Throughout 2018, Marketplace is marking the 10th anniversary of the financial crisis, from the impact of the Great Recession on our personal lives to how key decisions were made to recalibrate the U.S. economy. Earlier this year, Marketplace’s Kai Ryssdal sat down with former Federal Reserve Chair Ben Bernanke along with former Treasury secretaries Henry Paulson and Tim Geithner to talk about the financial crisis from their unique viewpoints.
Working alongside Bernanke, Paulson and Geithner during the crisis was Neel Kashkari. He is currently the president of the Minneapolis Fed, but 10 years ago as the United States was heading into the worst of the crisis with the collapse of Lehman Brothers and AIG, he was an assistant Treasury secretary under Paulson and became the person in charge of running the Troubled Asset Relief Program, or TARP, also known as the bank bailout.
Ryssdal spoke with Kashkari on Aug. 27 about his recollections of the crisis and where things stand today.
Below is a full transcript of the conversation.
Ryssdal: So this is a tricky way to start this interview, but you’re a guy who came out of Goldman Sachs. You’re from PIMCO. You had your stint in the Treasury. And I’m wondering when the New York Times runs your obit in 50 years, first sentence is going to be Neel Kashkari who led the biggest bailout of banks in American history died today at the age of 94. You all right with that? I mean, you’re a free market guy from way back and that’s your legacy the TARP and the bailout.
Kashkari: Well I’m absolutely proud of what we did during the financial crisis and we were, as you indicated, we were a free market Republican administration that hated the idea of intervening in markets. But it became apparent that we were facing a one in 100 year economic crisis and we needed to stabilize the economy. And so although we hated that it got to that point, I’m proud of the actions that we took, I’m proud of the people that I worked with and I would not turn my back on that experience in any way. I own it. I embrace it. I’m proud of it.
Ryssdal: I was actually going to ask this later in the interview but since you were so forthright in that I’m going to go with it now. You arguably are the guy whose life was changed the most by that incident, right? [Ben] Bernanke and [Hank] Paulson and [Tim] Geithner, you know, they were at the tops of their careers and they’ve moved on. They’ve done other things, Bush and Obama. We know what happened to them. This literally was a life changing event for you …
Kashkari: It was a life changing event for me in terms of my career but it was a much more dramatic life changing event for millions of Americans who lost their homes, right? People who lost their jobs. The reason this crisis was so unfair is a lot of people were responsible, bought homes they could afford. Then when the financial crisis turned into the Great Recession and then they lost their jobs, then they lost their homes, it was much more traumatic for them than it was for me. And I always remind myself of that.
Ryssdal: I want you to start in the spring-ish of 2008, right. You had called Hank Paulson a couple of years earlier and said, “Hey, I want to come work at Treasury.” And he said, “Come on down, I want to get things done,” as Paulson is want to do. And then things start going south and he says to you, “Neel, I need some help with this.” What was the first introduction you had to how bad things were going and the role you were going to play?
Kashkari: It was a slow process. It was the summer of ‘07 when he said I want you to be in charge of housing for Treasury and I said, “Hank, I don’t know anything about housing.” But he said, “Nobody else at Treasury knows anything about housing either. So figure it out. Work with our best economists, work with people at HUD and the White House, figure out what’s going on in housing and what if anything we should do about it.” And again, our bias was not to intervene, our bias was let the markets run their course, that’s the way markets are supposed to work. And as we got deeper into it and as time went on it became more and more and more serious. And I remember it was January of 2008 when there was a phone call that Secretary Paulson and I had with former Chairman Alan Greenspan. And in his very quiet way that Alan Greenspan speaks I heard him say over the speakerphone this might be a one in 100 year event. That set us back and that made us think, “Oh my gosh, Alan Greenspan is saying this might be a one in 100 year event. We need to get ready for the worst.”
Ryssdal: So you guys put together something called the “Break the Glass” plan —
Kashkari: That’s right
Ryssdal: — which was in essence if everything goes to the dogs as it were, here’s what we do. What was in that first plan?
Kashkari: Well, my colleague Phil Swagel, also a treasurer, and I drafted it. We went through a bunch of different options at a very high level. Everything from putting capital into banks to buying up assets from banks, a range of different options. It was 10 pages, probably six or eight different ideas. No details just concepts. Just to say let’s have an idea of what we might do if we really needed to do something dramatic. But we also knew that Congress would have to approve any of this. They would have to allocate the dollars for this. So we presented this to Chairman Bernanke and Secretary Paulson. They both said yes this looks reasonable —
Ryssdal: Wait, back up, what did Henry Paulson really say the first time you said “Hank, let’s talk bailouts?”
Kashkari: Well, Hank told us to pull this together. He said go work on what we will do if the you-know-what really hits the fan and the economy is on the verge of collapse. Pull together some ideas. So it was his idea that we do this work to begin with. We showed it to him. He said let’s go show this to Bernanke. Paulson and Bernanke said this seems reasonable but there’s no way we can go to Congress right now for this. They’ll say you’re crazy. So let’s just put it on the shelf and let’s hope we don’t need it.
Ryssdal: And then Paulson goes to Congress that summer and he’s testifying and he says in essence, actually he says, “Listen, if I’ve got a bazooka in my pocket I might not have to use it. If all I’ve got is a squirt gun, you never know.” And the theory being, listen, give me this authority and maybe I won’t have to use it if people know I have it. Turned out, as we know, he did have to use it and he gave it to you. What was the conversation like where he said, “Listen, Neel, I need you to run this TARP for me and whatever’s going to become the TARP. And I need you to help me get it through Congress.”
Kashkari: Well, it was very, honestly, it was very matter of fact because he and I at that point and others were working so closely together, he was the general in charge of the operation and I was one of his lieutenants, and he had other lieutenants by the way, and we were taking orders from the general every day. And I remember sitting in his office and said “OK, we’re getting the TARP authority, Neel I need you to run this.” And I said “OK, got it.” By the way, I had no idea what I was signing up for. He had no idea what he was assigning me. When we were talking to Congress about this new setup, the TARP, people said how many staffers do you think you’re going to need to run this? I said I don’t know maybe a dozen. Six months later we’d hire 140 people. I mean, it was a huge, complex operation beyond what we envisioned at the time. So we were all reacting in real time to changing events.
Ryssdal: Is it true that $700 billion number basically you guys pulled out of thin air? Trillion would have been too much. Five hundred billion not quite enough?
Kashkari: Yes, we wanted as much authority as we could get because the one mistake we kept making throughout the crisis was we kept underestimating how severe it was. So we said we’re going to get one shot to go to Congress. We need as much authority as we can get. And ultimately it was his political judgment on how much he thought we could convince Congress to give us.
Ryssdal: So as you, let me fast forward a little bit. As you sit here now as a Fed president, as a banking regulator and as a guy who’s been through the crucible as it were, why didn’t we know how bad it was going to get?
Kashkari: We never know when these crises happen how bad they’re going to get or that they’re going to happen. And that’s the nature. Human societies are prone to what I call these “mass delusion events,” repeatedly. Whether it’s the Tulip Bubble way back when or the stock market before the Great Depression, the tech bubble or now the housing bubble that we had in 2006, 2007. It’s a mass delusion event where everybody believes something positive is happening when in fact it’s the opposite. And so you know I bought a house in California in 2005. I sure didn’t see it coming. I was part of the mass delusion. So I don’t know, but I know it’s going to happen again. So the question now is what can we do now, from a regulation perspective, to put in some guardrails so that when it happens again it doesn’t bring down the whole economy?
Ryssdal: All right. So we’ll get there in a minute, but I want to go back to the day that the House votes on TARP. Where were you? Well, let me rephrase the question. The day the House failed to pass TARP, right. Where were you? What were you doing? What was your reaction?
Kashkari: I was sitting in the gallery over the House floor —
Ryssdal: Were you really?
Kashkari: — I was, watching the vote. And we left there dejected. The only thing we could comfort ourselves with was saying history will show that we asked. Paulson and Bernanke went to Congress, I was there when they met in then Speaker Pelosi conference room, House and Senate leadership, bicameral bipartisan. And they said basically the U.S. economy is on the verge of collapse. We don’t have the tools to deal with it. We need Congress’s help. History will show that we’re asking you for help. And so the only minor comfort that we had is that history would show that yes we did in fact warn them, we did in fact ask for help. And they said no. Which was not very comforting.
Ryssdal: Wow. Right. That’s not what you want to hear …
Ryssdal: So then what happened? You leave the gallery and does Hank get on the phone with Pelosi or what happens?
Kashkari: We went back to Treasury, Hank started working the phones again. And the White House started working the phones again, and thankfully, I mean, to be honest with you, the Dow Jones Industrial Average dropped 777 points that afternoon and members of Congress had been telling us our phones are ringing off the hook 99 to one saying, “Don’t you dare vote for this.” There’s no crisis because Main Street hadn’t felt it yet. Then when the Dow dropped 777 points their phone started ringing not 99 one the other way, but more 50-50 saying, “Oh my gosh, what did you just do? You better do something mister member of Congress.”
Ryssdal: So we had Paulson and Bernanke and Geithner on the program back in March. We sat down and did an hour with them actually. And the thing that came out of that was their frustration at not being able to make people understand how bad it was. Give me what that looked like from, you know, you’re sort of the worker bee, right? They were up here and you’re sort of the worker bee. How do you deal with people not knowing what you’re trying to do?
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Kashkari: Well that’s, you know I thought a lot about this when I reflect on what we could have done better. And it’s true our messaging and communicating the seriousness of the crisis was flawed. But here’s the challenge. If you’re the Treasury secretary, you’re trying to tell the American people how scared you are, what’s at stake, and you’re trying to comfort the markets at the same time. You’ve got one microphone and these two polar opposite messages and you end up with a muddled message in the middle. And that’s what we ended up with, and so from our perspective my message to my team was simply — ignore all of this. We have to focus on getting our programs up and running as quickly as we can as effectively as we can in a nonpolitical nonpartisan manner. Focus on what we can control. That’s all that matters. And I think we did a good job of that.
Ryssdal: It’s interesting because you know Geithner, in that interview we did back in March, basically said the rational gut response is let it all burn and then they’ll figure it out. And clearly that can’t happen.
Kashkari: That’s right.
Ryssdal: You finally get the TARP and it passes and you’ve got the $700 billion, which later gets whittled down and whatever, that’s that’s a little bit beside the point. But did you think when it passed that you had what you needed?
Kashkari: No. We thought this is our best shot. And I give Paulson and Bernanke and Geithner credit because they basically said let’s fire every gun that we have at this problem to try to solve it and hopefully it’s enough. In the worst moments of the crisis, we did not think we’d get a single dollar back from that $700 billion and we might have to go back to Congress again and say, “You know that $700 billion we asked for? It’s gone. We need another $700 billion because the country’s at stake.” That’s how scared we were in the worst moments of the crisis.
Ryssdal: When did you know it was going to be OK? I mean you had Lehman in September, you had TARP in early October and then what?
Kashkari: It was a slow burn of the big banks coming under more and more pressure. You know at Treasury I had a Bloomberg screen and I was watching all the various tickers throughout the day and you know watching the big banks, their stock prices approach zero was an indicator for me that the markets did not believe we’d done enough to stabilize the crisis. So in March of ‘09 I think the financial institutions hit a minimum and then when we got through the stress test in late April, early May of ‘09, that’s when I said OK we’ve turned the corner. The worst is behind us now and basically people know that the U.S. government, the U.S. taxpayers are standing behind the economy and that was a message that we had to send.
Ryssdal: Talk to me about the political environment of the time. I mean we had a presidential election going on, right? We wound up going from a Republican to a Democrat in the worst crisis in more than a generation. Did you think you know Congress and the TARP vote aside, did you think that the politicians had your back?
Kashkari: Oh no. No. I mean the leaders yes, but the rank-and-file politicians didn’t. I mean, I was taking the brunt of it because I’d have to go testify in front of Congress many, many times. And generally speaking the members of Congress were much more deferential and respectful to the Treasury secretary or the Fed chair than to some 35-year-old assistant secretary. But the members of Congress were reflecting the anger of their constituents. Their constituents were angry, their constituents were confused, didn’t understand what this crisis was and whose fault it was. And so I got to feel firsthand that anger.
Ryssdal: Did you ever look around, since you brought it up, and say I’m a 35 year old with only two years in government, what the hell am I doing here?
Kashkari: I didn’t think that, I thought we really need your help. I wish you were helping us instead of using this as a moment to make political statements or get more attention for yourself. But you know, it’s funny. Fast forward, two of the people who are absolutely toughest on me in the moment during the crisis, after the fact have reached out and have been very positive and supportive of the job that I did and that my colleagues did during the crisis.
Ryssdal: I would ask you to name names but you know …
Kashkari: I’m happy to do it. I mean when I ran for governor of California I saw that an article is being written about me. And then all of a sudden they had a quote from Dennis Kucinich and I was terrified. Oh my gosh Dennis Kucinich was so tough on me —
Ryssdal: Congressman from Ohio, right?
Kashkari: — Congressman from Ohio. What did he say? And in this quote, which was shocking to me he said “I know Neel Kashkari, he’s a good man. He was one of the best people that George Bush had working for him.” And so that and then Congressman Manzullo, former Republican congressman from Illinois had asked me to resign during the crisis during a hearing. He called me after I joined the Fed to say he apologized for his comments that he knows I was doing my best in a really tough situation. So to me that showed me that we got our message through that we’re doing our very best on behalf of the American people regardless of politics, even if our toughest critics could see that I do actually take some comfort from that.
Ryssdal: Let me ask you about two other members of Congress instrumental in this whole thing. Chris Dodd and Barney Frank and the law that bears their name. First of all as Dodd-Frank was being put together post crisis you are out of the government by the time, what did you think of Dodd-Frank as it was originally passed and conceived?
Kashkari: I thought it was it was done very quickly. They were trying to seize the moment of the crisis —
Ryssdal: Of necessity, right?
Kashkari: — well of necessity in the sense that the TARP being done very quickly and the stimulus being done very quickly were immediate responses to the crisis.
Ryssdal: This is the Obama stimulus in February, March of 2009, the year he took over.
Kashkari: Dodd-Frank was saying well let’s use this moment to now try to repair the gaps in our regulations that were exposed during the crisis, so well well-intentioned. I didn’t know at that time if it was enough. I didn’t know at the time if we knew enough to design a comprehensive regulatory response because we were just getting out of firefighting mode. We’re not yet sure how to design a new structure that’s going to be more fire resistant. That was probably my initial reaction at the time.
Ryssdal: This has become though your, I guess it’s your cause now as you sit here as the president the Minneapolis Fed, right, this idea of too big to fail and we’re still at risk. As you look at Congress now rolling back parts of Dodd-Frank and changing the financial regulatory environment, first of all do you believe we’re safer than we were 10 years ago?
Kashkari: We are safer than we were 10 years ago simply because the biggest banks do have more capital, more of their own skin in the game to protect taxpayers against their own mistakes than they had before the crisis.
Ryssdal: Yeah, but they’re also bigger than they were by a factor of a lot, if I could use a technical term, right? Their profits are up. They’re doing fine. And yet Congress now is saying maybe we need to loosen up on the big banks …
Kashkari: No, well I said they’re safer. I didn’t mean they’re safe enough. We need to go much further. The biggest banks are absolutely still too big to fail. If big banks ran into trouble today, the taxpayers would be on the hook because the administration would be faced with the same choice we were faced with. Let them collapse and potentially bring down the U.S. economy or use taxpayer money to bail them out. And I think that people end up using taxpayer money to bail them out.
Ryssdal: Do you think people know that?
Kashkari: You know I’ve been saying it to anybody who will listen. But the challenge is the regulatory wins in this political moment are blowing in the opposite direction. So from my perspective we just need to keep the message out, keep pounding this drum, keep putting out the analysis and if there is a moment where the pendulum swings then we seize it.
Ryssdal: You said in a speech not too long ago, a couple of years ago I guess, “you know why should we expect regulators this time and market participants this time to be able to see a crisis coming when we so clearly didn’t last time.” Which says to me that you believe fundamentally nothing has changed.
Kashkari: I believe fundamentally there are … think about building a dike against a flood, against a hurricane or tsunami. We’ve raised the wall a little bit now against a future flood coming because the biggest banks do have more capital, more reserves to protect against losses than they had back in 2005 or 2006. But our analysis shows that dike is not nearly high enough and it’s in our own economic interest as a country, as a people, to force the banks to build that dike higher to put their own skin in the game. You know when you or I go to buy a house the bank makes us put 20 percent down. That 20 percent is there to protect the bank in case we run into financial trouble. And if you increase your down payment the bank is even more protected. Well big banks today have about half as much down as they request you and me to put down on our own homes. And so that’s what we need do we need to make the big banks put enough of their own money down that will protect taxpayers in case they run into trouble.
Ryssdal: On the theory that there’s another crisis coming, hopefully not as bad as the one 10 years ago. But there’s another financial recession and crisis coming. What’s going to cause it. What’s your guess?
Kashkari: It could be any number of things. It could be a spark in emerging markets like we’re seeing in Turkey where there’s a lot of uncertainty, that could potentially trigger a crisis of confidence and could spill over globally into the U.S. It could be the Federal Reserve. It could that we overdue raising interest rates. I’ve also been saying that we’re raising interest rates too aggressively. We might keep raising interest rates and the economy can’t take it and we put the country into recession.
Ryssdal: Well you’ve been very public about your dissents when you’re a voting member of the Federal Open Market Committee. And I don’t know if Chairman Powell is actually going to listen to this interview but his people certainly will. Why do you think the Fed keeps going?
Kashkari: Well we’re trying to assess — is the economy running at full potential. We want to keep it from overheating because if it overheats then that can lead to runaway inflation which is really bad for everybody —
Kashkari: — so, but assessing is the economy running at potential, below potential or above potential, it’s an inexact science. So I’ve simply been saying I don’t see any indication that we’re running above potential so let’s let it keep running and if we start to see signs that it’s overheating we can always raise rates then. So I think my colleagues and I are having an honest disagreement about this very fundamental question.
Ryssdal: Even though unemployment’s at four-ish percent and there is no inflation in this economy today, you’re still leery?
Kashkari: I’m leery that we’ve been saying for years now we’re at full employment. That’s it. There’s no more workers and then all these workers come off the sidelines saying yeah I want jobs and this is in a modest wage growth environment. Imagine if wage growth actually picks up maybe a lot more workers will come in off the sidelines. The more workers that come in off the sidelines and take jobs, the better for the U.S. economy, the better for those workers the better for all of us. So let’s let that continue.
Ryssdal: Do you think the Fed, and actually this is the last Fed question I’ll ask, because you and I could do this all day. But do you think they’re still institutionally as it were, because the people have changed, a little bit scarred by the crisis?
Kashkari: There’s scarring from the financial crisis, yes. But there’s scarring, bigger scarring from the inflation of the 1970s. And I think that that is persuading us more than anything else and why we’re so biased towards … you know we say that we are we have a symmetric view of inflation. We don’t mind if it’s 2.1 or 1.9 but in our practice, in what we actually do, we are much more worried about high inflation than we are low inflation. And I think that that is the scar from the 1970s.
Ryssdal: It’s interesting, it’s monetary policy by fear basically.
Kashkari: You know policymakers are human and each has their own set of emotions and their own histories. And we do our best with the data that we have and the experiences that we’ve had.
Ryssdal: Step back then from the Fed and policymakers to the bigger economy. What’s the legacy of the financial crisis in this economy today?
Kashkari: I think the legacy of the financial crisis is the extreme polarization that we are experiencing every day. You know, we’ve violated in our response to the crisis, we violated core American beliefs. We have beliefs in our country that have been passed down from generation to generation. A belief in free markets. If you take a risk you get the upside but you get the downside. That’s been with us for a couple of hundred years and we violated that in ‘08. And when you violate the core beliefs of a society I think it leads to great anger. And so shortly after the crisis when we got through the worst of it you saw the Tea Party and Occupy Wall Street both rise at roughly the same time. They are one on the right one on the left but basically angry about the same thing. And so the distrust of institutions the distrust of experts, maybe I’m overdoing it but I think a lot of it comes back to the ‘08 crisis and our response.
Ryssdal: I wonder if part of it is that as a direct result of the crisis and the financial mismanagement that happened nobody went to jail …
Kashkari: I do think that’s part of it. Absolutely. At least then I think people could have said well they had to use taxpayer money to bail those guys out but at least the bad actors went to jail and paid the price for it. And you’re right none of the senior guys went to jail. And I do think that that adds to the anger and the distrust that the system is rigged.
Ryssdal: So when the next crisis happens. Are we ready?
Kashkari: I don’t know. I think the challenge is if there were another ‘08 type crisis today could we get Congress to support us the way we did in ‘08? I think probably not. And that means the U.S. economy, the American people, Main Street would bear the ultimate consequences of that.
Ryssdal: That must be terrifying. I mean you’re a guy who’s kind of in charge of that.
Kashkari: It is terrifying. Now the good news is we don’t see, we’re always out there looking for signs of another big crisis brewing, we don’t see signs of that. But then again our track record is terrible in seeing signs before they actually happen so don’t take a lot of comfort from the fact that we’re not seeing it right now.
Ryssdal: OK. You like Chairman Powell —
Kashkari: I do.
Ryssdal: — and you guys get along. You’re both not economists. Does that matter?
Kashkari: I think it’s helpful to have a mix of perspectives on the Federal Open Market Committee. I wouldn’t want a committee of only economists and I wouldn’t want a committee of no economists either. So both of us have a lot of experience in policy making. Both of us, I would argue, work very well with economists, learn a lot from them but also can bring our own judgment. And so I’ve got great admiration for Jay Powell. I think that being a Fed chair coming from the business sector with no policy experience or no Federal Reserve experience I think that would be very, very difficult. The fact that Jay Powell has six years as a governor and has taken his six years very seriously to study monetary policy, I think it has trained him very well to be our Fed chair.
Ryssdal: One of the things I talked about actually with Chairman Powell when I sat down with him six weeks or maybe two months ago was how hard he’s working to demystify the Fed, to speak English, you know he’s changing his press conferences and all of that stuff. How much does it matter that Americans have some economic literacy just in terms of being aware of the crisis or next crisis or what’s happening or just knowing what’s going on?
Kashkari: I think it’s really important. I think, first of all his work to demystify the Fed I think is very positive. We need to earn people’s trust so that if there is a future crisis and we have to do unconventional or confusing actions that they give us the benefit of the doubt and that we’ve earned their trust so I really support what he’s doing there. And I do think so, to minimize the chances of future crises our citizens need to understand what’s happened in the past so that they can see the signs of hey this could happen again, let’s be more careful going into it. And so I think the more literate, financially literate our citizens are the better.
Ryssdal: Just on that economic literacy thing. The catch is and I say this knowing that this is my life’s work and kind of yours as well. This stuff can really boring. So the idea of getting people to pay attention becomes tricky. When you go out and do speeches, when you do your presentations, when you are out and about, how do you engage people in this. What’s the trick?
Kashkari: Well I, first of all, I hate reading dry speeches because first of all it bores me to read it. I can only imagine what it does to the audience to sit there and listen to it. So when I travel around my district I do a lot of town halls where I’ll just speak for five minutes and say let me tell you what the Federal Reserve is and why there’s a Minneapolis Fed and how our job is to represent you. But now I want to hear from you on what’s happening in the economy and then we have a 55 minute Q and A session all live streamed on the web. People seem to appreciate that. They come they ask me questions they you know offer criticisms where they disagree. But people do seem to get engaged in a very authentic way. So that’s one tool that has worked on a narrow scale.
Ryssdal: What happens if people don’t understand? What happens if they just let the black box be the black box?
Kashkari: Well that’s what unfortunately was happening leading into the last crisis. Alan Greenspan when he was chairman, he intentionally spoke in a very mystifying way because it made himself seem smart and you know it just made everybody else scared to ask about the Fed. Well that didn’t build trust. And so in ‘08 when the crisis happened and we needed people to trust us, there was a big trust deficit and that trust deficit then got deeper through the controversial actions that the Fed had to take. So the things that Chairman Powell and Janet Yellen before him are trying to do are to rebuild that trust.
Ryssdal: To this idea of the crisis next time and maybe it’s going to be Treasury Secretary Mnuchin, maybe it’s going to be his successor. Somebody is going to have to go to the Hill and say we need this authority to wind down this bank or we need this amount of money. If Congress doesn’t get it and doesn’t understand we’ll have another vote like the TARP going down. Is Congress not being willing to engage on this going to make the next crisis worse?
Kashkari: If it gets so bad that we absolutely need Congress’s help, yes. If they refuse just because the politics of the moment do not allow them … you know many members of Congress paid for their TARP vote with their seats. It was one of the finest moments in our democracy’s political history seeing leaders across the aisle step forward and do what’s in the country’s best interest not in their own professional best interests. And then they lost their seats. And so if this were to happen again and people said “no I want to keep my job,” then the country is going to suffer for it. And that is scary. And that’s why everything we can do to rebuild the trust across party lines, we need to do.
Ryssdal: One of the things that’s happening now in this economy is that there is a tendency as we talked about earlier, there’s a tendency toward lesser financial regulation, both substantive and then sort of down at the worker level. What do you make of that and where do you think that comes from?
Kashkari: I think the regulatory environment is like a pendulum. It swings to tight regulations and then the pendulum swings back. And right now the pendulum is swinging in a deregulatory moment and the challenge is, you know don’t let it swing too far and don’t undo some of the guardrails that were put in place. But again I’m of the view that we didn’t even put in guardrails tough enough after the last crisis and so it does concern me.
Ryssdal: This is a little bit sideways but the headline numbers on the economy are really strong and the expansions you know have been going since June of 2009 and stock market record bull and all of that. While acknowledging that economic expansions don’t die of old age, how closely are you and your colleagues at the Fed keeping an eye on the longevity thing here?
Kashkari: We are. I mean we know as Janet Yellen famously said “expansions don’t die of old age” as you just said, but we’re looking for what are the things that could trigger that end. And again it could be something coming out of emerging markets. It could be something coming from the trade battles that are being taken right now. It also could be done by us it could be done by the Fed raising interest rates when the economy can’t sustain it. One measure we look are long-term borrowing costs for the U.S. government so say 10-year Treasuries. We’ve got this big tax cut, big increase in spending, the Federal Reserve is shrinking our balance sheet. And yet the 10-year Treasury is still below 3 percent yield. That is telling me that the markets do not believe the long-term growth prospects of the U.S. economy have picked up.
Ryssdal: So it’s interesting actually this idea of the Fed versus the markets because in a lot of ways the markets are looking at what the Fed is doing and saying “I don’t care.”
Kashkari: I agree the markets are basically not believing some of our predictions about our interest rate forecast. They’re saying you think you’re going to be raising rates? We know you’re not —
Ryssdal: And so what does that tell you?
Kashkari: — it tells me we need to ask questions about our own assumptions. It should force us to second guess our own assumptions on why we think these higher interest rates are appropriate if the markets are saying we don’t buy it.
Ryssdal: Of course the markets have been wrong before …
Kashkari: I agree. Unfortunately this is somewhat of an art. It’s not an exact science.
This story is part of Divided Decade, a yearlong series examining how the financial crisis changed America.