On Monday, I was among a group of eight bloggers who attended a discussion with "senior Treasury officials" in Washington. Several nice accounts of that meeting have already been posted (see roundup below). Here's mine.

First, I'd like to thank the "senior Treasury officials" for taking the time to meet with us, and for being very gracious hosts. Whatever disagreements one might have, in statistical if not moral terms it was an extreme privilege to sit across a conference table and have a chance to speak with these people. And despite the limitations of the event, I'd rather there be more of this kind of thing than less. So a sincere tip o'the hat to all of our hosts. Thank you for having us.

The second thing I'd like to discuss is corruption. Not, I hasten to add, the corruption of senior Treasury officials, but my own. As a slime mold with a cable modem, it was very flattering to be invited to a meeting at the US Treasury. A tour guide came through with two visitors before the meeting began, and chattily announced that the table I was sitting at had belonged to FDR. It very clearly was not the purpose of the meeting for policymakers to pick our brains. The e-mail invitation we received came from the Treasury's department of Public Affairs. Treasury's goal in meeting with us was to inform the public discussion of their past and continuing policies. (Note that I use the word "inform" in the sense outlined in a previous post. It is not about true or false, but about shaping behavior.)

Nevertheless, vanity outshines reason, and I could not help but hope that someone in the bowels of power had read my effluent and decided I should be part of the brain trust. The mere invitation made me more favorably disposed to policymakers. Further, sitting across a table transforms a television talking head into a human being, and cordial conversation with a human being creates a relationship. Most corrupt acts don't take the form of clearly immoral choices. People fight those. Corruption thrives where there is a tension between institutional and interpersonal ethics. There is "the right thing" in abstract, but there are also very human impulses towards empathy, kindness, and reciprocity that result from relationships with flesh and blood people. That, aside from "cognitive capture", is why we should be wary of senior Treasury officials spending too much time with Jamie Dimon. It is also why bloggers might think twice about sharing a conference table with masters of the universe, public or private. Although the format of our meeting did not lend itself to forging deep relationships, I was flattered and grateful for the meeting and left with more sympathy for the people I spoke to than I came in with. In other words, I have been corrupted, a little.

I've been asked, so I'll mention that no one was flown in to attend the meeting. Many participants came from within driving distance of DC. The rest of us flew or took a train on our own dimes. We were offered a tray of cookies at the meeting, from which I abstained on principle. Those of you who think that's silly have no idea how much I like cookies.

The content of the meeting was not very exciting. Treasury officials clearly had some points they wanted to communicate. Okay, then. I offer myself as stenographer to power:

  • It worked! Officials pointed to a lot of good news in terms of visible cash flows associated with TARP and the various assistance programs. They claimed that since the Obama administration has taken office, more money has come back than has been put into the financial system (although what programs are included in that calculus I don't know). They pointed out that the blanket money market guarantee and TGLP (for new issues) had already or soon would come to an end, and that a bunch of the post-Bear programs offered by the Fed have wound down naturally, through disuse.

  • The stress tests were real. Treasury had no idea what they would show when they announced them, the tests were conducted diligently, the results were not subject to negotiation as widely reported, only errors of fact were corrected. The sole purpose of the tests was to offer a fair accounting of the state of the banks. Treasury did intend to reassure capital markets not by fudging the stress tests, but via the Capital Assistance Program under which Treasury stood by to invest to cover any capital deficiency if funds couldn't be raised privately. Once sunlight had poured in to reveal banks' actual condition, however, private capital was forthcoming, so government assistance was unnecessary, except for one particularly troubled institution (GMAC).

  • The stress tests were not overly optimistic along the most important dimensions. Yes, unemployment, housing prices, and GDP were worse than even the "more adverse" scenario. But bank revenue and capitalization levels have exceeded stress-test projections. One official pointed out that unemployment is a poor predictor of mortgage defaults. Overall, outcomes are evolving much better than they would have hoped.

  • The regulatory reform proposals Treasury is developing are for real, they are substantive, they will make a big difference and deserve our support.

  • Policymakers at Treasury are sincere and working hard in the public interest. They are not resting on their laurels, and worry more than any of the rest of us possibly could about what might go wrong. Despite the positive developments thus far, they still anticipate a difficult road ahead, but are working capably to manage whatever may yet come.

  • However bad our problems were, they were small compared to what European countries allowed to develop, on a relative-to-GDP basis.

Despite all the flattery and cookies, the senior Treasury officials did get quite a bit of pushback. I noted that a lot of the "on-balance-sheet" good news is a function of large contingent liabilities assumed by the government, the sort of "tail risk" that eventually did in the banks. Michael Panzner and Kid Dynamite pointed out that financial statement values are questionable, and threw out terms like "extend and pretend" and "ponzi scheme". David Merkel, a brilliant man with a very gentle demeanor, brought the conversation back to cash flows, reminding us that valuation is uncertain but cash flows never lie. Neither side of the argument had much to say to that, since no one knows how the cash flows on financial assets built up during the credit boom will actually evolve. Yves Smith pushed back very adamantly on officials' characterization of the stress tests, pointing out that Treasury didn't employ enough examiner man-hours for the tests to be credible, given past precedent with much smaller institutions holding much simpler positions. She also derided the proposed derivatives reform bill as containing loopholes wide enough to drive a truck through. Accrued Interest expressed skepticism about financial regulatory reform. He's a free-markets guy who dislikes and distrusts intrusive regulatory regimes. He wants to see an end to "too-big-to-fail" by creating a credible resolution regime that would let private risks be borne privately. Tyler Cowen asked about the stimulus funds given to states, whether it'd be difficult to wean them going forward, whether states would be in a position to game the Federal government. In person as in writing, Tyler is a master at synthesizing diverse strands. At a certain point, he took control of the meeting, and teased out what was common to our often conflicting comments — skepticism that unsustainable aspects of the financial system that preceded the crisis were actually being changed, a sense that problems were being papered over or accommodated rather than solved. John Jansen asked a series of incredibly ballsy questions about the Treasury's specific funding plans, in terms of maturity of future bond issues. (His questions were not answered, but they had me musing about whether Reg FD would apply to "senior Treasury officials".)

Aside from the bit about contingent liabilities, my main schtick was regulatory reform. Accrued Interest and I made for kind of an odd couple, in that we stood across a great ideological divide (he prefers a minimalist regime, while I want a very active one), but shared the same bottom line: It should always be possible for a financial institution to fail. A Treasury official pointed out that eliminating "too big to fail" doesn't solve the problem, since institutions can be systemically important because of their interconnections and roles along a wide variety of dimensions. I responded that "too-big-to-fail is too stupid a criterion", but pointed out that it would be possible to progressively tax several of the various markers of criticality so that it becomes uneconomic for an institution to remain indispensable. AI quipped that I was proposing Pigouvian taxes on being important. He didn't like the idea, mumbling something about central planning of market structure, but his coinage was very insightful. My mantra, which I tried to push ad nauseam, is that we should prefer structural rather than supervisory approaches to bank regulation.

I also asked about the role of the financial system in terms of allocating capital, whether it troubled officials that real resources were badly misallocated prior to the overt crisis, and how reform should address that issue. They answered that it did trouble them, but surprisingly (to me) emphasized that misallocations were often related to real estate, where a wide array of government policies led to distortions. I think that lets bankers off the hook way too easily. Financial institutions created, sold, and owned investments that performed terribly even with all the subsidies and guarantees offered by the government, so we have no reason to think they'd not have found some other outlet for malinvestment if real estate hadn't been convenient. In this context, the subject of global financial imbalances briefly came up. I mentioned that there is such a thing as capital controls. A Treasury official answered flatly that capital controls are outside the range of plausible policy options.

Anyway, it's unsurprising that a bunch of bloggers would mouth off over a wide range of issues, and the things we mouthed off about shouldn't be very surprising to people who read our blogs. The most interesting aspect of the meeting was anthropological, getting a look at how senior Treasury officials behaved, how they interacted with us and what kind of a thing this was to them. It was a two hour meeting, but different groups of officials came at us in shifts, and stayed with us for 20 to 40 minutes. The tone of the meeting was open, earnest, and informal. But somehow, it never felt like we connected, like there was a lot of actual communication occurring. There were eight bloggers, and although some of us spoke more than others, we were all aware that "air time" (as Yves put it) was scarce, and we limited followups to make sure there was time for others. The officials, on the other hand, didn't seem to perceive the time as precious. One spoke very deliberately, very slowly. Others were quick to pick up on and run with funny tangents, anything that could serve as a focal point for harmless banter. (The name of Michael Panzner's blog, "Financial Armageddon" played that role a lot, so perhaps "harmless" is not quite the word.) This is just my impression, and I may be mistaken, but I got the sense that they do this kind of thing frequently, these rolling meetings with some group of people whom it is important to treat as important, but whose conversation they don't necessarily value all that much — people who are there to be "brought into the tent". (It reminded me of when, a long time ago, I had to do technology demos for an endless stream of corporate backers.) I felt like, aside from the talking points above, their openness, earnestness, and sincerity were the core of what they were trying to convey. The trenchant verbiage back and forth was just something that had to be endured while sustaining the appropriate attitude. I don't blame them for this. In fact I may be projecting, describing how I myself would behave if I had an important policy job with this sort of "public affairs" meeting as a frequent interruption. Nevertheless it was my impression.

In that vein, I thought there were certain tricks, rhetorical techniques employed, that I enjoyed. In response to a several difficult questions, one official enthused that what the interlocutor had brought up was an important concern, something he really cared about, but then quickly went on to assert that, in his judgment, it was unlikely to be the pivotal or most challenging problem. I thought this a very effective trick to sweep an issue aside, a kind of jujitsu by which the official would render very sharp comments harmless by moving with rather than fighting against the questioner. After this move, the only possible disagreement is a judgment call about which of many problems is most pressing, and whose judgment would be better than that of a senior official immersed daily in the practicalities of policy? Twice Treasury officials commented on how uncommon a group we were, how we asked particularly pointed questions or were unusually bright. To borrow a cliché, I'll bet they say that to all the groups. One official made use of an expletive early in his discussion, which had the effect of making us feel like insiders, like this was not the sort of canned, guarded conversation one might see on CNN. The same official was quick to address us by first name when responding to questions. That wasn't hard, since our names were in front of us, written on placards in large letters. But it was still effective. Being addressed so familiarly makes you feel important, like you are someone powerful people deem worth their while to know. Obviously, the reality distortion field wears off when you leave, once you think it over. But these guys are pretty good at what they do.

There was one time, and only one time during the meeting, when I felt completely stonewalled. Ironically, it was not a Treasury official, but one of my fellow bloggers, who did the deed. Accrued Interest's trademark style is to weave Star Wars mythology into sharp disquisitions about the bond markets. Early in the meeting I asked AI what the appropriate Star Wars metaphor was for the event we were attending. He took a moment to think, then his face lit up with a smile. But all he said was that he thought it best he didn't say. I don't think any force in the galaxy could have pried it out of him.

Other bloggers' impressions

Update History:
  • 05-November-2009, 3:45 p.m. EST: Umm... replaced "public" with "public". (Thanks Andrew Dittmer!) Also changed "what kind of thing" to what kind of a thing" for no particular reason.
Steve Randy Waldman — Thursday November 5, 2009 at 2:45am [ 25 comments | 0 Trackbacks ] permalink

Sometimes the blogosphere really is an echo chamber. I'd like to join in.

Brad Setser has been silenced, via the devious mechanism of, um, hiring him for a job at the White House.

I've admired Brad for a very long time. It is not an exaggeration to say his blogging altered the course of my life. I was a Java programmer curious about economics when I stumbled upon Brad's original blog at RGE Monitor. I learned an incredible amount trying to make sense of his deep and intricate posts. I became quite the groupie, first as a silent lurker, then as a participant of annoying frequency in the incredible comments section he has always inspired. My thinking, and the changes in direction that my career has taken, owe a very great deal to that experience. In a just world, I would have paid Brad Setser a lot of money as tuition.

His disappearance from the blogosphere is a terrible loss. I have not been a fan of the current (or previous) administration's handling of the financial crisis, and am terribly cynical about many key players in the economic policy establishment. Although I have often disagreed with Brad, I trust him very deeply, both in terms of the quality of his work and the concerns that drive him to do it. I'm not sure whether to be pleased or mad about Brad's abduction to the corridors of power. That will depend, I think, on how carefully his colleagues listen to the irreplaceable voice they have deprived us of.

Thank you for everything, Brad. Now go save the world already. Goodness knows you've been trying for long enough.

Steve Randy Waldman — Wednesday August 5, 2009 at 6:03am [ 8 comments | 0 Trackbacks ] permalink

I cannot believe it is 2009. I've made it to about 1978 on my own personal to-do list. I'm running just a little bit behind.

Time comes at you like a freight train, but it is bad form not to smile and wave as it screeches by. So here's to 2009, which I am told is the number of the current year.

Some pundits now suggest it was obvious that 2008 would collapse suddenly into 2009. 2008 was not sustainable, they say. It was a bubble, and as a matter of simple arithmetic, 2009 was sure to follow. It was inevitable, they say, like a Kondratieff winter.

Readers of Interfluidity are not so gullible as to fall for that kind of rear-view forecasting. It was always improbable that 2009 would attach itself to any year present or past. After all, 1984 is eternally the number of a dystopian future, and logically the present can be no later than the future. We have not found babies on Jupiter, an event that would be past in any year subsequent to 2001. Sure, strictly speaking, this kind of reasoning should have ruled out 2008 too. But what are the odds that a rent in the fabric of Keynes-Einstein space-time would endure for half a femtosecond, let alone for a whole 'nother year? No. The smart money expected a correction back to 1931, or 1974, or 1982. 2009 wasn't even in the running. But here we are. Anybody got a road map?

Who knows. Maybe this peculiar dimension will turn out not to be so bad. Here's hoping. May it be all sparkly and strange for you. Perhaps we will encounter a benevolent and impossibly advanced alien race, and then discover at the last moment that the comm-screen through which we speak with them is actually a mirror.

I want to take a moment to thank Interfluidity's commenters, who continually amaze me. This is one of those websites where the quality of comments almost always exceeds that of the headline posts. I'm off in some sunny place right now. I just had a read of the comments attached to my previous, kind of crappy post. Wow. Amazing. Thank you.

Steve Randy Waldman — Thursday January 1, 2009 at 10:06pm [ 9 comments | 0 Trackbacks ] permalink

The last couple of posts have generated some very high quality comments, many of which I'm still itching to respond to. I usually try to participate in comment threads. I very much enjoy the conversations, and learn a great deal from the give and take. But my participation has been limited and will probably continue to be so, at least for the next couple of months.

I do read every word (and usually follow the links too). And I very much appreciate your taking the time to read, and to write.

It's actually a bit silly for me to apologize for my nonparticipation, though. I'd only bring down the level. I'm honored that you choose to chatter here.

Steve Randy Waldman — Sunday November 23, 2008 at 8:10pm [ 0 comments | 0 Trackbacks ] permalink

This wasn't the first time, and I can assure you it won't be the last of my sudden disappearances. I'd like you all to think that I am occasionally called off on super-secret assignments by an unacknowledged branch of an unacknowledged government. Or perhaps I have a penchant for being abducted by aliens. (Callisto is fabulous in the springtime. I highly recommend.)

But no. Behind this curtain is a disheveled lump of a thing, a satisficer in the guilt-minimization problem that each new day presents. For correspondences lapsed and everything else unwritten or undone, the least I can do is apologize. And thank those who do somehow manage to write and rewrite the world every day. I drink words greedily even when I offer none at all. Never, ever let them tell you there's no such thing as a free lunch.

Update: The previous post, almost a month old, attracted some extraordinary comments. I hope to have more to say on several of the themes discussed — seignorage and the credit crisis, fiat vs commodity money and full or fractional reserve banking, etc. etc. But don't wait for me. Others have said it all already, much better than I will.

Update History:
  • 5-May-2008, 3:10 p.m. EDT: Added update re previous post comments.
Steve Randy Waldman — Monday May 5, 2008 at 3:59am [ 0 comments | 0 Trackbacks ] permalink

To regular readers and other imaginary friends, my apologies for the prolonged silence. I owe much a deeper apology to several very real correspondents whose mail has gone unanswered for the past few months.

I am given to strange twists and turns in my personal and professional life. My new wife and I recently took a plunge into the sea of entropy, and are only beginning to catch our breaths at the surface. We find ourselves in Lexington, Kentucky. Go figure.

My personal life remains very much in transition, but I'm hoping to resume a semi-regular writing schedule. Many thanks to any and all who take the time to read these words.

Steve Randy Waldman — Thursday March 29, 2007 at 3:01pm [ 0 comments | 0 Trackbacks ] permalink

Glenn Reynolds writes...

ARNOLD KLING ON fear of confrontation: "Unfortunately, large segments of American society no longer have the ability to confront real evil. People lack the confidence and moral clarity to stand up to intimidation. . . . One can view Islamic militants as armed versions of unruly teenagers. We should not feel guilty toward them. We should demand reasonable and decent behavior from them, rather than excuse their tantrums or their crimes."

That would require thinking of ourselves as adults, which is unacceptable to many.

I want to think of "us" as the adults. In fact, in the run-up to the Iraq war, which I supported despite the clear disingenuity of the war's justification, I took a similar, explicitly paternalistic view of the world. The Europeans in particular were behaving like petulant teenagers, protesting "the system" while enjoying a vast subsidy, in financial terms and as "moral comfort", by letting America do the dirty work ensuring their security. And I viewed much of the Middle East as locked in a kind of post-Marxist, post-colonial, Che-T-shirt-style adolescent radicalism, which mixed with Islamism and pan-Arab nationalism, and unfortunately real explosives. My view at that time was that the United States was an arbiter of reason and civilation, imperfect but sufficient to enforce certain standards and keep the peace.

But, owing partly to the incompetence which with Iraq's reconstruction has been managed, but primarly to the fact the United States has allowed the soundness of its own economy to become badly undermined, I no longer believe we are credible adults. My estimation of the Europeans and the Islamic world have not changed. I've little flattering to say about either. But now the United States reminds me of an alcoholic parent trying to keep its delinquent kids in check. Tipsy, blustering America might be well-intentioned, it might in fact know better what's right and what's wrong, but its constant bumbling, its ability to throw tantrums but incapacity to lead or to guide, and its self-destructive partying on cheap capital render it an ineffective role model. The US is in for a bad financial hangover from its subsidized home-equity binging. While I have complete faith in America's ability to take a cold shower and figure out how to right itself economically, that will take several years, and those will be years in which the US will be weakened, and manifestly in crisis. America's security burdens will weigh heavily in an era of financial pain at home and escalating US dollar prices for anything and everything in foreign lands. I'm afraid we may not have the wherewithal to carry the load.

And then I am haunted by Osama Bin Laden's tale of the weak horse and the strong horse. In a world where America is weakened and Europe is senescent, let's hope that it is India, or the Pacific Rim, or even Red China itself that rides tall for a while, and not some destructive amalgam of religion, nationalism, and fascism.

Steve Randy Waldman — Wednesday April 5, 2006 at 5:34am [ 2 comments | 0 Trackbacks ] permalink

For the last year or so, my personal investment portfolio has been heavily, aggressively short US equities and the US dollar. It's not working out for me so far. Both the dollar and US stocks have done fairly well, and I have significant unrealized losses, and am struggling a bit to cover my positions. I find that being short is an ethically interesting and challenging position. I find troubling my awareness that to some degree, I have a financial interest in bad things happening. A terrorist attack in Saudi Arabia leads to a spike in oil prices? Ka-ching. A hurricane in the Gulf? GM declares bankruptct? Ka-ching, ka-ching, ka-ching.

That makes me feel nasty, like some evil Gargamel plotting misery and mayhem from his castle keep. Really, I'm not. Like most people, I'd like for everything to work out for everybody. So how is it that I've put myself in a position I stand to profit from other peoples' loss and misfortune? (And perhaps there is justice, the hand of God even, in the losses, rather than profits, I've made from the strategy.)

Steve Randy Waldman — Sunday March 26, 2006 at 9:43am [ 3 comments | 0 Trackbacks ] permalink

Office space. By far the nicest in Constanta. 208 square meters, brand new air conditioning and heating systems, original hardwood floors, three balconies with breathtaking views of the sea. Adjacent to Constanta's largest business hotel (Hotel Ibis). 15 € / m2 / month. Contact swaldman@casaleon.ro or dial +40 723 602524.

Steve Randy Waldman — Wednesday March 15, 2006 at 1:47pm [ 1 comments | 0 Trackbacks ] permalink

It would be hard for an expatriate not to love a book whose first line is

It should be against the law to mock someone who tries his luck in a foreign language.

So begins Budapest, by Chico Barque, delightful in English translation from the Brazilian Portuguese about an invisible man of letters who falls in love with the Hungarian language.

Steve Randy Waldman — Saturday March 4, 2006 at 1:49pm [ 0 comments | 0 Trackbacks ] permalink
In Baltimore, it's morning, but I'm not in Baltimore. It's 1:30 pm here in Constanta, at the edge of darkness, or at least the Black Sea, and I having a lazy beginning to a day which, after all, still has an agenda. My finacée, R—, has not been feeling well. We stayed in bed together this morning, and after a while we both felt better. There are consolations to this gypsy's life I've made for myself.

But it gets to me, it always gets to me, and I must go and try to hawk my family's "villa". Somewhere, there must be the perfect trading company or somesuch that would love to make a home of the finest office space in Constanta, at the very heart of the city with original hardwood floors and spectacular views of the beach. My charge has remained vacant 5 months, and I am embarrassed. Oh, dear reader, you wouldn't happen to be a multinational businessperson expanding into Central Europe? Oh well. I thought not.

To the realtors' offices then, to put a fire under all their asses. I am one to talk, here in bed and it's going on 2 pm, but I have no great impression of the work ethic of the Constantan realtor. Of course they preen with the status symbols of the age, the long, dark coats and gleaming silver mobile phones, but it seems to me they put up ads and wait for phone calls, and atata tot — that's all. It's not enough, of course. So I will make myself much pushier.

R— is in the bathroom, primping and powdering herself in long rituals. She will never be persuaded, though I have tried, I have, that all this work is entirely unnecessary. So I wait my turn, to use the can, take a quick shower, then off we go, to lunch, to the realtors.
Steve Randy Waldman — Friday March 3, 2006 at 6:51am [ 0 comments | 0 Trackbacks ] permalink
When I was a child, I was told that I was a good writer. That always seemed to me like a mixed blessing, because writing is something that mostly I did out of obligation, for school or for some other purpose. There were those times when I wrote because I wished to write. But those were usually times when something was wrong.

Interfluidity is born at a moment where I feel a spontaneous desire, perhaps even some desperation, to write. Now as it was always, I am provoked into writing because something is wrong.

Something is not flowing. Something is blocked. At one level, this is something akin to writers' block. But it is goes beyond that, because it was never my ambition to be a writer, exactly. At a broad level, I feel I have something to contribute, there is something that I'm supposed to do or have done, and I've not succeeded in doing it. Interfluidity is my attempt somehow to flow, to get all the things I am thinking and trying out there, even on a page made of electrons and other peoples' eyes.

I'm skeptical of myself these days. My recent track record has not been one of success. There are a thousand projects started and never quite completed. (This is my second blog, here's the first.) I've taken foolish risks financially, and therefore foolish losses. I've tried, so far without success, to reintegrate myself into the academic world. I'm feeling closed-in, stuck, at a loss. So here's a new page, upon which I will try yet again to flow.

I am not a humble person. There are things I have to contribute that could really matter, that could be revolutionary even. But so long as it all remains closed-up in the hollow cavity of my skull, who gives a shit? Interfluidity.
Steve Randy Waldman — Thursday March 2, 2006 at 11:10am [ 0 comments | 0 Trackbacks ] permalink
This is a placeholder, some words, forgettable, regrettable, as I've nothing to do or to say but to try to get the look right, the graphics up, all that jazz.

But it is also I suppose a new beginning, to something, a forgetting of escapades and failures past, a clean path to new misadventures. Let's see where it goes.
Steve Randy Waldman — Wednesday March 1, 2006 at 1:31am [ 0 comments | 0 Trackbacks ] permalink