Too Big To Fail

After nearly a decade of crisis, bailout, and reform in the United States and the European Union, the financial system – both in those countries and globally – is remarkably similar to the one we had in 2006.

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June 9, 2017 – Online MCAT CARS Practice

Question: What is your summary of the author’s main ideas. Post your own answer in the comments before reading those made by others.

After nearly a decade of crisis, bailout, and reform in the United States and the European Union, the financial system – both in those countries and globally – is remarkably similar to the one we had in 2006. Many financial reforms have been attempted since 2010, but the overall effects have been limited. Some big banks have struggled, but others have risen to take their place. Both before the 2008 global financial crisis and today, just over a dozen big banks dominate the world’s financial landscape. And yet the ground is shifting beneath the financial sector, and big banks could soon become a thing of the past.

Few officials privately express satisfaction with the progress of financial reform. In public, most of them are more polite, but the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, struck a chord recently when he called for a reevaluation of how much progress has been made on addressing the problem of financial institutions that are “too big to fail” (TBTF).

Kashkari worked for Henry M. Paulson in the US Treasury Department, beginning in 2006. He not only watched the financial crisis develop; in October 2008 he became the assistant secretary responsible for the Troubled Asset Relief Program (TARP), with the goal of stabilizing the financial system. He is a Republican who has worked at both Goldman Sachs (a big bank) and PIMCO (a large asset-management company). So people pay attention when he says, “I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy.”

And Kashkari is correct in his assessment of the Dodd-Frank financial reforms of 2010. This legislation and the ensuing regulations have moved some issues in the right direction. “But given the enormous costs that would be associated with another financial crisis and the lack of certainty about whether these new tools would be effective in dealing with one,” he argues, “I believe we must seriously consider bolder, transformational options.”

Kashkari is now proposing exactly the right approach: to hold public conferences and extensive discussions to evaluate whether large banks should be broken up, whether they (and other financial institutions) should be forced to fund themselves with more equity and less debt, or whether there should be a debt tax to discourage excessive leverage. The first conference will be on April 4 (I will be one of the speakers).

Kashkari is just one of 12 presidents of regional Federal Reserve Banks. And he sits on the Federal Open Market Committee (FOMC), which sets monetary policy – but not on the Board of Governors of the Federal Reserve System, which oversees bank regulation. Still, his call for an evaluation of the TBTF problem will have a major impact for three reasons.

First, the views he expresses are entirely sensible and mainstream, based on deep experience (his and others) with this and other financial crises. Kashkari is presenting from a position of authority a message that many other reasonable people have been trying to convey for nearly a decade.

Second, Kashkari has articulated – in appropriate central-bank language – precisely the same view that the remaining Democratic presidential candidates are putting before the voting public. Hillary Clinton has a detailed and thoughtful plan for financial reform, with emphasis on taxing leverage and increasing capital requirements. Bernie Sanders would prefer to break up the banks. But the goal is the same; and, as Kashkari points out, any of these tools can potentially get us to a better place.

When reasonable Republicans and Democrats begin to converge on policy, we are more likely to get sensible change.

Third, Kashkari’s timing coincides with the arrival of new “blockchain” technology, which makes it possible to organize financial transactions in a more decentralized way. Various versions of this technology are either already available or currently under development – and there is a very real prospect that this will reduce transaction costs across much of the financial sector.

We do not yet know which version will prevail, and there is active discussion about how to ensure that the new standards and systems enhance stability, rather than (as with some previous financial innovations) producing unpleasant unintended consequences.

Most important, blockchain technology has the potential to reduce substantially, or even eliminate, the value of being a trusted intermediary such as a large bank. And yet the big banks themselves are pouring money into this technology – presumably hoping to save at least some part of their business by limiting the degree of ultimate decentralization.

Kashkari will lead the way to rethinking – and, one hopes, ending – the TBTF problem in traditional big banks. In a blockchain world, he and his colleagues are likely to work hard to prevent any variant of TBTF from reappearing.

Adapted from


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Jack Westin
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  1. TBTF problem = need reform + decentralization + use technology (blockchain) (Kashkari)


  2. Author agrees with Kashkari thinks its good idea to go with breaking up big banks (sanders) or tax rhem (hilary) to avoid bad finaicial effects of large banks. Financial reform not working.


  3. author compares today’s economy with 2008’s crisis economy.
    TBTF is to be blamed for econ failure according to Kashkari.
    experience, articulate, good timing of ‘blockchain’ gives good reasons for kashkari’s proposal to evaluate TBTF.


  4. MI: Kashkari leading a charge against TBTF problem for the sake of preventing a future financial crisis


  5. This passage discusses financial reform, and how kashkari, a republican and president of the financial reserve of a specific state will use his power to influence others on how this reform can happen.
    The passage mentions 3 reasons why he will help influence this change, and the prominence of this reform. The passage has a focus on banks that are too big to fail as well.


  6. MI: Big banks are a problem in need of discussion and solution. Author’s tone: negative and emphasizes that others agree and are becoming aware of need for reform across political parties even. However, author stands behind Kashkari and heralds as long-anticipated harbringer of financial change. Structure: gives 3 supportive reasons why decentralization will be good and feasible for the US economy.


  7. MIP: TBTF + Kash impacts money policy + Consider Transformation (AU)


  8. Kashari = re-evaluate financial system, views = sensible + authority, Blockchain tech to eliminate TBTF intermediary; author = positive


  9. big banks = risk to economy, Kash influential + articulate, blockchain technology good


  10. MIP: Au. agrees with Kash. –> big banks = too big/bad for econ. + need bolder reform; tone = neutral


  11. Theme: Author talks about how big banks have not been severely penalized for causing the current financial crisis despite fiscal reforms. Reforms are not doing much to alleviate the situation and author is confident that Kashkari is the man to bring about the necessary change which the economy so badly needs.

    Author agrees with Kashkari that banks shouldn’t be given the leeway and they ought to be penalized for causing the financial crises (struck a chord…is correct in his assessment…is not proposing exactly the right approach) and who also holds the belief that big banks still think they are too big to fail. He believes this mentality will pose a threat to the economy. Kashkari is advocating for bolder changes to be implemented to circumvent the onset of another financial crisis. He feels that there should be public discourse on whether big banks should be broken up, forced to have more equity and less debt and if they should be taxed for having excessive debt (algorithm)

    Testable: know how Kashkari aims to take on the big banks and how they should be regulated

    Although Kashkari is only one of the 12 presidents of the regional FRBs and does not oversee bank regulation, the author believes he has to power to implement changes.

    Testable: know that this is possible because 1) Kashkari’s views are based on his own experience and he is presenting a message that people have been trying to convey for so long) 2) he shares views with democrats despite being a Republican (author believes when both parties share the same perspectives, change is more likely to be implemented, there will not be any gridlock as your opponent tries to block your agenda) 3) His campaign is timely given the arrival of the blockchain technology with several versions either already available or currently under development

    Blockchain technology has the potential to undermine the big banks. Interestingly, big banks are willing to invest in this technology so that they can have some form/extent of control over it and they will be able to mitigate and limit the detrimental effects the technology has on their businesses which may be challenging considering Kashkari is aiming to undermine big banks (work hard to prevent any variant of TGTF)

    Tone: Author is optimistic about the financial future despite the current climate as he is very confident that Kashkari will rusher in the change that is needed


  12. TBTF = risky, same as 2006 so K = financial reform through conferences and discussions and will have impact (blockchain, mainstream, same idea as PC)


  13. Biggest banks = risk for economy. Decentralization = needed (Kashkari).


  14. MIP: Big banks are too big to fail, which could pose a future risk on the economy. Change is need, specifically breaking down these larger banks. Kashari is in a position to illicit change since he is in a position of authority and has similar views to democrats.


  15. MP: There is an interest to break up big banks to help prevent future/current financial crisis
    tone: (+) author agrees


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