93 – Neel Kashkari and Ron Feldman on the Minneapolis Plan and Monetary Policy Reform

Episode Summary

Executive Summary: The episode centers on the Minneapolis Fed’s plan to end “too big to fail” by sharply increasing capital requirements for the largest banks, alongside a discussion of monetary policy. Kashkari argues the biggest banks still rely on an implicit taxpayer backstop and should hold about twice as much equity, while Feldman explains the economic logic, mechanics, and limitations of the proposal. The conversation also covers low inflation, Fed transparency, and alternative banking reforms.

Main Topics: The Minneapolis Plan to End Too Big to Fail (Priority: 5/5): Kashkari outlines the plan’s core idea: force the largest U.S. banks to fund themselves with much more equity so taxpayers are not exposed in a crisis. He emphasizes that the biggest banks still remain too big to fail and that doubling equity would materially reduce systemic risk. Why Too Big to Fail Persists (Priority: 5/5): Feldman traces the problem to both moral hazard and systemic spillovers: markets expect government support, and large interconnected banks can spread distress through the economy. He argues the two stories are linked and lead to similar policy prescriptions. Capital Requirements and Plan Design (Priority: 5/5): The detailed proposal sets a 23.5% equity requirement for banks above $250 billion in assets, with higher requirements up to 38% for the most systemically important banks. It also includes a tax on shadow banking and relief for community banks. Skepticism About Alternative Bailout-Prevention Tools (Priority: 4/5): Feldman critiques bail-in debt, COCOs, and orderly liquidation mechanisms as insufficiently credible in a real crisis, arguing that only common equity has a strong historical record of absorbing losses without triggering bailouts. Monetary Policy and Low Inflation (Priority: 4/5): Kashkari argues persistent sub-2% inflation reflects inflation expectations that have drifted below target, partly because the Fed has treated 2% like a ceiling. He is skeptical of raising the target or adopting a new framework before the current one becomes credible. Fed Transparency and Communication (Priority: 3/5): Kashkari explains why he uses Medium and Twitter to justify FOMC votes after the fact, arguing this increases transparency without adding policy noise. He presents it as a model for clearer central bank communication.

Key Arguments: The largest banks are still too big to fail; if a crisis hit, taxpayers would likely be forced to backstop them again. The best way to protect taxpayers is to require much more equity capital, roughly doubling what the biggest banks hold today. The Minneapolis Plan is designed to assume regulators will make mistakes, so the system itself must be resilient even when supervision fails. Low inflation is likely being driven by inflation expectations that have settled below 2%, in part because Fed behavior has made 2% seem like a ceiling. A higher inflation target or a new framework is not credible until the Fed can consistently achieve its existing 2% target. Feldman argues too big to fail reflects both moral hazard and systemic spillovers, but either way the solution is to increase loss-absorbing capital. Bail-in debt, COCOs, and orderly liquidation may look elegant in theory, but in a crisis governments have historically avoided imposing losses on creditors. Community bank relief is included because the large-bank problem has blocked broader regulatory reform for smaller banks. Transparency through post-vote explanations can improve accountability while minimizing confusion from too many forward-looking Fed speeches.

Data Points: Proposed equity ratio for large banks: 23.5% of risk-weighted assets - Minneapolis Plan requirement for banks above $250 billion in assets Upper systemic-risk capital level: 38% - Maximum capital requirement for banks deemed especially systemically important Current large-bank minimum capital level referenced: 13% - Used as the comparison baseline in the discussion of the current regime Estimated reduction in systemic crisis probability: from about 70 to about 40 - Feldman’s description of the plan’s effect on crisis probability Net-benefit maximizing capital level: 22% - Feldman says their cost-benefit analysis peaks around this level Shadow banking tax if not systemically important: 1.2% - Proposed levy to discourage migration of risk outside regulated banks Shadow banking tax if systemically important: 2.2% - Higher levy for more risky shadow banking entities Asset threshold for large-bank rule: $250 billion - Banks above this size face the main Minneapolis Plan capital rule Shadow banking threshold: $50 billion - Size threshold referenced for the shadow banking provisions Inflation target: 2% - Fed target discussed in the monetary policy segment Alternative target ideas discussed: 1% to 3% range; 3% or 4% targets - Examples raised in the discussion of possible new monetary policy frameworks

Pivotal Quotes: "the biggest banks need about double the equity that they have today" — Neil Kashkari: Summarizing the core remedy of the Minneapolis Plan "our plan is designed to assume that regulators are going to screw up in the future" — Neil Kashkari: Explaining why the proposal is built to be robust to supervisory failure "the problem is that when these institutions get into trouble, they... can have failure effects on other institutions and the real economy" — Ron Feldman: Describing the systemic-spillover rationale for too big to fail

Implications: The episode argues for a major shift toward far higher bank equity buffers and simpler, more credible crisis-prevention tools. If adopted, it would reduce bailout risk, reshape regulation, and likely intensify debate over how much safety should come from capital versus government backstops.