Monday at the Treasury: an overlong exegesis

Last Monday, I had the privilege to meet up with a bunch of bloggers and Treasury officials for what might be described as a “rap session”. The meeting was less formal than a previous meeting. There were no presentations, and no obvious agenda. Refugees from the blogosphere included Tyler Cowen, Phil Davis, John Lounsbury, Mike Konczal, Yves Smith, Alex Tabarrok, and myself. Our hosts at Treasury were Lewis Alexander, Michael Barr, Timothy Geithner, Matthew Kabaker, Mary John Miller, and Jake Siewart. You will find better write-ups of the affair elsewhere [Konczal, Lounsbury (also here), Smith, Tabarrok]. Treasury held another meeting, with a different set of bloggers, on Wednesday.

It is bizarro world for me to go to these things. First, let me confess right from the start, I had a great time. I pose as an outsider and a crank. But when summoned to the court, this jester puts on his bells. I am very, very angry at Treasury, and the administration it serves. But put me at a table with smart, articulate people who are willing to argue but who are otherwise pleasant towards me, and I will like them. One or two of the “senior Treasury officials” had the grace to be a bit creepy in their demeanor. But, cruelly, the rest were lively, thoughtful, and willing to engage as though we were equals. Occasionally, under attack, they expressed hints of frustration in their body language — the indignation of hardworking people unjustly accused. But they kept on in good spirits until their time was up. I like these people, and that renders me untrustworthy. Abstractly, I think some of them should be replaced and perhaps disgraced. But having chatted so cordially, I’m far less likely to take up pitchforks against them. Drawn to the Secretary’s conference room by curiosity, vanity, ambition, and conceit, I’ve been neutered a bit. There’s an irony to that, because some of the people I met with may have been neutered, in precisely the same way and to disastrous effect, by their own meetings and mentorings with the Robert Rubins and Jamie Dimons of the world.

Obviously the headline act was Timothy Geithner. Off the record (or “on deep background”), Geithner is entirely different from the sometimes stiff character who appears on television. He is fun to argue with, very smart, good natured, and intellectually wily. As Yves Smith quipped afterwards, Geithner “gives good meeting.”

Despite that, our seminar was an adversarial affair. We began by relitigating financial reform. Officials began by talking up the buzz of activity occasioned at Treasury by the Dodd-Frank Act — putting together the Financial Stability Oversight Council, “standing up” the CFPB — with the happy implication that good and important things were happening. We peppered them with skeptical questions. Mike Konczal asked what sort of metrics they would use to judge the success of the bill. (That’s a hard problem, they said.) It’s well and good that folks at Treasury are made busy by the Act, but is it having any effect on the behavior of banks? (There’s been some movement on overdraft protection, and banks are raising capital.) As Alex Tabarrok has already reported, Tyler Cowen asked the excellent question of how the Act has changed regulators’ incentives, of why we should believe that regulators won’t intervene next time as they did this time, bailing out bankers and creditors at the expense of taxpayers. Resolution authority was their answer. Regulators’ incentives were fine the first time around, but they simply didn’t have the tools they needed to take the appropriate actions, to chart a middle course between generous bailouts and catastrophic unwinds. I’m very skeptical of that account.

I was pleased that, thanks to both Tyler Cowen and Yves Smith, we had a solid discussion of derivative clearinghouses. I am a big fan of standardized derivative exchanges and clearinghouses, and trade on them frequently. But I’m very fearful of the degree to which we will rely upon them under the new regime. Like a gas under pressure, the financial sector pushes and prods for places where high returns can be earned at someone else’s risk. During the last cycle, that included banks, shadow banks, and the GSEs, which earned profit on huge asset portfolios cheaply levered by virtue of perceived state guarantees (that were ultimately ratified). In theory, financial reform will firm up those weak spots, reducing permissible leverage and increasing its cost as resolution authority makes non-bailout of creditors credible. Suppose that actually happens. Then clearinghouses will stand out as institutions that are much too big to fail, and whose ultimate creditors (derivative traders) do not and cannot monitor creditworthiness. Clearinghouses are cleverly structured, so that the “members” through which clients trade are exposed to one another’s losses and do monitor each other’s financial health. But it is easy to imagine scenarios where it is in all members’ interest to allow a product to be undermargined. Regulated, highly leveraged financial institutions rationally accept “negative skewness“, arrangements that are profitable for them almost all of the time, but that fail catastrophically when something breaks. During long periods of stable profitability, an institution builds a track record to persuade regulators that risks are minimal and capably managed. The institution is permitted to take ever greater risks, and distribute ever greater profits to investors, while times are good. When, eventually, a catastrophic failure occurs, losses exceed the capital of the firm and are shifted elsewhere, usually to taxpayers. An undercapitalized and undermargined clearinghouse is a great vehicle for this sort of game, as low margins attract fee income from speculative trading, and members can trade on their own exchanges as a means of acquiring the cheap leverage that regulation might otherwise prevent. I’ve skimmed the relevant section of Dodd-Frank, and as far as I can tell, the hard and fast rules governing “derivatives clearing organizations” are very weak. We will be depending upon the discretion of regulators.

Gap risk and liquidity risk are kryptonite to clearinghouses. Yves Smith pointed out that clearing credit default swaps in particular could prove very challenging. These contracts sometimes “jump to default”, creating large losses very quickly for the protection sellers. If a clearinghouse were to insist on margins large enough to cover sudden jumps to default, the contracts would probably become unattractive to investors. If it does not, then a systemic shock that impairs many credits simultaneously could take down the clearinghouse.

Treasury officials had clearly thought about these issues. They pointed out, correctly, that despite formally concentrating risk, clearinghouses are better than bilateral trades, because in practice derivative markets engender systemic, not just bilateral, risk anyway and at least with a clearinghouse one can track, manage, and regulate that. Ultimately, their answer was that once we put this extra transparency in place, we just have to trust regulators to regulate well. In response to Yves’ skepticism of clearing CDS, one official suggested that regulators will insist on adequate margins, and if that renders some products uneconomical then so be it. I’ll believe that when I see it.

A disappointing moment in the conversation on financial regulation was when several officials suggested that increased capital requirements in and of themselves would do much of the work of solving bank incentive problems. I hope they were just trying snow us with this, because if they believe it, it suggests that they haven’t thought very carefully about how well aligned the incentives of equityholders, bank managers, and traders are at highly levered institutions. All three groups benefit by putting creditors’ resources at risk and earning outsize profit against limited costs (loss of equity value or loss of a job). Under the new regulation, our “strong” capital requirements will probably permit banks to be levered at least 15 times poorly measured common equity. That’s not nearly enough to tilt shareholder incentives decisively towards capital preservation. Shareholders would have to work very hard to oppose the interests of managers and traders. One official wondered aloud why bondholders failed to discipline banks, in order to prevent this sort of misbehavior. I’ll leave that one dangling as an exercise for readers.

The conversation next turned to housing and HAMP. On HAMP, officials were surprisingly candid. The program has gotten a lot of bad press in terms of its Kafka-esque qualification process and its limited success in generating mortgage modifications under which families become able and willing to pay their debt. Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole. Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least. There were murmurs among the bloggers of “extend and pretend”, but I don’t think that’s quite right. This was extend-and-don’t-even-bother-to-pretend. The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system”, “the economy”, and “ordinary Americans”. Treasury officials are not cruel people. I’m sure they would have preferred if the program had worked out better for homeowners as well. But they have larger concerns, and from their perspective, HAMP has helped to address those.

Phil Davis, who made clear that his remarks were from the perspective of bank investors, thought Treasury was doing far too little to defuse the housing problem. He pointed out that even if the financial reform bill is beautifully crafted, its full implementation will take up to three years, during which the banking system will remain in peril, largely because of tenuous mortgages. He suggested that Treasury help pay down the mortgages of struggling homeowners until the remaining loan was solid. In exchange, Treasury would retain an equity claim on the home, from which in a good scenario taxpayers might be able to recover much of the cost of the program when the houses are eventually sold. A senior Treasury official gave the proposal a sympathetic hearing, but opined that exchanging a government claim against a homeowner for a bank’s claim against a homeowner in order to solidify bank balance sheets was not the best use of limited budgetary and policy implementation capacity. (For a change, I agreed with the Treasury official on this one.)

From HAMP, we segued briefly to a discussion of the GSEs. I got excited when one Treasury official explained that his inclinations were “minimalist”. I imagined winding down the GSEs, eliminating the mortgage interest rate deduction, cutting away the vast web of pernicious subsidies to home-lendership. My hopes were quickly deflated. By “minimalist”, the official meant parsimonious in terms of changes to the existing system. In a nutshell, he proposed insisting, by regulatory fiat, that future GSE’s borrowing costs be kept at a level appropriate to a private firm with no Federal backstop, implicit or otherwise. He thought there would be a continuing role for some kind of government guarantees of mortgages, but suggested this guarantee could be made more limited. (I think the idea would be to put private players — the Re-GSEs or originating banks — on the hook for a first loss.) In the spirit of Tyler’s question about regulatory incentives, I thought this proposal entirely naive. Over time, regulators would not succeed at forcing a substantial above-market spread on politically powerful private actors. (Well, private with respect to the upside, not if the downside, of their activities.) Further, the suggestion reflects an inadequate view of how creditors limit firm risk-taking. In the private sector, creditors do not only charge a higher spread for risk, but they participate in governing firms and constrain behavior directly via bond covenants. The name for bond covenants when imposed by a public sector creditor is “regulation”. Ultimately, this “minimalist” approach to managing the GSEs amounts to nothing more or less than keeping the existing system and proposing that it be better regulated, including specific regulatory suggestions that are foreseeably unlikely to withstand industry pressure. No offense to its very smart proponent, but this was a non-idea dressed up as reform.

I did express my skepticism to Mr. Minimalist. Unlike some of his colleagues, he was smart enough, or honest enough, to acknowledge that even with stronger capital ratios, it is naive to rely on the private capital structure of large, complex financial firms to enforce good behavior. So what is to be done, if not to regulate them as best we can? Almost as an aside, he noted that some people thought we should limit “size”, but that he couldn’t see how that would get at the problem, and had rejected the approach. Had there been time, I would have been glad to school him. “Size”, of course, stands in for and trivializes the notion of structural rather than supervisory regulation, an approach that many of us pushed desperately, only to be met by a wall of dismissal from Treasury and Congressional leaders. [*]

Perhaps Treasury officials really can’t see how limiting “size” might help. But I don’t think that’s right. These are very, very smart people. I think they understand the merits of the structural approach to financial regulation, but view the transition costs as simply too large to bear. But that begs the question of costs to whom, and whether (per the HAMP conversation above) it is wise to conflate the health of status quo financial institutions with the welfare of the economy as a whole.

Finally, our conversation turned to the current macroeconomic doldrums. Thankfully, there was none of the “let’s look on the bright side” chipperness of Timothy Geithner’s recent New York Times op-ed. Treasury officials didn’t downplay how bad things are. They did point out that considering the headwinds the economy faces, things are a bit better than they might be. The account went roughly like this: Last year, after the doldrums of March, the economy grew faster and performed better than most would have forecast. But recently it encountered two obstacles, one expected, the other an unexpected near cataclysm. The spurt of GDP growth due to post-panic inventory restocking was always going to end. But a sovereign debt crisis in Europe strong enough to shake confidence and financial markets in the US was not expected. Taking all that into account, things are a bit better than they might have been. One Treasury official pointed out that if we could return to the path of consensus growth forecasts from just before the troubles in Europe, we would have two or three difficult years ahead of us yet, but would be on a decent path. I took this as a kind of optimistic but plausible thought experiment on where we might be going.

I’m not going to belabor the obvious critique of this account, that it focuses too much on statistical growth and financial market performance and too little on employment (which, in the optimistic thought experiment, would follow statistical growth with a lag). Also, if we are enumerating headwinds to current GDP growth, I would have included the tailing off of Federal stimulus, a factor I don’t recall officials emphasizing.

I was impressed that Treasury officials had a pretty good understanding of the impediments to growth going forward. They understood that the core problem preventing business expansion isn’t access to capital but absence of demand. But I got the sense that, as they see things, they are boxed-in on that front, paralyzed and hoping for the best. When someone asked about monetary policy, an official said he really couldn’t comment on behalf of the Fed, but then proceeded to comment anyway, that in a very sharp downtown the Fed would have (presumably unconventional) ways to intervene, but that we were probably near the limits of what the central bank would do on the economy’s current path. Regarding their own bailiwick, an official perceptively pointed out that the set of spending programs Congress seems capable of delivering and the set of programs the public would consider wise and legitimate seem not to intersect. All of this resonated well with me: I view the current macro-sluggishness as a function of insufficient demand, yet stand with the hypothetical public in being hesitant to support “stimulus” and “jobs” programs that strike me as haphazardly targeted and sometimes wasteful or corrupt.

What ought a Treasury official do under these circumstances? Mike Konczal suggested that Treasury had latitude to stimulate without Congressional approval, pointing out that only a small fraction of the funds allocated to HAMP had been spent, and that with some cleverness the remainder could serve as a piggy bank. He was openly astonished when he was told that despite the tiny uptake thus far, according to Treasury’s extrapolations and accountings, at least $40 of the $50 billion allocated to HAMP would be used by the program and the funds were therefore already spoken for.

My suggestion was that Treasury should take the lead from Congress and propose a “two-year guaranteed income program”. If I were writing a proposal, I’d offer a lot of detail and caveats, but during a short meeting with scarce air-time, that was the sound-bite I came up with. As regular readers know, I think the government ought to be transferring equal sums of money to all adult US citizens irrespective of tax or employment status. That’s a form of stimulus that seems fair on face, that doesn’t pick winners and losers or skew the direction of the economy, and is plainly not corrupt. “Guaranteed income program” can be interpreted in lots of different ways, though, and I have no idea how Treasury officials took this. In any case, the quick response was to say it wouldn’t pass Congress, as though that were that. Later on, I suggested officials should push it anyway, and “go down, or up, with the ship”.

Putting aside the merits and demerits of my own proposal, under the present circumstance, where things are going badly and officials believe that some forms of policy activism would be wise but are politically impossible, how ought public servants behave? Is it too much to ask, as I did, that officials choose good policy and push it, even if that means tilting at windmills in ways that could erode political capital and be harmful to their careers? One can make the case, as I suspect Treasury officials would, that policy idealism makes the best into the enemy of the good, and results in less achievement than a more pragmatic approach. Sometimes that might be true, but I think it is dead wrong right now. We are currently trapped in a political dynamic under which the contours of what is conventionally possible are so terribly straitened, and so terribly corrupt, that “achievements”, like health care reform, even when they are incremental improvements in policy, are painful blows to the public’s sense of the potency and legitimacy of government. We have a President who campaigned under the slogan “Yes we can!”, but then governed by cutting deals with status quo interest groups and limiting options to what powerful lobbies could live with. I was not lying when I said at the beginning of this piece that I like the people at Treasury personally. I have no great wish that they should lose their jobs. But for the good of the country, I do think they should come up with what they think would be the best economic policy imaginable and push it on its merits, publicly and unapologetically, even if it costs them their positions, and even though I might be horrified by what they’d choose. (Despite all the conversation, I have absolutely no idea what they would choose.)

Amid the talk about flagging demand, blogger John Lounsbury had the courage to “drop a stink bomb”, as he put it. He said that in his view, the United States needed to move from a consumption to a production oriented economy, and that we ought to use the tax system to get there, increasing taxes on consumption and reducing taxes on capital. I agree with John that the US economy needs to shift so that it produces as much value as it consumes (see below) but I’m entirely unenthusiastic about this sort of tax policy. John’s proposal amounted to a full U-turn from our how-to-inspire-demand conversation, but the Treasury official with whom we were speaking didn’t miss a beat. He nodded sympathetically, and said that while he couldn’t discuss specifics of what the deficit commission was doing, they were doing good work. I left with a serious case of heebie-jeebies about what the deficit commission might be up to, but no details at all.

Despite my disagreement with John regarding tax policy, I share his concern that the US economy has habitually failed to achieve a “sustainable pattern of specialization and trade”, as Arnold Kling likes to put it. The most obvious reflection and enabler of this, I think, is the United States’ large, structural trade deficit (which recently spiked). I asked Treasury officials what they intended to do about this, keeping in mind that the problem runs much deeper than our bilateral relationship with China, as well as the importance of avoiding distortionary protectionism, unfair discriminatory policies, or trade wars. Alex Tabarrok (who fascinates me as a writer, but spoke far too little at the meeting) pointed out that Treasury had done a good job so far at avoiding conflict over trade and resisting pressure to impose foolish barriers. He is right about that, but Treasury has also done little thus far to address the structural imbalance. The trade deficit did decline briefly during the recession, but given its quick resurgence, that seems to have been a mechanical effect of the pause in economic activity rather than a sustainable change in trade patterns.

A Treasury official agreed enthusiastically about the importance of finding more sustainable patterns of trade. But he characterized trade balance as a medium-term issue that might resolve itself over time, especially if China (which he described as the “anchor” of a whole block of trade partners) allows its exchange rate to appreciate. He suggested that although the issue is important, we could worry about other things for now and save trade balance for later if it fails to self-correct.

I disagreed. I think that the trade imbalance makes stimulus both intellectually and politically difficult to defend (including my own “guaranteed income program”), because the pattern of business expansion we would stimulate would continue to overproduce domestic services and underproduce tradable goods relative to the patterns of production we will require when unsustainable international flows cease or reverse. In Austrian terms, I think demand stimulus in the context of continuing trade deficits will lead to malinvestment and another dangerous recession when what can’t go on forever stops. Rather than reinforcing patterns of investment that will have to be reversed, we should begin to wean ourselves of unbalanced trade flows, so that investors find it profitable to bolster the sectors we will require in order to pay for current consumption with current production. Unfortunately, it did not sound as though nondiscriminatory tools for enforcing trade balance, such as capital controls or “import certificates“, were anywhere on Treasury’s radar screen.

Overall, as I said at the start, the meeting was a lot of fun. I spend a lot of time around universities, and our meeting resembled nothing so much as an unusually lively seminar. Unfortunately, just like an academic seminar, I left with the feeling that there were a lot of bright ideas and brilliant people, but nothing much was going to come of it all, at least not anytime too soon.


[*] No one claims that limiting “size” alone, defined as market cap or balance sheet assets, would be sufficient to solve any problem. One dollar of equity can pull the whole universe into a financial black hole if it is sufficiently leveraged. But proponents of structural regulation understand that status quo large financial firms simply cannot be regulated, either privately by equity and debt holders or publicly by civil servants. As discussed above, when a firm is highly leveraged, equity holders switch from sober stewards of capital to risk-loving looters of creditor wealth. When a firm’s creditors are formally guaranteed, or when as a group they are sufficiently large, interconnected, and incapable of bearing losses, creditors also switch sides, ignoring risk and seeking yield on the theory that the social costs of forcing them to eat losses would be far higher than the fiscal cost of bailing out the bank. The entire private capital structure of systematically important financial firms wants to maximize risk-taking while minimizing regulatory costs, looting the public purse and splitting the proceeds between creditors, shareholders, managers, and other employees. Relying on “market discipline” for this sort of firm cannot work. Relying on public sector supervision ignores resource asymmetry and political constraints, as well as the information and incentive problems faced by even smart, well-intentioned regulators. Large, complex, leveraged and interconnected financial firms simply cannot be regulated, by the private or public sector. Without regulation they quite rationally maximize stakeholder wealth in a manner that happens to be socially and economically destructive. The only way around this is to change the incentives of all stakeholders, and that could only happen by placing them in a different kind of firm. We have to limit the size and composition of firms’ creditor base, so we can be sure losses to creditors would be socially and politically tolerable. (We do this already, or try to, with hedge funds.) We have to limit the scale of firm exposures, including on-balance-sheet, off-balance-sheet, and synthetic exposures, so we can be sure that the cost of nonperformance to counterparties would also be tolerable. Less obviously, we have to limit the scale of economic exposures relative to the number of independently responsible asset managers, so that no asset manager manages so much money that one or a few years of performance-based compensation would leave them set for life. The incentives of managers at small, nonprestigious banks are much better aligned with the long-term viability of their firms than hot-shots at glamour banks, who flit between high-paying gigs and hope to get their “fuck you money” fast. We have to limit the scope of operations at individual banks, because a complex bank is a bank that can’t be regulated, publicly or privately.

Also, small banks rationally allocate capital differently than very large banks. Big banks seek economies of scale to exploit. They trawl through vast streams of systemized data looking for patterns that can be widely applied to inform lending and investment decisions. Smaller banks seek out advantage based on local information and specific relationships. These are distinct strategies, and banks of different size will find different approaches adaptive. Lions and house cats are superficially similar, but thrive in different ecological niches. Large banks cannot effectively exploit local information, because local information is usually “soft” — that is, difficult to quantify and objectively verify. Lending based on soft information is inherently discretionary and prone to abuse, and large banks find it difficult to discipline the qualitative instincts of thousands of loan officers. Conversely, large bank employees find it impossible to defend inevitable failures, when, ex post, investments look to have been based on glorified hunches. (Small bank loan officers would have gotten buy-in up front from senior management, so failures get more sympathetically reviewed.) Further, most businesses will find it difficult to form credible relationships with very large banks, while small banks can have a real stake in an individual client’s success. But small banks can’t do what big banks do, as they lack sufficient data to mine client-order flow or tease out subtle relationships between FICO scores, patterns in checking and credit-card behavior, and loan performance. Small banks and large banks set about the task of allocating financial capital very differently. If you take a Hayekian view of capital allocation, small banks are likely to do a superior job.

(Small banks will do a better job in aggregate, even though those that fail will be found to have made more ludicrous and scandalous mistakes. Also, while most large-bank strategies are pathological, there is a well-known pathological small-bank strategy, “herding” or “information cascades”. In a small-bank-centric world, regulators would have to penalize copycat behavior, for example by taxing or increasing regulatory capital requirements when banks choose to invest in asset classes that are already overrepresented in the aggregate banking sector portfolio.)

Update History:

  • 22-August-2010, 10:00 p.m. EDT: Removing some excess verbiage: “less achievement overall” → “less achievement”, “in policy terms” → “in policy”. Removed some unnecessary commas. Fixed use of the word “diffuse” where “defuse” was intended, many thanks to Nemo for pointing this out!
  • 22-August-2010, 10:55 p.m. EDT: “There’s some irony to that” → “There’s an irony to that”
 
 

71 Responses to “Monday at the Treasury: an overlong exegesis”

  1. [...] Monday at the Treasury: an overlong exegesis Steve Waldman. This is an extremely good and gracious summary (he gives a little credit to every participant and has links to all the other writeups of the session) but I’m a bit astonished to find that Waldman found the session enjoyable. I was often annoyed and was finding it hard to maintain my usual WASP composure (but all annoyed WASPs do is put on a stony disapproving face, we really are not good at confrontation). I am also aware of the effect of having spent time there (my Santa Fe friends would call it being psychically attacked, the weird mental hangover which is finally wearing off is enough to make me start taking that sort of talk seriously). [...]

  2. Mitch writes:

    You ate the cookies this time, didn’t you? You’ve been turned! I can no longer trust anything you write.

  3. Ashwin writes:

    “One official wondered aloud why bondholders failed to discipline banks, in order to prevent this sort of misbehavior.”
    Unbelievable – someone at the Treasury wonders why despite all the implicit and explicit backstop provided by the TBTF doctrine, Fed “liquidity” facilities etc, creditors don’t care about the risk taken on by the banks?

    “The entire private capital structure of systematically important financial firms wants to maximize risk-taking while minimizing regulatory costs, looting the public purse and splitting the proceeds between creditors, shareholders, managers, and other employees.”
    That is spot on and the adaptive/evolutionary viewpoint that I keep banging on about on my blog tells us how we get this “looting” even if none of the actors in the system actually intend to loot the public purse.

  4. JKH writes:

    Terrific write up, worth waiting for.

    I still think you underestimate the power of increasing equity capital requirements.

    Also, you generalize, understandably, on the subject of regulatory capacity and competence. The US as a nation doesn’t know how to regulate, simply because it doesn’t really want to, by cultural inclination. That’s not the case with your northern neighbour. I’d draw the same comparison on the question of bank size. Chop up your banks with a US cookie cutter if you will, but the real reason is not because large financial institutions can’t be capitalized or regulated in a reasonable way.

    P.S. I see Basel is now running with the Canadian idea of contingent capital.

  5. ET writes:

    All the bloggers on that list write sober economic analysis, except: who is Phil Davis? From that link, he seems like just another guy hawking a newsletter, with some lowbrow cartoons and technical analysis voodoo thrown in for good measure. Seems like a weird invitee to a Treasury meeting.

  6. But What do I Know? writes:

    This is a great write-up, thanks. The Treasury guys remind me a lot of some Civil War generals that I’m reading about–smart men, who knew how to organize and train an army and lay out a campaign, but were afraid to take a chance when the fighting started. The single distinguishing attribute of Grant, Lee, Stonewall Jackson, and Sherman seems to be that they realized that victory would not be accomplished without a lot of killing and taking some chances, but to simply act cautiously meant the problem would never be resolved. Strong enemy positions sometimes had to be attacked, and the result wasn’t always going to be immediate success. When FDR got into office, he did a lot of things arbitrarily–some worked, some didn’t–but he did something. The present administration is too obsessed with office-holding and personal careers to take any chances. Things will have to get far worse before anyone in authority is willing to try something different than a marked-up status quo.

    Let’s just hope that when that time comes the regime in power will have smart, charming guys in it–brains and charm are wasted on this lot.

  7. drfrank writes:

    The footnote about the difference between the systemically “important” and therefore uncontrollable transnational financial conglomerates and small banks is more important than anything else in this post, folks. The obvious answer is to really re-privatize the former, making them partnerships rather than publicly traded corporations. When profit making opportunities are sought at the edge of the law and regulation, then the partners must have something to lose if they make mistakes. More regulation is not an answer. As regards the small banks, a slight shift in incentives could very well make them more profitable. Suppose the only place one could obtain a home mortgage or a credit card were through the offices of a bank with assets under $1 billion. Suppose the originating bank were required to hold a decent equity stake in any securitization. The initiatives of the government in the crisis have gone in the opposite direction. Pass through to the GSE’s is the only game in town. The large bank originators are getting better rates than the small guys. Nobody, including Fair Issacs, can really tell you how your score is determined and all kinds of idiocy abounds. Yet the only way to qualify for a loan is on the basis of the FICO score, thanks to the way the government programs are being administered.

  8. George Soros writes:

    Grinfuck session…

  9. Mars writes:

    Excellent account of the meeting, Steve, and very depressing, particularly the sense that Treasury conflates the good of the financial system status quo with the overall prosperity of the American economy (i.e. what’s good for JP Morgan is good for America). On the guaranteed basic income idea, I think there is a vastly superior way to solve the problem of demand, a proposal that might actually get bipartisan support. A number of us have supported the idea of a Job Guarantee program, which is based on a buffer stock principle whereby the public sector offers a fixed wage job for up to 35 hours per week to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers which expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks. You could get rid of a lot of the social welfare programs as you’ll be replacing involuntary unemployment with job guarantees and it would act as a price stability program as well because the government wouldn’t outbid the private sector for labour, but simply maintain a floor. But this way, you retain a force of “shovel ready” labour. And if you leave it in as a permanent feature of government, it minimises the government’s discretionary action for political favours and crony capitalism, which is how you deal with the Predator state problem.
    You could also use it for retraining and building up our manufacturing base again to replace the Chinese crap that they produce for WalMart, which isn’t very good anyway.

  10. Excellent account of the meeting, Steve, and very depressing, particularly the sense that Treasury conflates the good of the financial system status quo with the overall prosperity of the American economy (i.e. what’s good for JP Morgan is good for America). On the guaranteed basic income idea, I think there is a vastly superior way to solve the problem of demand, a proposal that might actually get bipartisan support. A number of us have supported the idea of a Job Guarantee program, which is based on a buffer stock principle whereby the public sector offers a fixed wage job for up to 35 hours per week to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers which expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks. You could get rid of a lot of the social welfare programs as you’ll be replacing involuntary unemployment with job guarantees and it would act as a price stability program as well because the government wouldn’t outbid the private sector for labour, but simply maintain a floor. But this way, you retain a force of “shovel ready” labour. And if you leave it in as a permanent feature of government, it minimises the government’s discretionary action for political favours and crony capitalism, which is how you deal with the Predator state problem.
    You could also use it for retraining and building up our manufacturing base again to replace the Chinese crap that they produce for WalMart, which isn’t very good anyway.

  11. Mr. E writes:

    Nice summary – thanks.

    You know your MMT, so you must be aware that the large Current Account Deficit is necessary to get the USD reserve currency out into the world. The USD cannot be both in Current Account balance and the worlds reserve currency at the same time.

    Other notes:

    1. A bit surprised you didn’t push back more on the fact they were treating banks, institutions and everyday people as one huge, All-American group.
    2. Did they provide any details at all on the HAMP allocation? It is such a huge statement and doesn’t seem to have any backup in facts we can observe.
    3. Tyler doesn’t have a good understanding of clearinghouses, and Yves isn’t much better. They both fail to understand how much latitude a clearinghouse has over company assets. And here is the kicker – they both don’t understand that in a situation with a clearinghouse, the members must know that they are on the hook first and they wont get paid if the clearinghouse goes under. This is something that few people understand. If a clearinghouse fails, then people are not going to get paid. Because these are derivatives, the total exposure nets to zero – even in the case of a non-payment! So for every loser, there is a winner. That the winner has already spent the money isn’t a concern, but this is suffling money, not destroying it.

    As for the concerns that clearinghouses do not address the risk of systematic underpricing of risk by all participants and that CDS have the potential to explode in exposure, I think Yves is missing two huge, huge points: Clearinghouses are far better than the current system, and perfection doesn’t exist. On both of these points, she is just missing the big picture.

    CDS will always exist – the idea is too profoundly powerful and useful to be put back in the bottle and un-thought. Chine Mieville style magic doesn’t work in the real world. So the question becomes the best way to mitigate the risks associated.

    Clearinghouses are the answer to that. The precise structure should be more robust than the current designs, and should include the ability to grab hard assets from firms. But the ICE CDS clearinghouse has excellent structure, and the LCH guys are top notch.

    Then, we know that there is no such thing as perfect risk management. It doesn’t and cannot exist. We can design good and robust systems, systems that are able to handle adverse shocks and situations of many imaginable types, but the unpleasant fact of the wise parts of Taleb’s black swan still exist. There are situations which are not knowable today that will occur that will have outsized impacts on the financial world. We cannot plan for all of them.

    The only possible risk management for this would be for the U.S. government to use MMT as a starting point and say something like “U.S. citizens, we promise that if the financial sector ever melts down, you won’t lose your standard of living to the best of our money issuing ability”. I don’t expect statements like this from the U.S. anytime soon.

    3. Good to hear they were aware of the severity of the current downturn. Maybe they will be frank with Obama and tell him to cut the payroll tax for persons and businesses to zero for the next 6 months, with a pre-defined exit plan that restores the tax in 25% increments each subsequent quarter if the econmy is performing, and a plan that can be stopped if the economy stalls again.

    4. I was a bit surprised there was no discussion about another stimulus and what it might entail.

    5. Johns tax proposal was nearly entirely backwards. We’ve increased taxes on labor and production, reduced taxes on capital to the point where all anyone wants to do is create capital without labor – which creates a huge financial sector by incentives, right? Under what circumstances is reducing demand any good at all? You want demand to be skyhigh at all times – right? Why would you want to reduce the demand for goods – and in this current environment, why would you even consider such a crazy idea? The problem the entire world is facing is that it has the abiltity to produce far, far more than it has the demand to consume. A crazy idea.

  12. David Pearson writes:

    It seems the administration’s attitude towards the economy could be summed up thus:

    “Plan B is for Plan A to work”

  13. Pete0 writes:

    I’m curious: did Treausury play Meet the Press like this before the blogging era? If not, what a fantastic unintended consequence of our newfangled age of engagement…

  14. mhnec writes:

    Re Hamp:
    “The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock.”

    “Treasury officials are not cruel people.”

    You are far too conciliatory for Treasury on this point. Treasury advertised HAMP as assistance for home-borrowers in dire straits. In practice, Treasury abetted the banks in extracting every last penny out of insolvent home-borrowers. In aggregate, HAMP has actively damaged participants to assist the banks and “the system”.

    “I’m sure they would have preferred if the program had worked out better for homeowners as well. But they have larger concerns, and from their perspective, HAMP has helped to address those.”

    Again, too conciliatory. Without the government paying down home mortgage principal which would have assisted both home-borrowers and banks, the options were for Treasury to chose to assist the home-borrower at the expense of the banks, or assist the banks at the expense of the home-borrower. These choices were mutually exclusive and Treasury’s choice is clear.

    Of course, no home-borrower would have signed up for HAMP if Treasury had advertised it as assistance for banks. So, in Treasury’s mind, the deception was necessary for the greater good.

  15. token bull writes:

    Thank you, Steve, for the engaging summary.

    I can’t help but wonder what the point of these meetings is. It appears that Treasury is not looking for heterodox policy suggestions; are the meetings simply a venue to appear more reasonable to the more intellectual aggressive economic blogging community?

    What good to the country–to the economy–comes of these meetings? (And “increased communication” is not a fair answer–after all, it appears more one-way.)

  16. Indy writes:

    “… I left with the feeling that there were a lot of bright ideas and brilliant people, but nothing much was going to come of it all, at least not anytime too soon.”

    I saw this in the Army all this time – you may not believe the US Army is filled with such brilliant minds, but they are there, they are thinking well, and they are just as powerless and discouraged, not by self-interested cowardice of boat-rocking (as may be more the case in other bureaucratic institutions), by by such a sure and corrupting sense of futility. It’s simply an institutional defect, rarely overcome except in temporary and exceptional circumstances when truly gifted leaders recognize and neutralize the problem.

    So one needs to ascend one meta-level higher, and find the structural reform which permits the other reforms – that fertilizes a healthy process of continuous evolution from within.

    That is your challenge, Interfluidity, should you dare to accept it. Think *deeply*, and the next time invited to attend a Treasury meeting you must come prepared with the institutional fix that busts the dam that holds back advocacy for all those impossible dreams. You mission is to conjure a conversion of a vigorous, brilliant, but infertile seminar into a prolific germinator of the spawn of human actions. If you’d like help, I’d be happy to contribute my efforts, just put +1 on your next RSVP ;~D

  17. babar writes:

    very nice account, thanks.

    i am sure you know this, but the reason that most of the HAMP funds haven’t been used is that Fannie and Freddie aren’t being comped by the treasury for HAMP. they are taking substantial losses (~30B) for doing HAMP mods without being compensated. then they pay 10% interest on these amounts. i know this is only accounting, but when people say that the GSEs lost so many dollars, they don’t take this sort of thing into account.

  18. Ted K writes:

    By far the best write-up of the 2nd Treasury meeting. I especially liked this quote:
    “In response to Yves’ skepticism of clearing CDS, one official suggested that regulators will insist on adequate margins, and if that renders some products uneconomical then so be it. I’ll believe that when I see it.

    And this one:
    “Mike Konczal suggested that Treasury had latitude to stimulate without Congressional approval, pointing out that only a small fraction of the funds allocated to HAMP had been spent, and that with some cleverness the remainder could serve as a piggy bank. He was openly astonished when he was told that despite the tiny uptake thus far, according to Treasury’s extrapolations and accountings, at least $40 of the $50 billion allocated to HAMP would be used by the program and the funds were therefore already spoken for.”

    You know Mike Konczal is probably my favorite finance blogger, but even though he is extremely intelligent and has a razor sharp mind his reactions strike me as sometimes boyish or wet behind the ears.

    Also I want to say I really really really super agree with your thought on policy activism and pushing some concepts to the public. Stand behind your ideas like old Theodore Roosevelt. What good does a good intellect do you if you can’t push your ideas and give them pragmatic use?? The example that really annoys me is Senator Chris Dodd going on NPR and saying (I am paraphrasing here) “Well I really like Elizabeth Warren, but gosh golly gee wiz, we just can’t get the votes” Shrugging his shoulders like some little boy. It’s bullsh_t and Dodd knows it’s bullshit. Get out there on the talk shows and let the people know the efforts this woman has made for the American public and society. They can get her voted in easily, but Dodd is more interested in slinking off to a cushy retirement and apparently President Obama is more interested in the scenery of Maine.

  19. Tom Hickey writes:

    I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system”, “the economy”, and “ordinary Americans”.

    Sums it up in a nutshell, and it is now obvious to everyone, even those not paying attention. That constitutes a political time bomb that is sure to explode in the voting booths of America come November 2010, and possibly again in 2012 if the situation doesn’t change, that is, if key people are not fired or at least allowed to decide that they need to spend more time with their families.

  20. Tom Hickey writes:

    Regarding size, it clearly does matter. Since supervisory private and public controls are impossible to impose adequately, we need to get back politically to the days of Teddy Roosevelt’s “Square Deal” progressive reforms and trust busting, and impose a structural solution that obviates moral hazard and systemic risk. TBTF is now a hot button political issue and the public is not fooled by the names of supposed reform bills that aren’t. As Bill Black, Frank Partnoy, Janet Tavakoli, Elliot Spitzer, Simon Johnson, and others have observed, this has become a forensic issue more than an economic one and CEO’s regularly practice “control fraud,” as Black terms it.

  21. Tom Hickey writes:

    #11

    Mr E wrote: We’ve increased taxes on labor and production, reduced taxes on capital to the point where all anyone wants to do is create capital without labor – which creates a huge financial sector by incentives, right? Under what circumstances is reducing demand any good at all? You want demand to be skyhigh at all times – right? Why would you want to reduce the demand for goods – and in this current environment, why would you even consider such a crazy idea? The problem the entire world is facing is that it has the abiltity to produce far, far more than it has the demand to consume.

    Exactly. The problem that the world faces in the entering the Age of Globalization is increasing demand globally, and that means increasing worker income (as well as as instituting controls on supply to make it environmentally sustainable). Instead, as Michael Hudson has admirably documented, financial capitalism has taken over the process of globalization and reversed its proper relationship with productive capitalism. Financial capitalism has to be brought under control by being restructured if rent-seeking and the corresponding trend toward debt peonage are to be reversed and productive capitalism responding to demand based on income is to become the foundation for the increasingly globalized economy.

    What’s so hard for the people in charge to get this — unless they are on the side of financial capitalism?

  22. Tom Hickey writes:

    Marshall @#10, I would call it something like “employment assurance” instead of a job guarantee, which sounds like workfare. The purpose of the MMT job guarantee is not to replace “welfare” with workfare, and I have seen “job guarantee” confused with this. It recalls the recent gaffe of the GOP in calling unemployment insurance “welfare” and “a hand out,” when employees had paid in to the program for many years and are not just collecting the benefits they paid for.

    Moreover, it needs to be explained how the job guarantee is both a price anchor against inflation and also a means of eliminating the huge losses from foregone opportunity that output gaps involve and the enormous degradation of human resources that unemployment and underemployment entail, the costs of which dwarfs other leakages in terms of GDP and future productivity. I can see why the officials would not be excited about the proposal since it would seem to them to be a non-starter politically. However, properly explained, those objections could be overcome, since it helps everyone and, properly structured and administered, is not a jobs boondoggle.

  23. jtuck004 writes:

    I appreciated most of your post, the several critiques, and your suggestion about the “guaranteed income program” (which I hope includes work, not just payment).

    But it strikes me when I see remarks like

    “I view the current macro-sluggishness as a function of insufficient demand, yet stand with the hypothetical public in being hesitant to support “stimulus” and “jobs” programs that strike me as haphazardly targeted and sometimes wasteful or corrupt”

    that the “hesitant hypothetical public” are those who are employed or otherwise have “theirs”, and thus have the luxury of carping about attempts to invest in this country. I suspect the not very hypothetical and quite real 30 million (and increasing) people who are unemployed or no longer making enough hours or work to pay their bills or save their home are desperately looking for some kind of solution, and they don’t see it that way. Amazing, there was enough to carve off trillions of dollars to support the financial sector, yet not enough for a solution that would reduce the back-breaking debt that is dragging down the people who just want to go to a job every day.

    We need a work program which puts the basis for demand out there, gives people a way to hold their head up, and provides the foundation for a sustainable solution. We have a pres who could motivate a nation – maybe he needs to stand up and tell us to go to the moon, (or whatever the equivalent is for the 21st century). Make it plain we are in a race with developing nations, that we haven’t got time for hate right now, that the American people have never backed down from a challenge and that if anyone can do it they can. Go to new schools, do whatever it takes to change transportation, energy, and health care and reform them for the next new hundred years. He needs to tell them he will direct the resources to that need, and rather than excuses make it clear how we pressure the politicians to invest in this country. People will get behind him if they are sure he won’t continue to turn his back just to keep the pitchforks away from the bankers.

  24. [...] reports that Treasury is not willing to deal with this problem. Interfluidity tells us: Ultimately, this “minimalist” approach to managing the GSEs amounts to nothing more or less [...]

  25. reformas writes:

    i don´t know, whats the matter?

  26. [...] interfluidity » Monday at the Treasury: an overlong exegesis [...]

  27. JKH writes:

    SRW,

    A few late thoughts on your earlier brilliant post “Capital can’t be measured”, which you linked to above:

    http://www.interfluidity.com/v2/716.html

    Capital is quantum subset of risk. The purpose of capital is to absorb unexpected losses. It is for this reason that bank capital is often referred to as risk capital. As we’ve discussed a few times, for a given measurement of risk, selecting the level of capital is equivalent to selecting a strike price for an in-the-money call option.

    If capital can’t be measured, it’s because risk can’t be measured. We don’t know the future, and we don’t know the probabilities for the future. The probabilities are themselves subject to risk. So risk can’t be measured in the sense that it can’t be measured with certainty. The measurement of risk is risky. And its turtles all the way down from there.

    Therefore, we can’t measure capital because capital is a quantum subset of risk, and we can’t measure risk.

    Because capital is a proper quantum subset of risk, we can’t choose a level of capital that covers the outcome of risk in all situations. No matter what strike price we choose for the call option of capital, we can always lose our premium entirely.

    “Value at risk” is at the heart of the financial system’s conventional measurement of both risk and capital. It is simply statistics applied to financial risk. It’s a commoditized approach to measuring risk and defining a capital subset of risk. Both the LTCM risk dynamic and the credit crisis risk dynamic were driven by this approach.

    I’m always mystified when I see the post mortem analyses of Lehman, with regard to this question. Capital is an open risk position. The risk inherent in capital is not hedged. Given financial market events following the Lehman bankruptcy announcement, is it all that mysterious to explain changes in such an open risk position? Who was managing the risk capital position of Lehman in the days after September 15, 2008, and how were they doing it? I seem to recall that the markets did not take the Lehman bankruptcy in stride. How did Lehman’s capital and risk managers take the combination of the two? How was that open risk capital position being managed in those days? Was this a case of profoundly reflexive risk?

    The idea that “for large complex financials, capital cannot be measured precisely enough to distinguish conservatively solvent from insolvent banks” is somewhat circular in logic. The fact is that because of risk, solvency or insolvency is never absolutely knowable before the event occurs whereby a specific, precise event of insolvency becomes defined by history. The widespread blogosphere declaration of banking system insolvency mystifies me because of this.

    You said:

    “Capital does not exist in the world. It is not accessible to the senses. When we claim a bank or any other firm has so much “capital”, we are modeling its assets and liabilities and contingent positions and coming up with a number.”

    I’d say capital exists in the same way that the value of a stock exists, before it is sold. I’ll never know the eventual truth about it until the event happens. Until then, my stock value is uncertain in the same way that bank capital is. Perhaps the record of publically traded prices is reassuring, but all stocks are valued according to the perception of underlying capital value, which is uncertain and at risk and can change at any time.

  28. [...] Take-Out August 23, 2010, 8:43 am –Over at Interfluidity, Steve Waldman debriefs the world on the recent discussion Treasury had with the luminaries of the financial blogging world. [...]

  29. nick gogerty writes:

    On the big versus small bank issues and lending to small business. In the short term big banks win as cost of capital and access is a commodity game of basis points. He who has the lowest funding costs via access to capital wins. In the long run lending is an information game favoring the smaller attentive firm. He who truly knows the client has the fewest number of defaults and workouts. Squaring the circle of this conundrum is a major issue.

    Securitisation puts large firms on over-drive when guassian cupolas, AAA ratings and perceived diversification are considered better information about portfolio level risk than tacit or personal knowledge at the individual loan level. It is models vs. relationship banking in this arena. Faith in models favors the large, that sadly won’t change soon. Models are a over stated proxies for knowledge and fail to reflect the ongoing relationship management small holders can provide. Feast today famine tomorrow isn’t going to disappear with an approach based on more models etc. I like the analogy of flexible covenants and ongoing working relationships over the course of a debt’s life.

  30. What’s so hard for the people in charge to get this — unless they are on the side of financial capitalism?

    You answered your own question. Why else would Obama keep around acolytes of the discredited Bob Rubin?

  31. [...] might turn into real activists in the struggle ahead.   So this time the revelatory catalyst was Steve Waldman’s report from last week’s econoblogger conclave at Treasury. Here’s the critical quote:   On [...]

  32. [...] in people, art, discussions, philosophy, etc. And I’ve just seen another one. The section on trade patterns/economy of production in the context of economics bloggers meeting with the Dept of Treasury (and Timothy Geithner), [...]

  33. [...] Randy Waldman’s writeup of economics bloggers’ meeting with Treasury officials makes for pretty interesting vacation [...]

  34. Linda Barth writes:

    After reading the entire article I saw no mention of one of the main problems we real estate professionals see on the ground as we continue to try and move the real estate market forward. I’m, of course, refering to the severe contamination of the FICO system! That program is completely off the track and yet I NEVER hear anyone talking about it. There is mismangement, misinformation and clearly misuse of this archaic system. As long as were REFORMING lets get it ALL on the table. Although I was disappointed to learn that HEMP was really not intended to help the average individual, I’m not surprised. I’ve had more than one client say they’ve worked for months trying to do a modification sending documents over and over again only to be told at the end they don’t qualify. What a pitiful commentary on what we’ve become as a nation. When we’re more focused on making the greedy banksters whole while watching hardworking Americans be tossed in the street we should be ashamed as a people. One more thing, where’s the campaign for Elizabeth Warren! I’d be delighted to be one of her supporters and email my congressman and senators! It’s more than a little refreshing to see someone who really does care about average Americans. Plus she’s SMART! Whoa….maybe that’s the real problem!!!!!!!!!!!!! LMB

  35. VJK writes:

    JKH @


    If capital can’t be measured, it’s because risk can’t be measured. We don’t know the future, and we don’t know the probabilities for the future.

    That’s a very deep observation which should be, but amazingly is not, immediately obvious to anyone engaged in the business of purporting to predict economical/financial future based on the past data points, e.g. trying to predict CDO tranches trajectory based on his/her grandmother spending/saving patterns 50 or whatever years ago.

    Unwarranted normality assumptions in, for example, VaR calculations or in the BSM formula are just specific cases of the financial modeling nonsense that not even events like LTCM failure caused by utterly unpredictable Russian sovereign default, amongst other less significant reasons, can reverse.

  36. beowulf writes:

    Good stuff Steve. As for “guaranteed income” proposals, Besides as job guarantee (“employment assurance” as New Dealers called it), there’s also Ed Phelps’s wage subsidy plan.
    http://bostonreview.net/BR25.5/phelps.html

    http://www.boston.com/news/globe/ideas/articles/2003/09/28/the_wages_of_luck/

  37. [...] Steve Randy Waldman at Interfluidity writes about a discussion last week with several bloggers and Treasury officials: Monday at the Treasury: an overlong exegesis [...]

  38. [...] by Mike on August 23, 2010 Steve Waldman wrote up last Monday’s Treasury meeting in a must read post. I wish I had written it, it captures both the meeting and how Treasury looked to people on our side [...]

  39. Gabe writes:

    “Alex Tabarrok (who fascinates me as a writer, but spoke far too little at the meeting) pointed out that Treasury had done a good job so far at avoiding conflict over trade and resisting pressure to impose foolish barriers. He is right about that,”

    this is garbage…witht eh economy as bad as it is they shold be looking to have actually fre trade..not just not fucking things up! What about free trrade with Cuba..what about new sanctions on Iran?

    The ruling class has no admiration for free trade in principle…they just use the words to promote certain policies when it benefits the oligarchy and hinders competition with the oligarchy. It sounds like Alex was searching for ways to kiss ass.

  40. wally writes:

    “…where things are going badly and officials believe that some forms of policy activism would be wise but are politically impossible, how ought public servants behave?”

    I’m no admirer of the fruits of Reaganism, but one thing that everybody in government should have learned from Reagan is that you do not stop pushing your program because somebody tells you it won’t pass Congress. You stop pushing only after you have what you want.

  41. [...] • How Treasury Thinks (Interfluidity) [...]

  42. sk writes:

    You were amongst a bunch a thieves- you didn’t once call them that did you? Yup. you ate the cookies. Shame.

  43. [...] “officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole. Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures [...]

  44. [...] interfluidity » Monday at the Treasury: an overlong exegesis (Source) [...]

  45. constantnormal writes:

    “They don’t have intelligence. They have what I call ‘thintelligence.” They see the immediate situation. They think narrowly and they call it ‘being focused.’ They don’t see the surround. They don’t see the consequences”

    Jurassic Park — Michael Crichton (1990)

  46. [...] Randy Waldman tells the story of a meeting with some Top Men, including Treasury Secretary Tim Geithner [...]

  47. Mr. E writes:

    Marshall and Tom,

    I don’t know about the employment guarantee. It seems a bit crazy to me. Big fan of Wray – even read the ol’ book – but that premise seems to avoid a pretty huge problem of different wages across the U.S.

    In much of the south, this wage would be high, whereas in NYC, a joke.

  48. Tom Hickey writes:

    Mr E (47)

    The employee guarantee that is one of pillars of MMT isn’t something I have researched in detail. As I understand the basic principles, it is an idea that merits consideration, and I think that details such as you mention could be worked out. I suspect that the people working on this have anticipated most of the objection and answered them already.

    Bill Mitchell and Joan Muysken published a rather exhaustive study of employment under the title, Full employment abandoned: shifting sands and policy failures (Elgar 2008). Bill Mitchell provides an overview of the job guarantee at CofFee (Center of Full Employment and Equity).

  49. It sounds like Obama’s boys have sweet talked the bloggers. How about looking past how nice these jerks are and look at what they are actually doing? Everything in this piece points to the fact that they are looking out for the banks and not the people. Obama is a dismal failure for appointing these people and keeping them there while tens of millions of people are out a job. We need someone with some backbone like the Roosevelts who are not afraid to take on the financial community that is raping the country.

  50. [...] bloggers and the Treasury officials discussed was HAMP. According to blogger Steve Waldman’s write-up, Treasury officials were “surprisingly candid” about the program’s [...]

  51. [...] bloggers and the Treasury officials discussed was HAMP. According to blogger Steve Waldman’s write-up, Treasury officials were “surprisingly candid” about the program’s [...]

  52. [...] discusses the change in messaging about the Home Affordable Modification Program (HAMP) used in a recent meeting between Treasury [...]

  53. Cedric Regula writes:

    “One official wondered aloud why bondholders failed to discipline banks, in order to prevent this sort of misbehavior. I’ll leave that one dangling as an exercise for readers.

    With that line, you have proven you are ready to write satire and parody on par with the best of ‘em!

  54. Gabe writes:

    treasruy is a bunch of lying pieces of trash and their blogger friends are pathetic.

    “OK, so Cash-For-Clunkers didn’t do squat for the environment, but look what it did for car sales.” That is, they are admitting HAMP was not about keeping people in their borrowed homes at all. Instead, it was about bailing out Treasury’s bank buddies.

  55. [...] interfluidity » Monday at the Treasury: an overlong exegesis [...]

  56. [...] top players there (including Geitner) and several prominent bloggers.  You can see the article here.  The blog this is taken from is http://www.interfluidity.com.  The interesting part was when they [...]

  57. [...] one blogger’s (Interfluidity)account: (Treasury) Officials pointed out that what may have been an agonizing process for individuals was [...]

  58. FreeSpirit writes:

    [Hacker has just had a stormy cabinet meeting over a sudden financial crisis.]
    Hacker: Bernard, Humphrey should have seen this coming and warned me.

    Bernard: I don’t think Sir Humphrey understands economics, Prime Minister; he did read Classics, you know.

    Hacker: What about Sir Frank? He’s head of the Treasury!

    Bernard: Well I’m afraid he’s at an even greater disadvantage in understanding economics: he’s an economist.

    [From Yes, Prime Minister Ep. 5][

  59. [...] Program to help homeowners avoid foreclosure, the Obama officials explained that they judged “HAMP to be a qualified success because it helped banks muddle through what might have been a … Shocked at the admission that HAMP was meant to bail out banks and not help owners, Media Matters [...]

  60. [...] Program to help homeowners avoid foreclosure, the Obama officials explained that they judged “HAMP to be a qualified success because it helped banks muddle through what might have been a fata… Shocked at the admission that HAMP was meant to bail out banks and not help owners, Media Matters [...]

  61. [...] to specific people. But the accounts are all generally distressing, particularly this one from economics whiz Steve Waldman: The program was successful in the sense that it kept the patient alive until it had begun to heal. [...]

  62. [...] to specific people. But the accounts are all generally distressing, particularly this one from economics whiz Steve Waldman: The program was successful in the sense that it kept the patient alive until it had begun to heal. [...]

  63. [...] Economics whiz Steve Waldman [writes]: The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system,” “the economy,” and “ordinary Americans.” [...]

  64. [...] views to specific people. But the accounts are all generally distressing, particularly this one fromeconomics whiz Steve Waldman: The program was successful in the sense that it kept the patient alive until it had begun to heal. [...]

  65. [...] Economics whiz Steve Waldman [writes]: The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system,” “the economy,” and “ordinary Americans.” [...]

  66. [...] to specific people. But the accounts are all generally distressing, particularly this one from economics whiz Steve Waldman: The program was successful in the sense that it kept the patient alive until it had begun to heal. [...]

  67. molecule writes:

    Please don’t call them “smart people”.
    At best they are “smart-sounding” people, which is what it takes to climb the “bureaucratical” ladder.
    Smart people would have prevented, preempted and stopped the kind of nonsense that took us here.
    Please revise your definition of who is smart. The article sounds like we’re in good hands, just hold on to something during temporary turbulence. Talk about heebie jeebies.

  68. [...] point, even officials at the Treasury are acknowledging it (albeit in a slightly unsavory manner). From Steve Waldman’s roundup of the finance bloggers’ Treasury shindig: On HAMP, officials were surprisingly candid. The program has gotten a lot of bad press in terms of [...]

  69. [...] When did that become a mandate of the U.S. Treasury department?Here are the bloggers’ posts:Steve WaldmanJohn LounsburyYves Smith – aka Susan Elizabeth WebberMichael KonczalPhillip Davis – I [...]

  70. Bill writes:

    “They understood that the core problem preventing business expansion isn’t access to capital but absence of demand.” That is true now because the economy was allowed to go to the crapper and money pumped into banks was meant to simply absorb losses; banks were allowed to become tight as a drum in lending, which reinforced the downward sucking but creating more unemployment and less “demand.”

  71. Bill writes:

    “have a President who campaigned under the slogan “Yes we can!”, but then governed by cutting deals with status quo interest groups and limiting options to what powerful lobbies could live with.”

    Without campaign finance reform this will remain and fester.