A Few Observations of My Own

Below is a blog post recap by Yves Smith of Naked Capitalism of a meeting that took place yesterday between a group of bloggers (including yours truly) and various Treasury officials, entitled "Curious Meeting at Treasury Department":

The Treasury invited a small group of bloggers for a “discussion” with senior officials on Monday. Initially, the meeting was to be background, which is a sort of journalistic “FYI but you can’t use it” but we were told at the meeting that we could discuss the meeting as long as remarks were not attributed to particular individuals.

None of us knew in advance how many attendees there would be; there were eight of us at a two-hour session, Interfluidity, Marginal Revolution, Kid Dynamite’s World, Across the Curve, Financial Armageddon, Accrued Interest, and Aleph (and of course, others may have been invited who had scheduling conflicts). There was a place card for Megan McArdle as well.

I was surprised that the powers that be would bother with financial bloggers, and I wondered at the decision rule behind the selection (besides wanting a mix, particularly from a political standpoint). This was also not an anonymous briefing of the sort that has come under criticism (but the anonymity request is still peculiar; is this a Team Obama fixation?) Given that the efforts have Administration has been made efforts to bring critics from the left into the fold, I was wary of attending (I’m not keen about the idea of being propagandized) and expected a higher control format (10-15 people, which would have limited the opportunity to interact).

It wasn’t obvious what the objective of the meeting was (aside the obvious idea that if they were nice to us we might reciprocate. Unfortunately, some of us are not housebroken). I will give them credit for having the session be almost entirely a Q&A, not much in the way of presentation. One official made some remarks about the state of financial institutions; later another said a few things about regulatory reform. The funniest moment was when, right after the spiel on regulatory reform, Steve Waldman said, “I’ve read your bill and I think it’s terrible.” They did offer to go over it with him. It will be interesting to see if that happens.

Four of us had a drink afterward and none of us felt that we learned anything (not that we expected to per se; if the ground rules are “not for attribution” in an official setting, we are certainly not going to be told anything new or juicy). But my feeling, and it seemed to be shared, was that we bloggers and the government officials kept talking past each other, in that one of us would ask a question, the reply would leave the questioner or someone in the audience unsatisfied, there might be a follow up question (either same person or someone interested), get another responsive-sounding but not really answer, and then another person would get the floor. The fact that the social convention of no individual hogging air time meant that no one could follow a particular line of inquiry very far.

My bottom line is that the people we met are very cognitively captured, assuming one can take their remarks at face value. Although they kept stressing all the things that had changed or they were planning to change, the polite pushback from pretty all the attendees was that what Treasury thought of as major progress was insufficient. It was instructive to observe that Tyler Cowen, who is on the other side of the ideological page from yours truly, had pretty much the same concerns as your humble blogger does.

It was also striking to see that the Treasury officials lacked a vision for a banking system for the 21st century that was materially different that the one we have now. The flip side is if they did, articulating that publicly might get them accused of doing Communist central planning, but I didn’t hear second level arguments that said they had considered the issue in a serious way, save not winding the clock back to much more on balance sheet intermediation, aka traditional banking, as opposed to “market based credit”. Nevertheless, at a McKinsey alumni meeting months ago, a partner who has been advising the Treasury and Fed told the group that the Administration wants to make being systemically important very costly to force firms to do what is necessary to get out of that category. That of course is structural reform, but we got no acknowledgment of that as an aim. And aside from raising capital requirements more for big firms than smaller ones, it is not clear how far Treasury could go down that path on its own (and strictly regulatory measures can be rolled back by a new Adminisitration).

Several of us raised questions about whether what their vision for the industry’s structure was and that the objective seemed to be to restore the financial system that got us in trouble in the first place. The answers instead focused on more stringent regulations, higher capital levels, and of course the derivatives regulation bill. I tried twice to engage them on how the bill has so many loopholes that it is not going to make any difference as far as the real problem is concerned (the out for customized derivatives, in the Administration proposal, gave the industry an easy and obvious way to evade the rules; the House pretty much gutted what was left) but I was not specific enough in saying what “loophole” constituted and was basically deflected (and was also told the derivatives on balance sheet would be subject to tougher capital requirements, and the industry was complaining that the bill would make things more costly for them. Ahem, it has become standard practice of all the powerful lobbies to make a great deal of noise about any change on principle, so the level of complaining is not a valid indicator of the efficacy of reform).

I also asked about the size of the financial services industry (as in one of the distortions that resulted from deregulation and rates being too low was that the financial sector had grown too large, which by implication means it needed to shrink. I was told it had shrunk and that the Fed was winding down its programs. Yes, but the expectation is that as the Fed winds down, the private markets will step into be breach, which means more credit private credit extension. There was no acknowledgment of the issue raised by Joseph Stiglitz, that if credit intermediaries are making too much money, the banking system tail is wagging the economic dog.

They also defended the stress tests as being serious, and again did not seem to win converts.

One area that we didn’t get into was the special resolution regime, which is receiving considerable pushback from Congress. Treasury has asked for open-ended authority to resolve large financial institutions, which is pretty much a blank check. That’s a breathtaking power grab by the Executive and should not be acceptable in a democracy. It wasn’t surprising that post the TARP that Congress would be completely unwilling to go there. Any decision to wind up a large bank is going to require Congressional authorization; the amounts at stake are too large for this not to be a political decision. The Resolution Trust Corporation working capital needs ($50 billion, if I recall correctly) were authorized by Congress, and Congress also became impatient and called for it to be wrapped up sooner than Treasury wanted (some studies have argued that the faster sales that resulted gave the taxpayer a lower return than the RTC would have gotten otherwise). And even if you could solve the political impasse (remember, Bear failed in ten days; think Congress could agree to a big backstop in that short a period of time?) I am not certain this change will be salutary in the absence of trading counterparties knowing exactly what would happen to them while an organization was being wound down. One of the things that makes securities firms decay quickly is that no one wants to have their accounts frozen, as happens now in a bankruptcy. You need considerable detail on mechanics, and it does not appear to have been disclosed yet (my buddies at the Roosevelt Institute conference on Monday said Rodgin Cohen, who was presenting and advocating the Administration plans, was also scarce on details).

But the other fact is that these guys are very smooth, very smart, and seemed quite sincere, which made it difficult to discern how much they really did believe and how much of what they said they had to say because they need to defend official policy and maintain confidence. Let’s face it, they get prodded and roughed up by big dogs with some frequency. There was nothing we asked that would be new. They’ve covered this ground with other people of more consequence and therefore have answers ready. We are a pretty unimportant audience (yes, they did bother making time for us, but let us not kid ourselves on how far down the food chain bloggers are) and we cannot argue from a position of advantaged information, so it was inevitable that we would not get beyond standard responses.

Overall, Yves did a good job summing up what transpired at the gathering. That said, I thought I'd throw in a few thoughts of my own:

• In response to the question about what would happen if, as Reinhart and Rogoff had concluded about past financial crises, the current episode also proves to be a "protracted affair," it wasn't clear that there was a "plan B" in place if things do not recover in 2010 as many mainstream analysts expect. In fact, the suggestion from one official was that the tenure of the current crisis would likely be nearer the shorter end of expectations.
  
• There was also a bit of a disconnect between the remarks various Treasury officials have made in public forums and what was said at the meeting. Last Thursday, for example, Bloomberg reported that Treasury Secretary Geithner spoke to the Economic Club of Chicago and said:

“You can say now with confidence that the financial system is stable, the economy is stabilized....You can see the first signs of growth here and around the world.”

Yesterday, however, a number of those present clearly acknowledged that things could (still) go wrong and said such fears kept them awake at night. While that is not unusual in and of itself, at the very least it adds to doubts I and others have expressed about the true state of the financial system and the economy.

• Finally, the meeting seemed to confirm the strong grip that Wall Street has on the levers of legislative power. In response to a throwaway remark by one of the bloggers present that discussions about the overly large size of the financial sector relative to the real economy were "not politically correct," one official suggested the reality was just the opposite, and that a substantial majority of the public agreed with that assessment.
  
  If you take that together with the assertion that the Treasury Department -- and, by extension, the Obama administration -- is fully committed to financial sector reform, as well as the fact that the Democrats dominate Congress, the implication is that other forces -- namely, the moneyed interests and their lobbyists -- are standing in the way of necessary change. Nothing new there, I guess.

Comments

[ndk]

... the current episode also proves to be a "protracted affair," it wasn't clear that there was a "plan B" in place if things do not recover in 2010 as many mainstream analysts expect.

I don't think there's much scope for any good plan B's, to be honest. It's a sufficiently fluid environment that they're flying by the seat of their pants. That is defensible. Their course of action, however, certainly is not.

As loans continue to sour at rapid rates and China continues to overinvest, we're certainly going to run into more insolvency problems and bigger deflationary pressures. Calculated Risk mentioned this last night. Loan quality is abysmal and getting worse. I happen to believe the risk-adjusted rate of return on lending economy-wide(similar to the equilibrium real interest rate) is negative, and has been getting lower and lower for a long time. Even if it's not, there's a metric crapton of bad debt out there, and more by the day.

It may not be 2010, but at some point in the nearish future, there are going to be extreme bad loan problems in America and China. My guess is they will continue to stuff all the bad debt they can onto the Fed balance sheet and hope for the best. The political willpower and popular tolerance for any more bailouts is gone, so they can't do it in any visible sense. This is it.

It's not going to work, and our little flirtations with Keynesian fiscal policy has cemented my views about multipliers being, like, really low if positive. The demand boosts have not at all come from organic income, but instead from targeted programs loaded with incentives to trigger consumption. Funny thing is, that'll probably be difficult to disentangle in future data and studies.

Anyway, thanks for going, and please give your brain a thorough scrubbing with ammonia. We need it clean.

[Cate Long]

It's an interesting opportunity that you had to query our public officials on financial reform and the state of the economy.

Your might want to check out Riski, the open source platform for financial markets reform. It's mainly for Hill staff and the media but it might be useful to you.

http://riski.us

Kind regards, Cate Long

[I'm Not POTUS]

It sounds to me like Treasury was doing some preemptive practice. I guess they were worried the softballs thrown by the MSM would leave them at a disadvantage later on when they have to start answering real questions.

You should have asked them how they as individuals were preparing for the day when they get laid off. I would have loved to here how that string of answers evolved.

[ndk]

Cate, could you please stop spraying that spam everywhere? I know the Obama administration is all social and new media and Wikitastic, but this is getting even more offensive and egregious. Stop trying to control the platforms of discussion and debate. You are not the world.

[ndk]

Never mind. Cate appears to be just a vanilla spammer, and riski.us is registered just a few months ago.

ndk:~ ndk$ whois riski.us
...
Technical Contact ID: CR18029445
Technical Contact Name: Suresh Segaran
Technical Contact Organization: Freerisk
Technical Contact Address1: 85 Natoma St.
Technical Contact City: San Francisco
Technical Contact State/Province: California
Technical Contact Postal Code: 94105
Technical Contact Country: United States
Technical Contact Country Code: US
Technical Contact Phone Number: +1.6175014665
Technical Contact Email: tsegaran@gmail.com
Technical Application Purpose: P2
Technical Nexus Category: C21
Name Server: NS31.DOMAINCONTROL.COM
Name Server: NS32.DOMAINCONTROL.COM
Created by Registrar: GODADDY.COM, INC.
Last Updated by Registrar: GODADDY.COM, INC.
Domain Registration Date: Wed Aug 12 23:03:38 GMT 2009
Domain Expiration Date: Wed Aug 11 23:59:59 GMT 2010
Domain Last Updated Date: Wed Oct 07 19:19:52 GMT 2009

[JS]

I am not surprised by the fact that they do not have enough power to stop and clean this mess.
I dont know how high their ranks in the treasury are but as you said there is a political risk, and money risk.
The system is totally wrong/corrupt and trying to repair will not work, system wil fix itself naturally, another depresssion is inevitable.
If their fears kept them awake at night , thats scary for me because it means the armageddon may come sooner than we may expect.

[Lito Key]

We are several thousand indictments short of a starting point for reform.

Geithner himself is a responsible party for much of this, going back to his tenure as a team player in the NY Fed desk.

These cohorts have stolen 1/6th of the value of substinence level food costs for the next generation of children in the USA... they stole the future of Americans.... and the cadres are talking about illusory sitrep benchmarks in the financial economy, markets that won't exist as the real economy is permanently impaired from foreign competition.

And you are now sitting here giving them lip service as they are using you as agitprop.

[Martin, the Netherlands]

Well, it's nice to read that the U.S. Treasury has taken the trouble to ask a number of much-read bloggers for tea, even though it is unlikely that senior officials will have read those blogs. I wouldn't be rsurprised if the real purpose was not to let you obtain information from them , but to let them see what you were like. I trust that the blogging community will be suitably flattered, but keep up the good work.

[roger]

There are 2 things that stand in the way of
real and meaningful reform of the economy,
1: the moneyed interests and their lobbyists,
2: a flabbergasting ignorance of the nature of money,
what it can and cannot do.Some fools believe that it is
just another commodity like all the others,others I should
say most, ignore its enormous impact on human behavior and
its power to change social relations in the most negative way.
Money should be classified as a very potent drug no a medium
of exchange.

[buzzsaw99]

Why even bother with those maggots? they are going to do what they are going to do, let them fail.

[buzzsaw99]

[link]

[weinerdog43]

Wow. Is this depressing or what? Not terribly surprising, but one would think that the Administration would at least make some effort not to be so completely patronizing.

[Michio]

Dear FA,

I happened to be stumbled into this site, when I found a curious thread of bloggers-going-to-Treasury. I am an ordinary person with no sophisticated economic view but your observation near the end caught my attention:

"Finally, the meeting seemed to confirm the strong grip that Wall Street has on the levers of legislative power. In response to a throwaway remark by one of the bloggers present that discussions about the overly large size of the financial sector relative to the real economy were "not politically correct," one official suggested the reality was just the opposite, and that a substantial majority of the public agreed with that assessment."

There seems to be differences in perceptions of “real economy" and "financial sector contribution to the real economy" between, say, representative bloggers residing among "people" like me and the Treasury Dept. economists, quintessential insiders among the insider. After reading your reports and some others, there must be some hard data, which support the insiders' perceptions of financial sector’s enlarged contribution to real economy.

I am inclined to believe that the official’s may be correct and that yours and my perception (till now) of “Wall Street’s deep grip” is mere reflection of that fact. Of course, we have perceived correctly. That’s why there has been major economic problem in the US. Once problems are located, goal setting is not too difficult, e.g. the expansion of “our real economy.” Treasury Dept. is to supports Administration via finding ways to severely curve the power of financial sector groups.

This “financial sector’s unhealthy expansion” needs to be clearly communicated to the public. Then they will understand it and support Obama Administration. I hope that the officials grasped differences in perceptions, among many other things, via the discussion with the knowledgeable bloggers. I would personally recommend to Administration the use of a pie chart to graphically communicate to people.