In his speech, Kashkari called for three crucial steps:

• “Breaking up large banks into smaller, less connected, less important entities.”
• “Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).”
• “Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.”

That’s from a Business Insider account of his speech.

Kashkari, who ran the Treasury Department’s Troubled Asset Relief Program under both President George W. Bush and President Obama, worked for Goldman Sachs’ San Francisco office before his government job. After leaving the Treasury Department, he joined Newport Beach-based PIMCO. While he lost to Gov. Jerry Brown in a landslide, he was still considered an up-and-comer in California politics before moving to Minneapolis last year, where he assumed the Fed post in November. If he does seek California office again, as some political observers expected, his speech will likely be a focus for its perceived populist themes.

‘It’s very hard to see crises coming’

The Washington Post, Politico and many other East Coast media treated Kashkari’s comments as highly newsworthy and provocative. Reuters called his ideas “radical.” In a subsequent interview with the Post, Kashkari said, given the unpredictability of the global economy, it’s smart to adopt reforms during relatively stable periods to prevent future shocks before they happen:

If you look around the global economy, there’s a lot of uncertainty. There are people who are concerned about China’s slowdown and whether it’s going to be a hard or soft landing. All of those are out there, but it’s very hard to see crises coming.

 

Nobody was omniscient enough to call $100 oil or $150 oil a bubble. I’m not saying that it was a bubble; I think it’s supply and demand forces. But certainly nobody forecast it going down to $30. That’s just an example of an exogenous shock. Everybody’s eyes were open. None of the smart people saw it coming. What else don’t we see coming? …

 

[It] isn’t clear to me that just keeping investment banking separated from depository lending is necessarily by itself a solution. If we go back to the root causes of ’08, we had a nationwide delusion that home prices only go up. I participated in that delusion: I bought a house in California in 2005. Traditional banks made a lot of bad loans based on the premise that if home prices keep going up, these loans are going to be okay. …

 

To really be strong enough against a shock we haven’t thought of, we would either need much, much higher capital requirements — the banks are already pushing back hard against the capital surcharges — or we need to look at much stronger or more intense stress scenarios.

Kashkari, 42, a Hindu native of Ohio, has undergraduate and graduate degrees in mechanical engineering from the University of Illinois/Urbana-Champaign. He worked as an engineer for TRW in Redondo Beach before going to the University of Pennsylvania’s Wharton School for his MBA, which led to his Goldman Sachs job. When Goldman Sachs chairman/CEO Henry Paulson became U.S. secretary of the treasury in 2006, he hired Kashkari as an aide, laying the groundwork for his appointment as the assistant treasury secretary overseeing TARP.

But Tesla demanded — and won — so many breaks from the state of Nevada that the deal is an affront to any true believer in free-market economics. This is from the Chronicle:

Nevada won the fierce, five-state competition to host Tesla Motors’ planned $5 billion battery factory by offering a package of tax breaks and credits that could be worth $1.2 billion over the next 20 years, according to terms released by state officials Thursday. … Tesla won’t have to pay sales tax for 20 years. The company also won’t have to pay real property, personal property and modified business taxes for 10 years.

The size of the deal and the scope of the tax breaks makes this feel more like South Korean crony capitalism — the government in Seoul is a de facto partner of conglomerates like Samsung and Hyundai — then American capitalism.

But as Dan Morain points out in his Sac Bee column, this is increasingly common:

Nevada is simply following a trend. The Washington, D.C.-based nonprofit organization, Good Jobs First, tracks such giveaways. Tennessee gave Volkswagen $554 million in incentives. Mississippi gave a $1.3 billion package to Nissan in 2000. Oregon gave $2 billion in incentives to Intel.

“Unfortunately, it is common to see subsidies of this size,” Leigh McIlvaine, a research analyst for Good Jobs First. “There seems to be a perception on behalf of companies that they should be paid by the public sector to finance that growth. It is looking like an entitlement.”

California lawmakers are not shy about opening the treasury to help companies. They approved $420 million in tax breaks this summer for Northrop Grumman and Lockheed Martin, on condition that they build new bombers in California.

Milton Friedman: Big biz a foe of free market

I get the argument that Tesla is a unique company, and that Northrop and Lockheed are fairly unique as well, so the argument that these government gifts are hugely unfair to their rivals isn’t as apt as it when it’s made about tax breaks given to specific companies in more competitive industries. But at some point, I share Milton Friedman’s concerns, as noted by the Heartland Institute in 2012, about government and industry acting in synch.

Friedman exemplified the generous spirit behind the desire for free markets: they benefit the less-wealthy by leveling the playing field, allowing people to succeed on their merits instead of through political power bought with big money. Friedman had nothing but contempt for crony capitalism and the use of government to suppress market competition, although he was too polite and good-natured to express that feeling in any way but through sound economic arguments.

Friedman himself put this sentiment another way in a 1977 article for Reason magazine:

The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.

Maybe it’s pointless to worry about this six years after the federal takeover of the banking system, General Motors and Chrysler during the financial crisis, but there’s something really ominous about big government partnering with and/or propping up certain favored big businesses.

The initiatives they work on then become, in the lexicon of 2008, “too big to fail.” It’s not hard to imagine Nevada moving from tax breaks to direct subsidies if the Tesla “gigafactory” struggles to live up to its billing and needs help to survive — taxpayer help.

That is, much, much more taxpayer help.