Neel Kashkari was an assistant secretary in George W. Bush's Treasury Department who wound up running TARP (a.k.a. the bank bailout) and then launching a comically inept Republican campaign for governor of California. More recently, he became president of the Federal Reserve Bank of Minneapolis; he just gave his first major speech in that capacity, and it's a real shot across the bow.

He says the current approach to regulating the biggest banks in America is conceptually flawed, and that while policymakers should finish dotting the i's and crossing the t's on Dodd-Frank, they also need to start considering "transformational measures" that would create "fundamental change."

This is a particularly surprising view from a guy who ran for office as a Republican just two years ago and who's described himself repeatedly as a "free market" and "pro-growth" Republican. National Republicans have, of course, been critical of the Obama administration's approach to bank regulation but generally by arguing that the White House has put too much red tape in the way of industry. Kashkari, by contrast, says that what President Obama has done has been helpful but doesn't go nearly far enough. It's the kind of speech you could imagine Bernie Sanders or Elizabeth Warren giving, except in some respects he ends up embracing ideas that are more radical than theirs.

The whole speech is worth a read, but Kashkari's key idea is really contained in this paragraph. His point is that it's one thing to look at a financial institution and ask yourself what would happen if it went bankrupt due to a random act of massive incompetence, and another thing entirely to ask what would happen if banks were going bankrupt as part of a larger meltdown of the American economy:

I learned in the crisis that determining which firms are systemically important—which are [Too Big To Fail]—depends on economic and financial conditions. In a strong, stable economy, the failure of a given bank might not be systemic. The economy and financial firms and markets might be able to withstand a shock from such a failure without much harm to other institutions or to families and businesses. But in a weak economy with skittish markets, policymakers will be very worried about such a bank failure. After all, that failure might trigger contagion to other banks and cause a widespread downturn. Thus, although the size of a financial institution, its connections to other institutions and its importance to the plumbing of the financial system are all relevant in determining whether it is TBTF, there is no simple formula that defines what is systemic. I wish there were. It requires judgment from policymakers to assess conditions at the time.

Kashkari says he's reasonably confident that the regulatory tools put in place after the crisis can do a good job of dealing with systemically significance financial institutions in a non-crisis situation. The problem, he says, is that in a crisis, that calculation would become a lot less certain and policymakers would become a lot more risk-averse. The exact problem that faced the Bush administration in 2007 and 2008 would recur:

Given the massive externalities on Main Street of large bank failures in terms of lost jobs, lost income and lost wealth, no rational policymaker would risk restructuring large firms and forcing losses on creditors and counterparties using the new tools in a risky environment, let alone in a crisis environment like we experienced in 2008. They will be forced to bail out failing institutions—as we were. We were even forced to support large bank mergers, which helped stabilize the immediate crisis, but that we knew would make TBTF worse in the long term. The risks to the U.S. economy and the American people were simply too great not to do whatever we could to prevent a financial collapse.

So what does he think should be done about it?

Kashkari says we should "give serious consideration to a range of options" and that bank breakups ought to be on the menu. His other two ideas are less politically sexy but, if anything, more radical.

One is that large banks should be regulated like 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)." The other is "taxing leverage throughout the financial system to reduce systemic risks wherever they lie."

Both these proposals are, essentially, extreme curbs on banks' ability to finance their operations with borrowed money, which would make them a lot less profitable. Breaking up banks is something that would be really bad for the executives of the existing big banks and probably a little bad for their shareholders, but would still leave the banking industry as a whole in a prosperous condition. Curbing risk across the board would be more severe.