Don’t Fear the New Boss at the Minneapolis Fed

That lack of economics training means that Kashkari will tend to express himself in language that’s different from other Fed officials. People who have been through economics graduate school speak in the official cant of the profession. Instead of “addiction” we say “anchoring,” and so forth. People who don’t use this argot run the risk of being perceived as cranks by the academic econ community. 

But this isn’t a reason to fear Kashkari. A non-economist will actually be a welcome outside voice in an institution stocked with academics. What’s more, it could even improve Fed communication, since the general public doesn’t speak in economics jargon. 

It is probably true that Kashkari is somewhat of a monetary hawk. But even if so, he’ll be swimming against a general dovish tide at the Fed. The brief flowering of dovish sentiment at the Minneapolis Fed caused by Kocherlakota’s legendary conversion could never have been a permanent change, since the Minneapolis Fed’s board — which chooses the president — is the same as before. 

So does Kashkari come with any downsides? I do see one. Kashkari was involved in creating the Troubled Asset Relief Program — also known as the government bank bailout of 2008. As assistant secretary of the Treasury for international economics and development under Henry Paulson, Kashkari helped draft and administer the program that bought $700 billion in troubled mortgage-backed securities directly from the nation’s megabanks. 

Many people, me included, believe that some sort of bailout was necessary. But many also believe that TARP was too soft on the banks, since top management was left in place and given no penalty for getting the country in trouble. Many fear that the no-strings-attached nature of the bailout created what economists call moral hazard — an implicit guarantee of future bailouts that will end up encouraging banks to take excessive risk during the next bull market. Others suspect the government of giving favorable terms to politically connected institutions, particularly Kashkari’s former employer, Goldman Sachs. 

Now Kashkari, the TARP guy, is at the Fed. That could cause some negative optics for an institution that is already under heavy political attack, mainly from the right. Kashkari’s hawkish instincts will probably not be enough to exonerate him in the eyes of the conservative activists who want to hobble or even end the Fed, and his background at Treasury may give these activists some rhetorical ammunition. 

But in any case, it’s too early to tell what Kashkari’s appointment will mean for the Federal Reserve system or for monetary policy. The economics media will be watching with interest.