Fed’s Kashkari decries ‘absurd’ U.S. financial system that needs bailout every 10 years

https://www.marketwatch.com/story/f...-that-needs-bailout-every-10-years-2020-09-18
Minneapolis Fed President Neel Kashkari on Friday decried the U.S. financial system as “absurd” because it has needed a central bank bailout twice in less than 20 years.

“How can it possibly be this fragile?” Kashkari asked, in a speech to the Council of Institutional Investors.

In March when it became clear that the coronavirus pandemic would damage the U.S. economy, investors and institutions attempted to move to relatively safe assets, causing the U.S. funding markets to buckle.

The Fed moved in with trillions of dollars to support markets and, in the process, removed long-tail downside risks from aggressive trades held by firms.

“The funding markets that almost collapsed in March raise important and complex policy questions,” Kashkari said. It is not as simple as addressing the risks of too-big-to-fail banks, where the clear and straightforward solution is to force them to fund themselves with more equity, he said.

“The solution of fragile funding markets is less obvious but also important,” Kashkari said.

“Fundamentally, I wonder why we allow firms, financial or otherwise, to fund themselves overnight?” he asked.

What societal value is there in repo markets that prove so fragile when risks emerge,he said.

Earlier Friday, Kashkari played down investor fears over runaway inflation, saying a spike in prices would be a “high-class problem” for the central bank struggling to fight persistent low inflation.

Kashkari, who was a key player in trying to avert a more severe financial crisis in 2008-2009, favors stronger financial market regulation than many of his colleagues.


But even former top Fed officials like Ben Bernanke and Janet Yellen have said the Fed needs to get its arms around why financial markets broke down in March.

Supporters of the financial system have argued that banks and shadow banks were not the cause of the crisis as they had been in 2008.

But Kashkari seemed to have little patience with large banks that benefitted from government aid.

“You might not realize it, but the banks got a lot of help,” Kashkari said.

He noted banks were key beneficiaries of the COVID-19 economic stimulus measures passed by Congress this year. Without these one-time checks, more Americans would not have been able to make their credit card payments, he noted.

Analysis by the Minneapolis Fed suggests that banks should raise their capital levels given the risks they pose to the economy. He said the analysis shows that banks should fund themselves with at least 24% of risk-weighted asset — up from 13% today.

 

Fed contained yet another financial collapse with moral hazard and as a result has created record highs in the stock market by promoting risky spending. Buying **** debt and everything in between is 5 steps ahead of Zombie Banks and Lost Decades that Japan went through, except the only thing that makes this "uncharted" or "innovative" is that the Yen isn't the world's reserve currency.

This is the same stock market that's been propped up over the last 2 years by large cap corporations taking on even more debt in order to facilitate billions in stock buybacks.

How is any of this non-panic inducing? I guess kudos to fed for averting a financial run that triggers an across the board depression for both main and wall streets, but wtf are the costs to the American people besides eating **** and rona droplets at this very moment?

These are essentially epinephrine shots that pins on the hope the downer will run its course before the heart exhausts itself from shock.

Just keep swimming.
Just keep swimming.
Just keep swimming.

 

I pay attention to incredibly smart people who called it the last time. Dalio might not know the when but he's not pulling stuff out of his ass for his personal gain.

Nassim Taleb might be overly technical compared to an average interview but I felt like I learned more in this session than whatever I watched on the news for the past 2 months.