...Archive for November 2009

Hello (again) world!

Welcome to interfluidity at its new home. Hopefully I’ll have a substantive post soon. In the meantime, I’d appreciate any feedback in the comments on how the new site looks and works for you. Also, if you had subscribed, does your subscription to interfluidity‘s RSS feed still work? (Were you notified of this post without having to resubscribe?)


Administrative note

Sadly, interfluidity‘s host, American Powerblogs is shutting down. Over the next few days, I’ll be migrating the site to a new provider. Hopefully, when all is said and done, everything will switch over fairly seamlessly, including the full archives, comments, etc. I’m trying really hard to avoid breaking links. But this’ll be an improvised do-it-yourself transition. I’m sure that visitors will find some oddities over the next few days.

The last thing I’m going to worry about is getting the graphic design reconstructed, so expect the site to look pretty generic for a while. Also, older posts and comments will not show up on the new front page. I’ll add a post with a link to recent past posts.

I’d like not to disturb RSS subscriptions, and will try to reproduce the feed at the same URL on the new site. But I’m not positive that will work. So, if you do want to stay subscribed to interfluidity, please double check the site directly in a few days. I’ll post a “hello world!” kind of thing when it seems like I’m up and running again. If you see that in your feed, that’ll be a good sign.

I’d like to thank American Powerblogs for a great run. They’ve been wonderful, and I’ve loved the platform and the software. I’m sure that whatever I’m moving to will feel like a big step down.

Discretion and financial regulation

An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing.

It’s easy to explain why. In good times, regulators have every incentive to take banks at their optimistic word on asset valuations, and therefore on bank capitalization. It is almost impossible for bank regulators to be “tough” in good times, for the same reason it is almost impossible for mutual fund managers to be bearish through a bubble. A “conservative” bank examiner who lowballs valuation estimates will inevitably face angry pushback from the regulated bank. Moreover, the examiner will be “proven wrong”, again and again, until she loses her job. Her fuddyduddy theories about cash flow and credit analysis will not withstand empirical scrutiny, as crappy credits continually perform while asset prices rise. Valuations can remain irrational much longer than a regulator can remain employed.

Bad times, unfortunately, follow good times, and regulatory incentives are to do the wrong thing yet again. When bad times come, overoptimistic valuations have been widely tolerated. In fact, they will have become very common. Overvaluation of assets leads to overstatement of capital. Overstatement of capital permits banks to increase the scale of their lending, which directly increases reported profitability. Banks that overvalue wildly thrive in good times. Fuddyduddy banks lag and their CEOs are ousted and The Economist runs snarky stories about what schlubs they are. The miracle of competition ensures that many of the most important and successful banks will have balance sheets like helium balloons at the end of a boom. Then, like a pin from outer space, somebody somewhere fails to repay a loan.

When this happens, bankers beg forbearance. They argue that the rain of pins will eventually pass and most of their assets will turn out to be fine. They ask regulators to allow them to write down assets gently, slowly, so that they can let ongoing earnings support or increase their regulatory capital. If that doesn’t work, they suggest that capitalization thresholds be temporarily lowered, since what good is having a buffer against bad times if you can’t actually use it in bad times? Knowing, and they do know, that their assets are crap and that they are on a glide path to visible insolvency, they use any forbearance they extract to “gamble for redemption”, to make speculative investments that will yield returns high enough to save them, if things work out. If they don’t, the bankers were going to lose their banks anyway. The additional losses that fall to taxpayers and creditors needn’t concern them.

Here, wouldn’t regulators draw the line? When the trouble is with just a few small banks, the answer is yes, absolutely. Regulators understand that the costs of closing a troubled bank early are much less than the costs after a delay. If a small bank is in trouble, they swoop in like superheroes and “resolve” it with extreme prejudice.

But when very large banks, or a very large number of banks are in trouble, the incentives change. Resolving banks, under this circumstance, will prove very expensive in terms of taxpayer dollars, political ill-will, and operational complexity. It will reveal regulators to have been asleep at the wheel, anger the public, and alienate nice people whom they’ve worked closely with, whom they like, who might otherwise offer them very nice jobs down the line. When a “systemic” banking crisis occurs, regulators’ incentives are suddenly aligned with bankers: to deny and underplay, to offer forbearance, to allow the troubled banks to try “earn” their way out of the crisis. Regulators, in fact, can go a step further. Bankers can only “gamble for redemption”, but regulators can rig the tables to ensure that banks are likely to win. And they do. A central bank might drop short-term interest rates very low to steepen the yield curve. It might purchase or lend against iffy assets with new money, propping up prices and ratifying balance sheets. It might pay interest to banks on that new money, creating de novo a revenue stream based on no economic activity at all. Regulators might bail out prominent creditors and counterparties of the banks, suddenly transforming bad bank assets into government gold. Directly or via those bailed out firms, regulators might engage in “open market transactions” with banks, entering or unwinding positions without driving hard bargains, leaving taxpayer money on the table as charity for the troubled institutions. They might even redefine the meaning of financial contracts in a subtle ways that increase bank revenues at the expense of consumers.

If all that stuff works out, regulators might be able to claim that they didn’t do such a bad job after all, that the crisis was just a “panic”, that their errors prior to the crisis were moderate and manageable and it was only the irrational skittishness of investors and the taunts of mean bloggers that made things seem so awful for a while. Regulators, like bankers, have everything to gain and little to lose by papering things over. And so they do. Besides, things here weren’t nearly as bad as in Europe.

There was nothing new or different about the recent financial crisis, other than its scale. Yes, the names of the overvalued financial instruments have changed and newfangled derivatives made it all confusing about who owed what to whom and what would explode where. But things have always blown up unaccountably during banking crises. We have seen this movie before, the story I’ve just told you is old hat, and the ending is always the same. We enact “reform”. The last time around, we enacted particularly smart reform, FDICIA, which was painstakingly mindful of regulators’ incentives, and tried to break the cycle. It mandated in very strong terms that FDIC take “prompt corrective action” with respect to potentially troubled banks.

The theory of “prompt corrective action” was and is very sensible. It’s pretty clear that the social costs increase and the likelihood of an equitable resolution to problems decreases the longer banks are permitted to downplay weakness, the more regulatory forbearance banks are granted, or the more public capital banks are given. (An “equitable resolution”, in this context, means giving the shaft to bank managers, shareholders, and unsecured creditors to minimize costs to taxpayers and to sharpen the incentives of bank stakeholders to invest well. “Regulatory forbearance” and “public capital injection” are redundant: Under current banking practice, regulatory forbearance is economically equivalent to an uncompensated injection of public capital, like TARP but without the messy politics and with no upside for taxpayers. Make sure you understand why.)

So FDICIA tried to short-circuit our woeful tale by telling regulators they should have a twitchy trigger finger. If regulators intervene early and aggressively, the costs of the crisis will be moderate, and since the costs of the crisis are moderate, it should actually be plausible for regulators to intervene early and aggressively rather than playing the world’s most expensive game of CYA. It was a great idea. Except it didn’t work.

We’ve already told the story of why it doesn’t work. Bank health and safety is a function of capitalization, capitalization is a function of bank asset valuation, and there is no objective measure of asset valuation. During good times “conservative” valuations are demonstrably mistaken and totally unsupportable as grounds for confiscating the property of respected, connected, and wealthy businesspeople. Regulators simply fail to take prompt corrective action until it is far too late.

As you read through the roughly 1400 pages of currently proposed regulatory reform, ask yourself what, if anything, would interfere with the (uncontroversial and long-understood) dynamic that I’ve described. Giving regulators more power doesn’t help, when regulators have repeatedly failed to use the powers they had. Putting more bank-like institutions and activities under a regulatory umbrella seems sensible, as does eliminating opportunities for firms to choose among several regulators and shop for the most permissive. But even our most vigilant and competent regulator (hi FDIC!) was totally snowed by this and the previous two banking crises. It has become fashionable to suggest that the idea of “systemic risk” is novel, and that just having some sort of high-level, blue ribbon council explicitly charged with worrying about financial catastrophes will change everything. But financial meltdowns are not new, Timothy Geithner was giving smart, widely discussed speeches about systemic risk in 2006, exactly as the current crisis was building.

There is, unfortunately, almost no correlation between the degree to which an institution or sector is supervised by regulators and behavior or misbehavior during a financial crisis. Commercial banks, GSEs, and bond insurers were intimately regulated and are now toast. Mortgage originators, boutique securitizers, ratings agencies, and CDS markets were largely unregulated. They also clearly failed. The one trainwreck that the current round of proposals might have forestalled is AIGFP, whose unhedged, uncollateralized CDS exposure would make even the most lackadaisical regulator blush. But it is not at all plausible, especially in the US, that AIG was the linchpin without which the late troubles would not have occurred. If we had to refight the last war under all the regulations now proposed, we might have won one battle. But we’d very definitely have lost the war. Deregulation won’t solve the problem. But neither will the sort of regulation now proposed by Barney Frank or Chris Dodd.

But what about Bernie Sanders? Is “too big to fail” the problem? Yes and no. Unsustainable bank-funded asset price booms can and do occur even among small banks. But systemic crises are more likely in a world with big banks, as only one or two need totter to take down the world. Chopping up banks reduces the frequency of major crises. Also, “prompt corrective action” does sometimes work for small banks. For big banks, PCA is just a joke — Citibank is and always will be perfectly healthy until it is totally a basket case. But regulators do stage early interventions in smaller banks, even during relatively quiet times, and that does help. Crises among small banks can lead to large fiscal costs (c.f. the S&L bailout). But even during serious crises, many small banks turn out to have been prudent, and small banks tend not to be so interconnected that a cascade of failures leaves us without a financial system. Small-bank-based systems fail gracefully. (See Felix Salmon.) Crises among small banks are less corrosive to incentives for careful capital allocation, and less offensive to distributive justice, than large bank crises, because regulators are willing to force preferred equityholders and unsecured creditors of smaller banks to bear losses while they hesitate to do so for big banks. Also managers of smaller banks can be perfunctorily defenestrated, while managers of megabanks somehow survive (and even when they don’t, they are too wealthy to have to care). Again, one hates to be mean, but treating the managers of trouble-causing banks roughly is important both to get the incentives right and out of regard for justice.

We should insist upon a market structure in which financial institutions are universally small. But smallness cannot be defined by balance-sheet assets alone. We need to manage the degree of interconnectedness and the scale of total exposures (including off-balance sheet exposures arising from derivative market participation). Further, we need to ensure that no market participants are indispensable by virtue of controlling some essential market infrastructure. Clearing and payments systems, securities and derivatives exchanges, etc should be multiple and redundant if privately owned, or publicly managed if efficiency demands a monopoly provider. Essential infrastructure should be held by entities that are bankruptcy remote from firms that bear unrelated risks, although the stakeholders needn’t be bankruptcy remote from the critical infrastructure. (For example, if the owner of a derivative exchange goes under, the exchange must be immune from liability, but if the exchange suffers losses due to insufficient collateral requirements, the owner could still be liable.)

Fundamentally (and a bit radically), for financial reform to be effective, regulators must actively target market structure. Financial systems are public/private partnerships, not purely private enterprises. It is perfectly reasonable for the state as the ultimate provider of funds and bearer of risk to insist on a robust and heterogeneous network of delegates. Regulators needn’t (and really cannot) architect the breakup of today’s destructive behemoths. All they need to do is identify dimensions along which firms become indispensable or threatening to financial stability as they grow, and tax measures of those attributes at progressively steeper rates. The taxes could be slowly phased in over a few years, to give existing firms time to arrange efficient deconglomerations. Importantly, legislators should characterize the target market structure, and empower regulators to define and alter tax schedules as necessary to achieve that target, rather than specifying them in law, to counter gaming by nimble financiers. (For example, a tax on balance sheet assets would lead to rapturous innovation in tricks to keep stuff off-balance-sheet.) Taxes should always be imposed in a nondiscriminatory way across the industry. (If you are not concerned about the role of political influence and favoratism in regulatory action, you haven’t been paying attention.) “Taxes” could take the form of increased regulatory burdens, such as capitalization or reserve requirements (though the effectiveness of the latter is diminished if central banks pay interest on reserves).

Variations of these ideas are actually in both Frank and Dodd’s proposed legislation. Regulators would have a fair amount of discretion, under the new laws, to do the right thing. They could ignore the terrifying shrieks of our banking overlords and force the monsters to break apart. But we come back to the first and most ancient law of banking regulation. Given discretion, banking regulators will always, always do the wrong thing. Only if Congress defines a verifiable target market structure and periodically audits the regulators for compliance will we eliminate “too-big-and-mean-and-rich-and-scary-and-interconnected-and-sexy-to-fail”.

But what about the much vaunted “resolution authority”. Doesn’t that change the deadly dynamic of banking regulation described above? Sure, it will still be true that during booms, banks will make dumb mistakes and regulators will be unable to point out that the Swiss cheese they’re calling assets is chock full of holes. But, you might argue, when the cycle turns, they’ll no longer be helplessly forced to resort to CYA-and-pray! They’ll have the tools to wind down bad banks ASAP!

Maybe. Resolution authority might be helpful. But I’m not optimistic. During the current crisis, there are two accounts of why we guaranteed and bailed existing banks — including creditors, managment, preferred shareholders, and financial counterparties — rather than resolving the banks and forcing losses onto the private parties who made bad bets. One account emphasizes legal constraints: we had laws that foresaw the orderly resolution of commercial banks, but not investment banks or bank-holding conglomerates. According to this view, regulators’ only options were to permit Lehman like uncontrolled liquidations of financial firms or else make whole every creditor to prevent a formal bankruptcy. If this is what you think then, yes, resolution authority might change everything.

But another view — my view — suggests that despite the limitations of preexisting legislation, regulators throughout this crisis have had the capacity to drive much harder bargains, and have chosen not to. Despite having no legal authority to do so, the government “resolved” Bear Stearns over a weekend in almost precisely the same manner that FDIC resolves your average small town bank. Secretary Paulson could at that point have gone to Congress with a proposal for resolution authority to institutionalize the powers he clearly required. Instead, he had Treasury staff prepare the first version of TARP and put it on a shelf until an emergency sufficient to blackmail Congress arose. Whatever the legal prearrangements, regulators have always had sufficient leverage, over firms and firm managers, to push through any structural changes they deemed necessary and to create bargaining power for firms to insist on loss sharing. Finally, earlier this year, when bank nationalization was an active debate, opponents did not because they could not claim that authority would not be found if the administration decided nationalization was the way to go. Harsh measures towards banks would have been extremely popular. What authority the administration did not have by virtue of existing powers and informal leverage they could have achieved by purchasing common shares instead of preferred during “capital injections”, or, in a pinch, by asking Congress for help. In my view, legal niceties were never the issue. Regulators opted to guarantee the banking system and bail out creditors because given the terrifying scale of the problem, the operational complexities and investor uncertainty associated with resolutions or nationalizations, the power of the banks and regulators’ personal connections to them — our leaders simply opted not to pursue more hardball resolutions. If we don’t change the structure of the financial industry, there’s no reason to think that next time around regulators won’t use the proposed resolution authority to do exactly what they opted to do this time. They won’t even need to go to Congress for a new TARP, as Frank’s proposal gives the executive branch carte blanche to provide financial firms unlimited guarantees and support. (I haven’t read the text of Dodd’s bill.)

Yes, I know that “living wills” are supposed to diminish the operational complexity and uncertainty associated with taking a harder line, and that, in theory, might encourage different choices. I also understand that some sort of industry-funded slush fund is supposed to bear future bail-out costs. My sense is that during a gut-wrenching financial crisis, hypothetical funeral plans will provide little comfort to terrified regulators, prepaid slush funds will prove to be laughably inadequate, and commitments to make firms pay for the mess ex post will be waived in order to shore up struggling bank balance sheets. These proposals are about providing the political cover necessary to get legislation passed, but they will prove to be utterly without substance when the next crisis occurs.

I’ll end where I started. The one rule that you can rely on with respect to banking regulation is that whenever regulators have discretion, they do exactly the wrong thing. For very predictable reasons and despite the best of intentions, they screw up. Besides messing around with intragovernmental organization charts, the main proposals before Congress give regulators more power and more discretion. That just won’t work.

Afterthoughts: It is really worth considering this excellent piece by Matt Yglesias, ht Mike Konczal.

I almost always disagree with Economic of Contempt on these issues. But despite being wrong, he is very smart, and a gentleman too. You should read this piece, which gets everything right, within the confines of supervisory regulation. We need structural changes most of all, but supervisory regulation won’t be going away, and there his points are dead on. Also check out his very creative defense of Too Big Too Fail banks. I happen to think liquidity is as often vice as virtue, so I’m not persuaded. (Assets that are difficult to value should be illiquid. Otherwise investors fall prey to delusions of safety and rely upon risk-management by exit, which never works out well.) So EoC is wrong. But he’s wrong in clever ways, and always worth reading.

Go Paul Kanjorski!

Update History:
  • 13-November-2009, 7:45 p.m. EST: Changed “as often virtue as vice” to “as often vice as virtue”.
  • 16-November-2009, 3:15 a.m. EST: Removed an awkward and superfluous space before a period.
  • 16-November-2009, 4:4 a.m. EST: Removed a comma and a repetitious “to banks”. Reworked (still awkward) sentence that used to read incoherentely “It’s pretty clear that both the social costs and the likelihood of an equitable resolution to banking problems increases…” It should have said costs increase, likelihood decreases, and now does. Inserted the word “by” before “asking Congress for help”. Put commas around “in theory”.

Sympathy for the Treasury

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.