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.

25 Responses to “Sympathy for the Treasury”

  1. frankl writes:

    sympathy for the devil? very nice

  2. someone writes:

    No doubt that those ‘Treasury officials’ are smart and well trained in pr tasks.

    But the bloggers publications show that you 8 smarties are capable to make the difference between fact and fiction.

    One curious question: Did they hand out business cards which would allow you to contact them later?

  3. The Epicurean Dealmaker writes:

    Well done, Steve. Watch out for those Treasury cookies: they’re dynamite!

  4. Kid Dynamite writes:

    terrific recap, Steve

  5. Wonderfully done! I especially liked the “slime mold” reference as that wonderful little life form has been an area of study of mine for years.

  6. Benign Brodwicz writes:

    Have yourself disinfected, the virus of power and influence dives deep.

  7. Harald Korneliussen writes:

    While I’m sure they wanted to “corrupt” you a little with this meeting, I’m not so worried about the reasons. After all, do they need good relations with finance bloggers?

    The optimist in me says that they read you, would have participated in the blog exchange if they were allowed to, and only want to make sure you stay interesting/useful – and don’t slip too much towards paranoia about their intentions, etc.

  8. Benign Brodwicz writes:

    And why didn’t anyone ask MarketTicker’s question: Where are the prosecutions for fraud? The real estate bubble, aided and abetted by Rubin, Summers, Greenspan, and the so-called banking regulators, and executed by Goldman Sachs and Fitch et al., is widely viewed as a massive case of financial fraud. And it was! Is there no accountability for past deeds? Or is that “not nice”?

    You guys were clearly under the sway of the Beltway pheromones.

    Did anyone say, “Trust me,” or was it just implied?

  9. ablebonus writes:

    The Star Wars metaphor – probably getting sucked into the Death Star by the tractor beam.

  10. JKH writes:

    I would have considered myself hedged on the cookie front if Iā€™d paid for my own transportation.

  11. Connolly writes:

    Fun summary, thx.

    What you describe as the sense of polite listening and engagement (like using your first name!) is the typical approach one sees at meetings with even low level City Employees.

    This meeting was all Theater and these folks could truly give a poop about you or your oh-so simple ideas.

    Called Politics, dude….and real power resides somewhere else.

    Mainly the Populace (BLOGGERS!) has none and does not know where to find any!


  12. David Merkel writes:

    It was great to meet you, Steve, and I am humbled at your appraisal of me. Check out my recent post — it lists who all was invited.

  13. Regulator guy writes:

    On an issue of substance, you say “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.”

    This is an essential question (and a quite hard one!): can one identify and accurately measure (and then perhaps tax) the potential “externalities” that a firm poses on the network of other firms? There are several potential externalities: a size externality, a counterparty credit risk (or network) externality, a “fire-sale” externality (where firms hold identical positions and a forced sale renders all insolvent), externalities associated with operating payment and settlement systems, and I am sure others.

  14. I would aprecciate to know, at what time the meeting started,(e-mail?) and would like to comment on the horoscope of the event in my weekly chronicle.

    My first idea was, this was a meeting, which the than masters of the universum of 1517 in Rome didn’t concede to the reformators.

    Great your referring to our vanity.


  15. Thomas Pindelski writes:

    I appreciate your candor regarding what was a pretty transparent attempt to co-opt bloggers like you.

    The skepticism you and your soul mates display is comforting, even as I wonder why any of you attended.

    The positive side of this is that you have them spooked and they are paying attention. Obviously they have an agenda. The next offer, let’s say it’s a trip on Air Force One, will be the true test. Just Say No.

  16. Ajay writes:

    Ha! Now you know how the villagers in DC feel … of course one should excuse their behavior since they face these important people daily and are convinced of that “our policy people” have our best interests at heart. On top of it unlike the gang-of-8, the villagers are listened to.

    Oh well … how easily ‘closeness to power’ makes us feel important. An interesting lesson.

  17. JKH writes:

    John Jansen interviewed by BNN TV:

    clip @ 5:20 p.m.

  18. anon writes:

    An idea threatened by human warmth is not much of an idea.

  19. Todd writes:

    I was thinking about the STO’s willingness to sit down with bloggers and it made me think of changes in media today and how this time is certainly NOT different.

    It reminded me of Martin Luther’s attack on Pope Leo the X’s church via the use of the printing press. Pope Leo X the tenth is probably one of the top Popes that the church would like to forget. He was in fact never a priest but was instead the son of Lorenzo de’ Medici and great-grandson of Cosimo de’ Medici. Cosimo was at the helm the Medici bank when it collapsed under the weight of non-performing loans and misappropriation of state funds. Funny how that works. Pope Leo was famous for the sale of indulgences or free passes to heaven for anyone convicted of just about everything. He was also known for having parties where little boys jumped out of cakes. Martin Luther highlighted the massive flow of funds over the Alps from German states within the Holy Roman Empire to Rome and the strain they placed on German states.

    The STO’s and our executive are reaching out not to learn from you or to hear you complaints. They are reaching out because you are well informed, insightful and widely accessible. Mainstream media is too compromised, lazy and uninformed to be a threat to them. With the exception of Bloomberg and Reuters, I doubt that most business desks at newspapers could decipher the difference between JP Morgan’s filings and Citi’s. You are a representative of the unwashed masses (a good thing). Your writings (blogs in general) are seen as crude, unprofessional and dare I say heretical. Keep up the good work. I await your 95 Theses.

  20. drscroogemcduck writes:

    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.

    this is also a technique from cold reading called the ‘rainbow ruse’. the idea is to tie two contradictory statements together so the amalgamation is hard to disagree with.

  21. scrilla_gorilla writes:

    I bet the Star Wars scene was when Darth Vadar has a meal with Leia and Lando on the Cloud City.

  22. Crawdad writes:

    Thanks for writing about this event. Methinks you were used as a focus group to find weaknesses in their spin, instead of truly looking for new/better ideas. Not much new there…

  23. Adamchik writes:

    I have had encounters with higher-level FRB and FDIC bureaucrats, and I always got the feeling that there was no way way that they could actually absorb reality outside their hallowed halls. I think they were all decent people, just too far removed from the workings of reality. Your key phrase for me was, “But somehow, it never felt like we connected.” That’s it exactly.

  24. Anonymous writes:

    You can see the use of profanity by the protagonist of Elmer Gantry. “A preacher who says damn” or something like that.

  25. One of the most dangerous things about allowing super rich and powerful megabanks is that they can hire armies of lobbyists and bribe congressmen and parties with enormous contributions. This can obviously cause highly sub-optimal policy and legislation to be adopted.

    It would be great if we could pass a low outlawing political contributions and lobbying for banks.

    I’d like to see all corporate political contributions outlawed, as this can cause severely harmful economic distortions of policy to benefit individual corporations and industries ā€“ for a particularly ugly example look at the sugar industry ā€“ but this would be very hard to pass politically.

    However, with the public, rightly, strongly against the banking industry, and strongly favoring measures to keep them in line and diminish their power, this would have a much better chance of passing than a blanket prohibition on all corporations. And, you could also, quite clearly, add the argument that this industry is special because of its great importance and externalities, that it’s strongly a public good industry.