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.
- Kid Dynamite — A Sit Down With Senior Treasury Officials - Part I
- Accrued Interest — Financial Regulation: How would you have it work?
- John Jansen — Bond Market Opening November 03 2009
- John Jansen — Bond Market Opening November 04 2009
- David Merkel — My Visit to the US Treasury, Part 1
- David Merkel — My Visit to the US Treasury, Part 2
- Michael Panzner — A Few Observations of My Own
- Yves Smith — Curious Meeting at Treasury Department
- 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.