On Monday I took part in a blogger meeting with several members of the Treasury Department. Alex Tabarrok has a writeup, as does Yves Smith and John Lounsbury has an extensive one as well.
First off, here’s a picture of me with Robert Rubin’s portrait:
Second, have you ever seen Miracle on 34th Street? Remember at the end when that guy legally is Santa Claus because he has all that mail delivered to him? I felt a little like that seeing “Mike Konczal, Rortybomb” on paper that had Treasury’s seal:
It was a pretty casual meet and greet. There weren’t any presentations, nothing to be sold on. We went to questions immediately. Geithner is very smart and personable, and it was very useful to chat with Treasury officials on background over the strengths and weaknesses of the financial reform bill.
Here are some of my notes from the meeting:
– My first question was that since we have clear conceptual metrics for how to judge the success of the other major policy achievements of the Obama Presidency like the stimulus (jobs created/saved) or health care (coverage, bending the cost curve) do they have internal metrics for successful implementation of the financial reform bill? I don’t think we have those metrics well-defined for financial reform (percent of derivatives clearing? liquidity reserving?) and as such it will be harder for the public and experts to define what a successful implementation of the bill will look like.
They didn’t have much in terms of goalposts. They pointed out that the big battlegrounds for rule-writing will be determining whether a firm is systemically risky, derivatives clearing and FDIC’s resolution. (Those are the major features of the bill, fyi.)
– They were very optimistic about Basel. They think it is moving faster and will come online with fewer conflicts than most appreciate. There will be a binding international leverage ratio. We weren’t told what it would be (they seemed surprised that we asked).
Shadow Banks, Resolution
– Tyler Cowen beat me to bringing out the shadow banking market questions, with a pointed question about money market mutual funds. I followed up with ask whether or not Perry Mehrling style reform was needed, serious structural backstops, dismantling or narrow banking reconfiguring of shadow banks.
Treasury in general thought that the buffers and new capital requirements would be more than enough to handle any problem resulting for shadow banking. Treasury brought up, when the Mehrling-style thought was invoked, how they didn’t want to live in a country where the government steps in a backstop the shadow banks. Steve Waldman yelled out “you already live in that country!” It was pretty funny.
There’s a money market mutual fund report coming out sometime soon I’ll have to keep my eye out for.
– Treasury said they were disappointed that people covering the bill didn’t emphasize a 10% cap on liabilities of a firm as a percent of all liabilities. Someone mentioned that two firms might feel a bit of heat right out the door. I’ve never heard that the liability cap portion of the bill was meant as an actual mechanism to block a level of concentration; indeed I’m used to hearing glowing things about Canadian banking and having a handful of very high level of banking-sector concentration being meme-dropped from the White House. I’m going to look into this next week and will write more.
– They used the phrase “level-playing field” a lot. They also said “finreg” for the financial reform bill and process.
– I mentioned that resolution authority may not be credible on the five biggest firms, and that this may distort the way the bond market interacts with a worse case scenario that we’ll end up with a Too Big To Resolve problem. Biggest banks are all bigger than at the beginning of the crisis, and so forth. I mentioned Shahien’s story about Moody’s difficulties on ratings the Too Big To Fail firms post-bill and what they thought of that too. They generally took a we’ll wait and see approach. Yves Smith jumped in here on the international components to resolution; again, same approach. They are optimistic about the markets taking resolution and regulation seriously.
– They are sticking by HAMP. The narrative seemed to change from helping homeowners to spacing out the foreclosures. I asked them to repeat it, because the idea that billions of taxpayer dollars are being spent to smooth out foreclosures for banks struck me as new narrative – it’s explicitly extend-and-pretend, and also fairly cynical.
– There was talk about how fiscal policy can’t move through Congress. I asked them about only 0.5% of HAMP being spent and how that could be used without Congress’ permission. Before I suggested that the remainder of the $50bn be divided into two funds, the Digging Holes Across States (DHAS) fund and the Filling Holes Across States (FHAS) fund, two far more socially productive means of spending the HAMP money than what is currently being done with it, I was told that the entire $50bn is expected to be spent by the time the program is over. I didn’t believe it; we will see.
– Overall, there seemed to be a sense of “we are done here” from the meeting. Maybe it was the fact that it is August, the informal manner of the meeting and a news cycle is driven by insane things, but there was a sense with the financial reform bill passed, deadlock in Congress and a Federal Reserve tip-toeing around its mandate things were going to slow down and options are more or less removed from the table. Which is a very scary thought with the economy the way it is.
I do love this post, Mike.
Yes, nice post and interesting reading, thanks. Look forward to hearing more of your thoughts.
Well I was disappointed in this post – and in every other write up I’ve seen, in one respect. It seems this is such an insiders chat session, for people that fundamentally don’t share the largest economic problem we face: unemployment and underemployment.
If you are worried about unemployment, it makes the agenda. finreg doesn’t absorb all the interest, important as it is.
Why the nonchalance about China and the peg?
I haven’t read Waldman’s or Yves’ breakdown yet, but last time David Merkel had the presence of mind to ask how many bloggers had been invited. Last time there were more invited than attended (for example James Kwak). The Atlantic business editor wasn’t there last time, but I imagine her deepest contribution to the conversation would have been about what impact the Treasury cookies ingredients had in the fall of Lehman and if Chips Ahoy would have made a difference…. Seven bloggers is much smaller group than last time. Were there other invitations that were passed on???? I hope you or one of the attendees can follow up on this question.
Although there is a great deal of propaganda involved here, I do think that Geithner and company deserve credit and bonus points for inviting bloggers. It is then up to the bloggers to hold them to tough questions and set the bar.
I am certainly no fan of Geithner’s, but he does deserve some points in the positive column for being open to questions.
Regarding HAMP, did you see the Wednesday WSJ article, “‘Vultures’ Save Troubled Homeowners”, at:
It highlighted the fact that a big problem in the re-negotiation of mortgages, including lowering balances, is that the stipulations in mortgage-backed bonds require that all, or perhaps a majority, of the bondholders approve. And this can be unfeasible with highly dispersed ownership.
Next time you talk to Tim, could you ask him about a change in law or regulation that would make it easier to allow renegotiation of securitized mortgages, like approval of a majority or all bondholders is not necessary if the actions are approved by some impartial regulatory party.
And if it can’t be done retroactively for the current crop of mortgage-backed bonds, what about asking Tim for regulations requiring future mortgage-backed bonds to have a provision that allows the bank or other party that created the bonds wide latitude in renegotiating the underlying mortgages in the fiduciary interests of the bondholders, without voting consent of those bondholders (or derivative holders).
The market would never let that one fly. Legally, it’s too similar to eminent domain. It would never fly. Geithner is smart enough not even to waste time running it up the flagpole.
It might not be legal retroactively, but there are already a lot of regulations, requirements, on financial securities. So, one of them in the future, for future mortgage-backed securities, could be that no matter how diffuse the ownership is, there are always some managers of the issue that have the right, and the fiduciary responsibility, to make dramatic modifications to the underlying mortgages in the interests of the bondholders, without there having to be a vote, or unanimous approval, of the bondholders. And the bondholders could always sue if they think it’s clear that the managers didn’t act in their fiduciary interest.
This kind of regulation, requirement, doesn’t seem that much stronger, or more radical, than the kinds of regulations we already have on securities.
Then we are in a very long period of extend and pretend. As Krugman is now taking to saying, we are turning Japanese.
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Dear YATs(Yet Another Technocrat)s,
So no one flat-out said that financial reform had failed(which is the case) since the one thing you(the bloggers) all have in common with “Treasury” is being technocrats.
Doesn’t Treasury(or this blogger group) understand that not requiring all derivatives to be put on exchanges with no exceptions means that the entire effort has failed? because the exceptions to the finreg rules will be gamed by the financial industry until fleets of trucks can be driven through them? Isn’t that obvious to any of you?
Anyway, you’re(New Deal 2.0) still a bunch of technocrats, not realizing that the Democratic Party was ruined 20(?) years ago when the DLC took it over and that you will as a group accomplish little or nothing at all.
I realize there are economists out there saying what I’m saying, at PERI, I think, but why aren’t they the ones invited to meet “Treasury”? Why y’all? Didja ever think about that? Hah?
Did you know that during the Clinton presidency Richard Rorty was summoned to participate in a roundtable discussion later dubbed “The Thinker’s Dinner” ?
There are several published accounts of the night’s conversation. This one (not the best) is from Sidney Blumenthal’s memoir “The Clinton Wars” (pp. 314-16.):
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Why no questions about the long term viability and feasibility of the financial system itself? A system that wouldn’t be exaggerating to say, has perpetrated economic crimes against humanity. A system that is fundamentally predicated on the notion of “I win. You lose.” A system that will collapse again.
But instead you fiddle with the details, while Rome burns.
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