On Financial Bloggers Meeting with Treasury Department

Below is a blog post recap by Yves Smith of Naked Capitalism of a meeting that took place Monday between a group of bloggers (including yours truly) and various Treasury officials, entitled "Curious Meeting at Treasury Department":

It was also striking to see that the Treasury officials lacked a vision for a banking system for the 21st century that was materially different that the one we have now. The flip side is if they did, articulating that publicly might get them accused of doing Communist central planning, but I didn’t hear second level arguments that said they had considered the issue in a serious way, save not winding the clock back to much more on balance sheet intermediation, aka traditional banking, as opposed to “market based credit”. Nevertheless, at a McKinsey alumni meeting months ago, a partner who has been advising the Treasury and Fed told the group that the Administration wants to make being systemically important very costly to force firms to do what is necessary to get out of that category. That of course is structural reform, but we got no acknowledgment of that as an aim. And aside from raising capital requirements more for big firms than smaller ones, it is not clear how far Treasury could go down that path on its own (and strictly regulatory measures can be rolled back by a new Administration).

Several of us raised questions about whether what their vision for the industry’s structure was and that the objective seemed to be to restore the financial system that got us in trouble in the first place. The answers instead focused on more stringent regulations, higher capital levels, and of course the derivatives regulation bill. I tried twice to engage them on how the bill has so many loopholes that it is not going to make any difference as far as the real problem is concerned (the out for customized derivatives, in the Administration proposal, gave the industry an easy and obvious way to evade the rules; the House pretty much gutted what was left) but I was not specific enough in saying what “loophole” constituted and was basically deflected (and was also told the derivatives on balance sheet would be subject to tougher capital requirements, and the industry was complaining that the bill would make things more costly for them. Ahem, it has become standard practice of all the powerful lobbies to make a great deal of noise about any change on principle, so the level of complaining is not a valid indicator of the efficacy of reform).

I also asked about the size of the financial services industry (as in one of the distortions that resulted from deregulation and rates being too low was that the financial sector had grown too large, which by implication means it needed to shrink. I was told it had shrunk and that the Fed was winding down its programs. Yes, but the expectation is that as the Fed winds down, the private markets will step into be breach, which means more credit private credit extension. There was no acknowledgment of the issue raised by Joseph Stiglitz, that if credit intermediaries are making too much money, the banking system tail is wagging the economic dog.

They also defended the stress tests as being serious, and again did not seem to win converts.

Overall, Yves did a good job summing up what transpired at the gathering. That said, I thought I'd throw in a few thoughts of my own:

• In response to the question about what would happen if, as Reinhart and Rogoff had concluded about past financial crises (.pdf), the current episode also proves to be a "protracted affair," it wasn't clear that there was a "plan B" in place if things do not recover in 2010 as many mainstream analysts expect. In fact, the suggestion from one official was that the tenure of the current crisis would likely be nearer the shorter end of expectations.
• There was also a bit of a disconnect between the remarks various Treasury officials have made in public forums and what was said at the meeting. Last Thursday, for example, Bloomberg reported that Treasury Secretary Geithner spoke to the Economic Club of Chicago and said:

You can say now with confidence that the financial system is stable, the economy is stabilized....You can see the first signs of growth here and around the world.

Monday, however, a number of those present clearly acknowledged that things could (still) go wrong and said such fears kept them awake at night. While that is not unusual in and of itself, at the very least it adds to doubts I and others have expressed about the true state of the financial system and the economy.

• Finally, the meeting seemed to confirm the strong grip that Wall Street has on the levers of legislative power. In response to a throwaway remark by one of the bloggers present that discussions about the overly large size of the financial sector relative to the real economy were "not politically correct," one official suggested the reality was just the opposite, and that a substantial majority of the public agreed with that assessment.
  
  If you take that together with the assertion that the Treasury Department -- and, by extension, the Obama administration -- is fully committed to financial sector reform, as well as the fact that the Democrats dominate Congress, the implication is that other forces -- namely, the moneyed interests and their lobbyists -- are standing in the way of necessary change. Nothing new there, I guess.

Comments

[Bayard:]

This is not news. No one at Treasury is really serious about rebalancing the finance industry. Although the majority of cogent (non-attached) economists seems to favor a break up of the TBTF financial companies, there is no heart for that, either in Congress (they've been bought) or the Administration (probably because they know that there Congress won't act) because of Summers (ex-Goldman anti-regulation) and Geithner (who is controlled by Wall Street thinking, and is too close to the Bigs).

I, for one, believe that we are headed toward another brink and the abyss because Wall Street is still acting as they did in the process that got us to last October.

Nov 04 05:51 AM

[lower98th:]

As an Obama supporter, it is distressing to see evidence that he cannot deliver as a populist president, and to hear the P word become Puppet.

A few one or two sentence laws woud move forward most of his professed agendas: No anti-trust waivers. Reinstate Glass-Stegal. No off-balance sheet accounting. Transparent, exchange-based trading of all assets.

Nov 04 06:24 AM

[Pat C:]

Please keep the blogging up if it is getting you an audince in Washington. Maybe you can get in front of the congress - everyone else is.

Nov 04 10:21 AM

[whydtinogo:]

"If you take that together with the assertion that the Treasury Department -- and, by extension, the Obama administration -- is fully committed to financial sector reform, as well as the fact that the Democrats dominate Congress, the implication is that other forces -- namely, the moneyed interests and their lobbyists -- are standing in the way of necessary change" -

Isn't this the case with everything that Obama promised to change - from health care all the way to not hiring former lobbyists. At least with the latter he got a hall pass, I mean a waiver.

Nov 04 10:59 AM

[neontyper:]

Hello! Obama and Geitner are purposley destroying the economy to form their dictatorship. People on their knees, that's what they want.

"Barrack Obama pay my mortgage" says the hoodrat in Detroit.

Nov 05 08:43 AM

[Leftfield:]

Geithner to the Economic Club of Chicago: "You can say with confidence now that the financial system is stable, the economy is stabilized,,,,,You can see the first signs of growth here and around the world,"
Treasury can peddle crap to "important" economists that can't get by bloggers or my mother. It figures; the people in charge and the trouble we're in are one and the same.

Nov 05 01:32 PM

[Jason Rines...:]

I see with the above spamming comment SA has not figured out how to block spammers. I offered, many times to help SA. I am done trying.

As for the bloggers, kudos to them for giving it the old college try. Let's see Treasury bring in a couple of other heavyweights, like Karl Denninger, John Lounsbury and Jim Quinn. There is no plan B, because these people will attempt to silence the rape victim now. History does rythme.

It is not they do not care per se, they just care more about themselves than the people that put them into power. So those who are last in the ivory towers to fall and come crashing down realize it is all now too late, that damn pride it always cometh before the fall.

Nov 05 07:50 PM

[rick12345:]

And what exactly would you and every other American in the country do if you new the truth about the banking system? Pull your money out of the local branch, causing a complete meltdown in the global economy. Yeah, that's a real smart thing to do.
Sometimes you just have to bite your tongue and prey like hell that those responsible are smart enough to fix the problem.

Nov 06 02:40 AM