Minneapolis Federal Reserve Bank President Neel Kashkari said the current banking crisis has brought the U.S. economy closer to recession, Fed officials said, “The fundamental problem we face in the banking system , regulatory problems,” he stressed.
Neel Kashkari on the U.S. economy, banking crisis, and recession
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, shared his thoughts on the state of the U.S. economy, the current banking crisis, and whether the U.S. is headed for a recession in an interview with CBS News Sunday.
When asked if the current banking crisis is bringing the U.S. economy closer to recession, Kashkari said:
It is definitely bringing us closer. What is unclear to us right now is the extent to which these bank stresses will lead to a widespread credit crunch.
“That credit contraction . . would then slow the economy,” he cautioned, noting that the Fed is monitoring the situation “very, very closely.”
“Such tensions could then reduce inflation. So we have to do less work on the Federal Funds rate to balance the economy,” Kashkari continued.” Right now, however, it is unclear how much stress on these banks will affect the economy.”
Several major banks, including Silicon Valley Bank and Signature Bank, have failed in recent weeks, prompting the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation (FDIC) to step in to protect depositors.
Kashkari was asked whether more regulation is needed to prevent bank failures or whether FDIC deposit insurance should be increased beyond $250,000. He was also asked if the 2018 rollback on regulation of midsize banks should be reinstated.The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 rolled back some of the regulations put in place after the 2008 financial crisis.
A Fed official responded:
Well, we have a fundamental problem in our banking system, a regulatory problem. I have argued for years that the largest banks in the world are still too big to fail.
Regarding the outflow of deposits from small banks to large banks, the Fed Bank Governor stressed: “It is unfair that deposits are flowing to the big banks because they have such a premium position that Credit Suisse was bailed out by the Swiss government.” He elaborated:
It is an unfair competitive environment that puts a lot of pressure on regional and community banks, and this needs to be addressed. We need both regional and community banks in America.
“Once we get through this period of stress, we have to come up with a fair and equitable regulatory system that will allow community and regional banks to prosper while ensuring the health of the banking system. We don’t have that right now,” Kashkari concluded.
Some have urged that government bailouts be extended to smaller banks. Billionaire Bill Ackman recently said, “We are headed for a train wreck,” warning that if the government leaves the current banking crisis unchecked, small banks will be permanently damaged.
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