Minneapolis Federal Reserve President Neel Kashkari is on the right track, but he’s not there yet. He’s one of a very small number of financial regulators (of any sort of regulator, come to that) who has the self-assurance and intellectual honesty to say, and to mean, things like
I start with the assumption that regulators are going to miss the next crisis. We’re going to miss it.
He’s got a solution to that, too, but it’s only a partial solution, and that incompleteness stems from a fundamental lack of understanding.
The lesson he drew [from the Panic of 2008] is that if you want to reduce the risk that taxpayers will have to finance another rescue, financial giants need to be much better fortified before the next panic hits.
This is a start (we can argue with specific levels of fortification, of capital reserves, that are suitable, but the principle is sound), but he needs also to recognize the other side of this cash coin: businesses, including banks and systemically important institutions, need to be allowed to fail without taxpayer monies. We have a perfectly fine bankruptcy system that works admirably well.
But the lack of understanding that regulators have of their capabilities, even with Kashkari’s degree of understanding as a start, makes much of that two-part solution less than fully relevant. The lack of understanding is this: if the regulators can’t predict the next financial (or any other) crisis, if they can’t characterize what it will look like, on what basis do they presume to be able to predict the institutions that are/will be important to those crisis systems?