Homeroom with Sal & Neel Kashkari - Tuesday, February 2

Hi everyone, Sal Khan here from Khan Academy. Welcome to the homeroom live stream! We've had a little bit of a hiatus, so it's good to see all of y'all again. We have a really exciting guest today, Neil Kashkari, who is the president of the Federal Reserve Bank of Minneapolis.

So, we're going to be able to talk a lot about the economy and the Federal Reserve and everything that's going on. But before we jump into that, I will give a couple of my standard reminders. First of all, a reminder that Khan Academy is a not-for-profit, and we can only exist through donations from folks like yourself if you're in a position to do so. So please think about going to khanacademy.org/donate, and donations of all sizes make a huge, huge difference.

I also want to give a special shout-out to several organizations that have stepped up, especially during COVID, when they realized that Khan Academy was being even more leaned on and we were running at a deficit. We're continuing to run a deficit into 2021, but special thanks to Bank of America, AT&T, Google.org, Novartis, Fastly, and General Motors for stepping up in a big way to ensure that we could continue to serve tens of millions of learners around the world through the crisis and beyond.

And then the last reminder is that you can get a version of this live stream in podcast format wherever you get your podcasts at Homeroom without the podcast.

So with that, I'm really excited to introduce Neil Kashkari. Neil, thanks for joining!

Neil Kashkari: Thanks for having me, Sal! It's great to be with you.

Sal Khan: So I’ve been dying to have this conversation since you first came on my radar, obviously. You were very involved during the 2010 financial crisis, and then you've had a really fascinating career where now you're the president of the Federal Reserve Bank of Minneapolis. So let's start in the present. Maybe a good place to start is what, you know, people — I think people have a general idea that there's something called the Federal Reserve. It affects things like monetary policy and interest rates, and then you have these regional banks, of which you're a president of one of them. How does all of this work? What is the overall charter of the Federal Reserve, and what is kind of the role of the regional banks?

Neil Kashkari: Well, thanks for starting, Sal. So in 1913, Congress created the Federal Reserve System, which is the nation’s central bank. Very simply, our job is to move interest rates up and down to try to manage the ups and downs of the U.S. economy. But Congress did something unique in 1913. They said they don't want the central bank simply housed in Washington, D.C., in the capital. They wanted it distributed around the country.

So they created 12 independent Federal Reserve banks, the ninth of which is the Minneapolis Fed. Our job is to cover this region — Minnesota, North and South Dakota, Montana, part of Michigan, and part of Wisconsin. And the 12th Federal Reserve Bank is the Federal Reserve Bank of San Francisco, which covers a huge area that wasn't very populated in 1913, but today it's really populated. The whole western third of the United States is effectively covered by the San Francisco Fed.

So our jobs are — we do a bunch of things. We regulate banks, we provide cash. So if you go to the ATM and you need to take out $100, that cash would have started out in a Federal Reserve bank. But we also understand what's happening in the economy and participate in the process where we set interest rates for the nation to try to achieve this economy that is growing, not overheating, but also not limping along.

And for anyone who's curious, we have actually many Khan Academy videos on exactly the mechanism by how the Federal Reserve can insert money and affect interest rates. It's a little bit complex but definitely understandable, so I encourage people to check that out if you're really curious about that.

And you know, Neil, what is, you know, on a day-to-day basis, what are kind of the types of questions that you think about and are kind of within your charter or you're thinking about right now?

Neil Kashkari: Well, right now, I mean — and this is — we have two fundamental goals that Congress has given us to achieve that stable economy. One is low inflation, which we define as 2 percent inflation, and one is maximum employment — as many Americans as possible are working and participating in our economy. We normally think these two goals are intertwined and we're trading them off against each other.

So if the economy is really strong and businesses have to compete to find workers, the unemployment rate will go down, wages will go up, and that'll lead to inflation. Then we'll have to raise interest rates to level that off. Well, so that's where a lot of our time is focused; are we at maximum employment? What's happening in the economy? Is there spare capacity? Now with the pandemic, you know, before the pandemic hit, the unemployment rate in America was quite low, at around 3.5 percent. But then the pandemic hit, and millions of Americans lost their jobs.

So the past year, my job has been different. For the past year, I've spent a lot of time talking to the best health experts in the country to understand where the virus is likely going, how long is this crisis going to endure, and then what does that mean for our economic recovery so we can achieve maximum employment and put Americans back to work?

Sal Khan: What do you think are the levers at the Federal Reserve's disposal? You know, there's this notion of lowering interest rates as much as possible, and some of the mechanics of that are essentially you're able to increase the aggregate Federal Reserve balance sheet, insert more cash, and so interest rates can come down.

But it seems like, you know, right now we’re already getting close to the floor. Are there other levers that the Federal Reserve can do, or is it really more dependent on the federal government to do more fiscal stimulus at this point?

Neil Kashkari: Yeah, great question. So we are doing a lot. We're using our tools. I wouldn't say that they're fully maxed out, but we're using them aggressively. By lowering interest rates, we make it cheaper for a family to get a mortgage to buy a house or for a business to get a loan to go build a factory. That's how we stimulate the economy. So our foot is on the floor right now, really trying to give a lot of stimulus to get the economy moving again.

And you're right, the key really is for fiscal policymakers, for Congress, to continue to step up to support the millions of Americans who've lost their jobs and there are thousands and thousands of small businesses. Many have already shuttered, but many are teetering because their businesses have been impacted by this. And so the COVID crisis is an example where monetary policy and fiscal policy can complement each other to support the American people until we get the pandemic behind us.

Sal Khan: One question related to that that I’ve been having at dinner parties, and I don't know the right answer to it — I don't think there's a clear answer, you know, all of the monetary policy and the monetary stimulus that’s been going in. It makes all the sense in the world to me for all the reasons you just said. You know, a lot of especially in service sector, retail jobs, travel, airlines, they are suffering. If you can lower interest rates, it can stimulate some demand; people can continue to invest in certain areas. The cost of buying certain things will go down, etc., etc.

But it does seem like there's this divergence. You know, people talk about the K-shaped economic recovery, where to some degree those who do have access to capital, you know, even people who own houses, when interest rates go down, they can refinance, they benefit; they, you know, the buyers have more purchasing power, so the house price goes up — they benefit. Arguably, you know, companies might benefit. And once again that might have follow-on benefits for many, many other folks.

But, you know, if you use the stock market — I know the stock market shouldn't necessarily be the high fidelity indicator — but if you use that, if you use other indicators, it does look like this separation has happened where those who have some assets, who have access to kind of resources, are doing better. And the monetary policy isn't able to necessarily reach as much those who don’t have as many resources.

Neil Kashkari: I think that's very fair. I think the K-shape recovery is real. You know, the tech sector is booming. Companies like in Minnesota — General Mills, is one of our big companies — they grew up to provide the food that's on the shelves in our grocery stores because we've all stopped going to restaurants, and I go to the grocery store a lot more often. Companies like General Mills are doing really well in this pandemic, but then you have the restaurants, and you have the airlines, and you have the hotels.

So I think the K-shape recovery is real. And let's be clear, low interest rates are not going to do anything to help a restaurant that is closed because of the pandemic, right? If they can't have customers come in because it's not safe, there's simply nothing that interest rates are going to do to help them. And that's why we're doing whatever we can to give the best analysis we have, encourage our friends in Congress or in the Executive Branch to provide fiscal support to people who've been laid off and to those small businesses, where monetary policy is not going to be very helpful.

Monetary policy is a blunt instrument that affects the whole economy at the same time. There’s no way for us to target it to one sector or another sector.

Sal Khan: And what's your view there? I know, you know, the Federal Reserve is intentionally separate from the government, and it's intended to be a kind of a non-political entity. But right now, in Washington, you do have a debate where it looks like the Biden administration wants to be more aggressive on the stimulus, while the Republican members of Congress want to be a little bit more conservative. They also want to do it, but we're talking about, you know, I think, you know, $600 billion versus, you know, well over a trillion or two.

Does the Federal Reserve have a point of view on that, or are you allowed to have a public point of view on that?

Neil Kashkari: You know, I get asked about that from elected representatives in my district all the time, and I always give them the best advice I can. I think those kinds of negotiations generally between, well, should it be $1 trillion or $600 billion or $1.4 trillion, I think we try to stay out of that because that really is about the political process making those decisions.

I’ve been very vocal, and I'll continue to be vocal, saying, you know, the job market today in America is as bad as the worst job market during the financial crisis. The headline unemployment rate is 6.5% to 6.7%. The real unemployment rate is around 10 percent. There are a lot of people giving up looking for work. So my basic message is we are nowhere close to having rebuilt our economy and putting people back to work.

So whatever Congress and the administration choose to do, I would encourage them to focus on those millions of Americans that are still suffering today, still out of work; they need more assistance until we can get this pandemic behind us.

Sal Khan: And what you just highlighted I think is a really important point, because a lot of folks don't realize that the details of how things like unemployment, how they're calculated, really tell you a lot about things. Because there's a world where people could get laid off, and as long as they're continuing to look for work, they're included in the labor pool, and so they're counted in the unemployment.

But then if they just give up at some point and say, "Yeah, you know what? I'm just not going to find a job; I'm just going to live with my parents," or something else, then they're not even counted in the unemployment. So actually you could have this dynamic. But to your point, I guess, you know, the more stimulus we can do, the better.

How concerned—if we do very aggressive stimulus—because, you know, we talked about earlier, and this is kind of your classical point of view, if the federal government runs huge deficits in order to provide stimulus, all while interest rates are quite low, that might create a lot of demand for a limited pool of resources or capacity or productivity, which could lead to a lot of inflation, which is obviously related to one of your charter.

How worried are you all about that right now?

Neil Kashkari: I'll speak for myself. I'm not worried about it. Inflation has been running low for 10 years before the pandemic, and now it's running even lower. If we had a little bit more inflation, I think we would consider that to be a success in us achieving our goal of 2% inflation. Here in Europe, something really curious happened in this pandemic.

Those of us who kept our jobs — like you, like me, like many of your viewers here today — generally speaking, we're saving more money because we're not going out to restaurants. Instead, we're going to the grocery store; we're not taking vacations and trips; we're staying at home. So the savings rate has gone way up because people who kept their jobs are doing fine; their incomes haven't been cut, and they're saving more money.

So the way the macro economy works, if you keep that money in the bank, it ends up flowing back into the financial markets, and that money is actually available to finance these increased government deficits. So I do think at some point, you know, we have to get our fiscal house in order. We have to make tough choices as a country. But right now, this is like we're at war, and this is, in my view, wartime spending to defeat the virus, that enemy and to support our fellow Americans until we can get through it.

Sal Khan: And I want to encourage everyone watching on YouTube or Facebook, please send your questions. We're already getting a lot of great questions, and I'll start with one from Smart Bear on YouTube, asking, "How do you think the economy will change in the near future due to the COVID-19 variants?" And I'll extend that, you know, do you think there's going to be—let's hope a year from now—we're back to some normalcy. Do you think there's going to be structural changes to the economy because of what we're going through with COVID?

Neil Kashkari: I think there are, and I think that they are hard to identify right now. I mean, one example is we've all figured out — you figured this out, Sal, a long time ago, but we all, the rest of us, figured out that you can actually work remotely very effectively in many industries and in many cases, not all, but in many. So I would expect that the use of technology like this is going to be permanently higher than it was before the pandemic.

I don't know; we have 1,100 employees at our bank — all but 50 or 70 of them are working remotely, working from home. I expect the vast majority to come into the bank, but might our structures look a little bit different to take advantage of this technology and provide more flexibility? It's certainly possible. Might we travel a little less for conferences and do more of them virtually or in a hybrid format? Certainly. So I think that likely there will be many changes that are permanent, that are positive, that are hard to identify exactly right now.

Sal Khan: I actually even heard — I agree with a lot of that and I'm fascinated. You know, even at Khan Academy, we're thinking about what's our right use of office space, how much travel do we need to do, etc., etc. But, you know, I was entertained when I read, this was several months ago, that retailers are seeing a lot of sales of tops — of formal tops and casual bottoms. So finally the rest of the world is starting to dress like I am! I don't know if you're wearing jogging pants below the waist, but I am right now, so you can't see it! [Laughter]

Neil Kashkari: Very, very! I won’t make you validate that! [Laughter] But yes, that might be another structural change.

You know, there's a question here from YouTube, a Chalk Day, and I'll ask the question and extend it a little bit. You know, should the education system teach banking at school? And I'll accept it—should there be more of an emphasis on finance, personal finance, accounting? You know, a lot of people, if you go back to the financial crisis back in 2009–2010, people describe it to just a lack of financial literacy, people getting over their heads. Where is there — you know, obviously at Khan Academy, we’ll try to do what we can — but I'm curious your point of view on a Chalk Day's question?

Neil Kashkari: Absolutely! I think a bigger investment in financial literacy and just making — you know, regardless of what your profession is going to be, you're going to have to manage your own personal finances and find a way to make ends meet and figure out, "Can I afford this house? Can I afford this car? Or even this cell phone plan that I might be interested in?" The basics of financial literacy I think are really important.

And just leaving it to people — what do we do right now? For the vast majority of people, we just say, "Well, you'll kind of figure it out as you go." But then when you make mistakes and you damage your credit, it can be very hard to recover from that, and then your interest rates are higher, and then it makes it more likely that you're going to run into financial problems. So I think we'd all be better off if people had the basic skills they needed at the front end so they don't have to learn by making mistakes.

Sal Khan: I completely, completely agree. And you know, we're happy to — we should figure out how we can work together to make that a reality. You know, another great question from YouTube, Christina Espinoza, "What advice do you have for teenagers who saw the GameStop event and want to take advantage of stock/investing? What do children need to know?"

So I have an opinion there as well. I know you are a former investment banker; I used to work as an analyst at a hedge fund, so I definitely have a point of view. But yeah, what would you tell Christina about — well, I'm just curious, what's your point of view on the whole event? Do you think this is just going to pass us by, or do you think this will lead to some form of structural change in some way? And then what advice would you have for teenagers who are looking to get into finance or invest?

Neil Kashkari: Well, I think what you're seeing in the markets with these individual stocks, like GameStop, I would just call it gambling. It's one group of speculators that's battling another group of speculators in a test of wills. My basic view on that is that's their right; God bless them, let them do what they want. And if they make money, terrific; if they lose money, that's their fault, and that's on them, and nobody needs to take care of them for that.

So they need to go into it eyes wide open. But to the teenager asking the question, that's gambling! It is rolling the dice. And when you go to Vegas — and I used to go to Vegas when I was a lot younger — you go to Vegas with some money in your pocket; you’ve got to be prepared to walk away and lose it all! Because that’s very possibly what could happen.

If you're serious about getting into investing, you should study it. You should take some classes. Go to community college, take some finance classes, some banking classes, and you can learn about how financial markets work, so that you're not just blindly — so that you're not just blindly gambling. What we're seeing right now is just gambling in the markets. And it might work out for some, but it’s not going to work out for most people.

Sal Khan: Yep. And I just want to add, I 100% agree with everything you just said. You know, as someone who used to work in the investment world, I can tell you that when it comes to individual stock picking, there's many very smart people who are doing a lot of research, and still it is a very hard job. And you know, I remember my old boss used to tell me, anytime you think you have a good investment idea when you’re buying a stock, someone else is selling that stock to you, so you've got to believe that you know something that they don't.

And you know, I do encourage anyone of any age—especially young people—to put some small amount of money into the stock market if you can. And you will learn this lesson that the market is a lot harder, and the other people on the side of the trade are probably more sophisticated than you might guess. So I completely echo that it is very speculative.

Now, there could be something about accumulating capital, having a diversified portfolio over time that could be something to look into. Or if you want to become a professional, as an investment manager, yeah, do your research and do your homework and learn to invest the right way, not just speculation.

But yeah, so for example, I don’t own any individual stocks; I own index funds. So I do have exposure to the stock market and the bond market, but I'm not sitting here saying I’d have to spend my whole day and night trying to do research to compete with the professionals who are literally spending all day and all night doing that research.

Neil Kashkari: I mean, I'll just add to that. I used to — my day job for seven years was an analyst at a hedge fund, where all we did is essentially pick stocks. And to, like you, my 401k, I have it in some diversified mutual funds, but I own no individual stocks right now either. All of our savings, I bought some rental properties; that's my—so I completely agree with you; it's a very hard game to pick individual stocks for things like that.

You know, one question that I like to ask guests, because, you know, we could talk about the economy all day and I have a ton of questions there, but also just want to understand your personal journey to how you got there, because I don't think, you know, I'm guessing when you were 15 years old you didn't say, "Oh, my career is going to be I’m going to be president of the Federal Reserve Bank of Minneapolis." So, and I know there are a lot of young people who are constantly like, "What should I do with my life? How do I have an impact?" What was your journey like? What did you think you were going to be when you were a teenager, and then how did that evolve? How did you end up where you are?

Neil Kashkari: Well, I started out my— I went to college, and I studied mechanical engineering at the University of Illinois. The reason I went to engineering school is because as a kid, I always loved math, science, and physics, and building things, so engineering seemed like an obvious place for me to go. I did my bachelor's and master's in engineering, then I went into aerospace and started developing technology for NASA.

I went there because, to me, working on NASA's space missions was as exciting and challenging as it could be. I learned a ton and I loved it, but I also realized, you know, my managers wanted me to get my PhD, in which case I’d really be committing to a career in research; I wasn't ready to do that.

So I decided to go back to business school to learn about business and finance. That led me to banking; then I went to the U.S. Treasury Department, and I’ve had a lot of twists and turns. The one common thread for me is I always pursue things I'm genuinely interested in that I think are important and that I think are challenging. And if I'm really challenged and I’m interested, I’ll end up doing my best and that’ll lead to hopefully lead me to be successful, and that's been true so far.

So there's been no plan; I've done a variety of different things. The longest job I've ever had is now here at the Minneapolis Fed for five years, and I'm excited; I just got reappointed, so I'll be staying around, which I'm excited about. But I guess my message is pursue things you're genuinely interested in, and life is long. Your first job does not have to be your last job.

Sal Khan: Sal, as you said, you were an analyst at a hedge fund for seven years; I bet along the way you never dreamed that you'd be running this, you know, world-renowned non-profit educating millions of people around the world.

Neil Kashkari: That's right. I had a lot of daydreams, some of which came true; some of my — yeah, I still have my whole singer-songwriter folk music career that has not gotten off the ground, so you know, it's all one platform — on to the next.

But yeah, I couldn't agree more with that narrative. You know, I am curious, and this might be a part of your distant memory now, but you definitely came first on my radar back in 2010 when it looked like the financial system was kind of seizing in some way. You were working for Secretary of Treasury Hank Paulson at the time to really think about how to unstick the economy, is the best way I could interpret it.

But I do have to say, you know, when it was happening, as much as I wanted the economy to get unstuck, I was also like, "Wow, there's a lot of actors who did a lot of things that were shady." You had the ratings agencies that were approving, you know, putting a high rating on, you know, sliced and diced securities that were questionable in value, and you had all these incentives.

And you know, I think most of us who, even though I now run a not-for-profit and you run a semi-quasi-independent government institution, I would say we both arguably believe in free markets, and you know, part of the best corrective force on free markets is kind of, you know, you deal with the consequences of your actions.

And so, you know, back in 2010 when a lot of these banks were kind of at the cusp of failing because they'd arguably had taken on more risk than they should have, you know, how did y'all think about that? You know, I used to say, "Yeah, I get you need to keep the banks kind of going so the economy doesn't seize," but what if you were to, you know, take the shares and, you know, kind of go through a controlled bankruptcy process and distribute them to the people of America so it stays private? What were the conversations back then around stuff like that?

Neil Kashkari: Yeah, we had those conversations, and it was terrifying. The fear that we had was that if the banking system collapsed — and you’d have that justice moment — you know, shareholders get wiped out, the banks would collapse. People said it’s like a forest fire: let the fire rage, and then the next season new saplings emerge.

What I always point out is that may be true, but then all the animals are dead! So what are the consequences to the American people who did not cause the banking crisis? If the U.S. banking system were allowed to collapse, you know, in the Great Depression, we had 25 percent unemployment! In the Great Recession, even though we did all of this massive intervention — Treasury, Congress, the Fed — we still had 10 percent unemployment. So it was still a devastating crisis.

And so I think I don’t think letting it all fail was a reasonable thing to do because the cost would have been borne by the American people, not just those on Wall Street. Having said that, you know, I've been a strong advocate since I joined the Minneapolis Fed that we need to do a lot more to make sure that can never happen again, and we need much stronger regulations on the biggest banks so that they don’t have risk of bringing down the U.S. economy again. And we have not done enough yet.

Sal Khan: No, I’ve actually come around to that. Back in 2009-2010, I had a much more principled view that, like, you know what, deal with the consequences or control the consequences and figure out something that, you know, on a principal level.

But I think you're right; you know, history has shown that what could have led us into the next Great Depression, those 10 years were actually a period of quite good economic growth that, you know, frankly, if COVID didn't happen, we would have still been on that curve that started back in 2010. So, and I so I've come around to the fact that I think y'all probably did save the economy in that timeframe, and the country owes y'all for that.

Neil Kashkari: Thank you, Sal.

Sal Khan: Because I can imagine what it's been through. You know, just in the remaining time that we have, I just kind of open it up to you. You know, any advice you have for folks on, you know, they're trying to form a view on the economy, on the world, or just on what to do with their life? We have people of all ages watching us right now. What advice would you have?

Neil Kashkari: Well, first thing, get vaccinated as soon as you're eligible. I know as soon as my turn comes—and I’m 47 years old; I’m not quite going to get a vaccine for a couple more months—but as soon as it's available, I'm going to get vaccinated. The best thing we can do to get our economy reopened is to vaccinate the vast majority of Americans, starting with those who are highest risk, but everybody else matters too because we could still get sick, and we could still spread the virus.

And so that's so important for the economic recovery. My mom has been vaccinated; my sister, my cousins — they're doctors; they've been vaccinated. You know, I’m waiting for my turn. So that’s number one. Number two — and I just applaud you for tuning in to this video call or this podcast — education is so important. It's been so important in my life and my success and in our economy.

Education is only becoming more important. It's important to continue to improve your skills, continue to get new skills. And so keep investing in yourself to get more skills and more education. Education is the key to unlocking opportunity in our country. It is the best tool we have to equalize our society, and we know it.

And the reason I’m so passionate about education is if people get a good education, it's the most powerful tool we have to break the cycle of poverty. And so, Sal, I really applaud what you and your colleagues at the Khan Academy are doing, and I would just encourage all of your viewers to be part of that process — invest in themselves, invest in their families, and the whole country will be better off for it.

Sal Khan: No, well, I couldn't agree more on both the vaccination and the education side of things. In my household, my wife is a physician, so she got vaccinated. My mother-in-law, who's at risk, needs her second dose, but I'm the missing link! [Laughter]

But I completely agree with that. And Neil, thank you so much for joining us. Our— you know, so many questions have been coming in; I apologize for not being able to get to a lot of them for everyone watching—but this was a real treat not only to understand the economy a little bit better, but also to understand your life journey.

And I think it gives everyone confidence that, you know, there's some really good people trying to do good for the world in our government and our financial system. So thank you so much!

Neil Kashkari: Thank you, Sal! This was a lot of fun; I appreciate it.

Sal Khan: Thank you, everyone, for joining. Hopefully, you enjoyed that conversation. And I do encourage you — there was a lot of questions that came in. There's one from Adrian Hamroccio talking about how to invest money and things like that.

We actually do have a lot of content on Khan Academy on both personal finance and on finance and capital markets generally. So if you're a young person or if you're the parent of a young person, watch that stuff together because frankly, a lot of adults, most adults, don't understand exactly how all of that works.

And so once you understand that, I’d also recommend, you know, you can get stock simulators— a lot of people are asking how to learn about stock investing and things like that. You can play with fake money initially and see how you can perform. But if you have some money saved up — $500, $1,000 — that could be a really good education to kind of see, to start learning about investing and putting it to work and seeing what works and what doesn't work, I think is a good way to start learning about money.

But anyway, I’ll stop there. This is going to be our only live stream for this week. We're going to get a little bit more regular over the weeks to come. I know we've had a few hiatuses—I don’t know, is that the plural of hiatus? Hiatai? [Laughter] But I will see y’all next week, so see y’all soon. Thanks for joining us!