notes, I realized that many of the concerns that I’ve had for a number of years are still unaddressed today.
And that’s building on, as you indicated, the great body of work that the Minneapolis Fed has done over many decades. Given my background having led the TARP (Troubled Asset Relief Program) and given the expertise that’s here at the bank, as we dug into it further, we realized that we can make a real contribution here.
You know, I took this job because I want us to make a big and positive contribution to economic policymaking in the country and I want us to tackle the biggest, most important issues that we face as a district and as a country. Too big to fail is a great place to start.
Region: As you just observed, the TBTF problem has been studied for years by policymakers, Fed economists and others. In addition to Too Big to Fail, Gary Stern and Ron Feldman’s 2004 book, the Squam Lake group, the Bipartisan Policy Center and the Hoover Institution have all, since the financial crisis, written detailed, very thoughtful proposals for how bank bailouts can be dealt with. Your initiative calls for more discussion of potential policies.
Is it really necessary to conduct even more research and hold more discussions, or do you feel the solutions have been identified and it’s more an issue of how to implement them?
Kashkari: Well, I think some thoughtful solutions have been identified, as you say, and what we’re doing is bringing those solutions forward and making sure we’re giving them the consideration I think they deserve. In my view, when Dodd-Frank was being negotiated, many of the more transformational solutions were taken off the table as being “too bold” at that time. I think now is the time to give those potential solutions serious consideration.
We’ve embarked upon a process not just to educate ourselves, but to educate the public. That’s why the forums that we’re hosting, the symposiums, are all public. We just held the first on April 4, and I feel it was a great success, in part because of its public nature. The press was there; it was live-streamed to the public. We had a great town hall that evening with people from across the district who just wanted to come in and talk about too big to fail.
We’ll do the same for our second TBTF symposium, on May 16. This is a process of educating ourselves and the public, and hoping that there will be consensus to make the final decision.
Do we need to go further? Ultimately, it’s Congress’ call, but I want to make sure that they have all the information they need so they can make an informed decision.
Early reception to the initiative
Region: What sort of reaction have you gotten to date on the initiative—from FOMC colleagues, other policymakers, scholars, the financial industry and the public? I know that when you announced it at the Brookings Institution on February 16, your predecessor at the Minneapolis Fed, Gary Stern, said it’s premature to doubt the Dodd-Frank stipulations with regard to orderly resolution and living wills. On the other hand, economist Simon Johnson at MIT has said that “Kashkari is correct in his assessment” of Dodd-Frank and that you’re proposing “exactly the right approach.”
What other kinds of responses have you had, pro and con?
Kashkari: I’ve been very pleased with the reception. We’ve gotten reaction from people across the political spectrum, which is great. You know, the Fed is nonpolitical and I think that it is important that we tackle problems in a nonpolitical, nonpartisan way. So I’m pleased that people on both sides of the aisle have come out and embraced this initiative.
I’ve also heard from a number of colleagues from the FOMC who either agree or at least say this is a conversation worth having, and they’re glad that we are stepping up to put this forward in a very serious way.
So I’m very happy with the reception. And to be blunt, the fact that the best critics can offer is attacking me as the messenger and questioning my motives—well, every time somebody questions my motives, to me it’s them admitting that we’re right, that this is an issue worth addressing because the banks are still too big to fail and we need to do more.
I feel very good about how this has kicked off. The hard work now begins. We’re running a very serious, substantive process, bringing in experts from around the country and maybe even around the world, to hear from them and educate ourselves and educate the public at the same time.
Region: You intend to present a plan by the end of the year. After that, will there be more effort on the too-big-to-fail problem?
Kashkari: We’ll see. It’s too soon to know. We’ve held our first symposium, and we’re in the process of designing our second, shaped by what we’ve learn so far. We’re keeping an open mind as we go down this path.
Vision for the Minneapolis Fed
Region: Beyond the too-big-to-fail initiative, what’s your broad vision for the Minneapolis Fed over the next few years? What does it need to accomplish? What challenges and strengths does it bring to that effort?
And in connection with that, could you tell us what you’ve learned to date about the challenges here in the Ninth District? The district has a very strong, very diverse economy, of course, but what problems do you see that need to be tackled here at home?
Kashkari: My vision for the Minneapolis Fed is that we should be thought leaders in the nation, helping to advance important economic ideas that are good for our district and are also good for the country. This bank has a long history of thought leadership, certainly on the too-big-to-fail issue, but not only that. Early childhood education is another example where the Minneapolis Fed has made a real impact locally and nationally. I think those are great examples for us, and I’m looking for other topics and areas where we can leverage the expertise that we have.
So, I want us to think big, I want us to be bold and I want us to make a big positive contribution to our district and to the nation. One of my big priorities is getting out across the district to all its regions—to get to know the district firsthand.
You’re right, we do have a very diverse economy here, which is a great strength. It also means that the issues we tackle locally matter nationally too because most of the major sectors of the national economy are represented here in the district as well.
I’ll give you an example. I heard from both of our senators here in Minnesota, Senator Klobuchar and Senator Franken, about the Iron Range and the struggles that they’re having with imports coming from abroad and what that has meant for the local workforce, the challenges that they face.
Motivated by what I heard from the senators and others, I traveled up to the Range just a few weeks ago to tour the area, share lunch with steelworkers (some of them unemployed), meet small business leaders and entrepreneurs, and talk with students at the Mesabi Range Technical College, among many others in the community. I learned a lot and hope I was able to share some of what the Fed does locally and nationally. That kind of dialogue and mutual education is a crucial first step, I think, in shaping good policy to address the district’s and nation’s economic challenges, from financial system stability to community economic development.
These are the kind of issues I want to dig into. There are some issues that may be outside of the scope of the Federal Reserve to address. Some of them may be pure fiscal policy. But the smarter we can be on what’s happening in the district, the better we can then bring these ideas to Washington to help shape the national policy discussion. That’s exactly what I’m looking forward to working with my colleagues and everyone across the district to do.
Region: Excellent. Thank you.
Kashkari: And thank you.