Yesterday, Minnesota Federal Reserve Bank President Neel Kashkari unveiled his plan to address his belief that some banks are still “too big to fail.” The plan wasn’t really surprising: more capital, more scrutiny, and new taxes if any financial institution was “systemically risky.” What was surprising, though, was President Kashkari’s lack of understanding of how important a strong financial system is to economic growth and Main Street business.
However, Kashkari should understand; he’s heard about this before. Back in April, David Ahlers, chief human resources officer at Graco, a machinery company based in Minneapolis, asked President Kashkari at a Minnesota Chamber event about this very topic [at the 32:18 mark]. Ahlers was concerned that Graco would not have access to financing if his lending partners were “broken up,” particularly because half of Graco’s products are sold abroad. Graco depends on multinational banks to meet its financing needs.
While Kashkari “Minneapolis Plan” doesn’t automatically break up the banks, the amount of capital that would need to be raised would simply make it uneconomical and perhaps impossible for many banks to continue doing business with a company like Graco. Those banks would be forced to make hard choices about what types of companies they could continue to lend to and at what cost.
Even worse, Kashkari himself acknowledged that the plan could result in a 41% reduction in GDP growth.
We asked David what he thought a 41% drop would mean for Graco. His response was simple and to the point: He said “it would likely reduce our business dramatically, causing us to reduce hiring and limit future investments in the business, to the detriment of our local Minneapolis community.”
David went on to note, “I appreciate Kashkari’s effort to protect us from changes in the market 100 years from now, but I wish he understood the real impact this would have on our business today."
We know that financial stability is necessary for economic growth, but growth is also essential for financial stability, and plans like President Kashkari’s would send our economy into a nose dive. As Congress and the incoming administration review financial regulatory reform, we hope they put a special emphasis on what those changes would mean for Main Street businesses and our economy.