My Visit to the US Treasury, Part 2

Before I start this evening, to all my fellow bloggers out there, if you were invited to the gathering at the US Treasury and did not come, I have a request and a question:

  • If you were invited, send me an e-mail.
  • Tell me why you decided not to come, if you would.

If present trends continue, I can tell you that bloggers are not pushovers for the US Treasury, but neither are they deaf or heartless.  Since my last post, here are the responses to the gathering:

As all bloggers there will note, those from the Treasury were kind, intelligent, funny… they were real people, unlike the common tendency to demonize those in DC.  As for me, I live near DC, and I am an economic libertarian, but I have many friends at many levels inside our bloated government.

They have to do their jobs.  If there is a conspiracy, it is well-hidden.  There are simpler ways to understand the mess that comes out of national politics.  We get the result that is least offensive to the most, and pleasing to few.

We had a good discussion, but I am not the one to put myself forward.  I made some comments, but did not get to ask my questions.  My personality was not the dominant one.

What I propose to do in this series of articles is go through the main arguments of the US Treasury from the handouts that they gave us (sorry, I can’t scan them and put them out for view), and try to give a fair rendering of what they have done.  My audience is dual: I am addressing those who read me in the blogosphere, and those at the Treasury.


Treasury officials said that they were trying to reduce the footprint of the rescues/bailouts as much as possible, doing it at a rate that would not jeopardize the recovery.  Their goal is to put in place  regulations that will prevent future disasters once the current disaster is past.

David: Well, yeah, that’s what to do if you can.  The question is what will happen to the markets when you start to remove significant stimulus from critical areas, as I said to my pal Cody a year ago.  Much of that is not in the domain of the Treasury, but the Fed.

The Treasury understands that the troubles of 2008 came from poor credit regulation and tight coupling in the financial system.

David: we over-encouraged single family housing as a goal for Americans.  When debt was too high for cash flows from average American households to afford residential housing, the prices of housing began to fall, and the foreclosure process began, as foreclosures happen once someone is inverted on their mortgage.  Residential real estate prices overshot by a lot.  We should be surprised that there are problems now?

I would not only eliminate the tax credit for new buyers, but I would phase out the interest deduction for mortgage interest.  Get people financing with equity, not debt, even if it means the economy is sluggish for a few years.  It will bring a longer-lasting self-sustaining recovery.  Debt-based systems are inherently fragile because fixed commitments remove flexibility from the system.

To the Treasury I would say, “Markets are inherently unstable, and that is a good thing.”  They often have to adjust to severe changes in the human condition, and governmental attempts to tame markets may result in calm for a time, and a tsunami thereafter.

Those that understand chaos theory (nonlinear dynamics) were less surprised by the difficult markets that we have faced.  We saw it coming, but could not predict exactly when the system would face crisis.  Bears are often right, but with significant delays.

The government is not the majority player in the system, but is the biggest player.  At critical points their willingness to offer support helped lead to a market rebound.

Now in the actions of the government, there is some “making virtue out of necessity.”  In supporting Fannie & Freddie in February 2009, they did not have much choice, unless they were to let them fail, which might have been a good thing.  As it is, F&F seem to be black holes where the government is unlikely to recoup their investments.

As for the bank stress-testing, one can look at it two ways: 1) the way I looked at it at the time — short on details, many generalities, not trusting the results.  (Remember, I have done many such analyses myself for insurers.) or, 2) something that gave confidence to the markets when they were in an oversold state.  Duh, but I was dumb — the oversold market rallied when it learned that the Treasury had its back.

I’m tired, and that’s enough for the evening.  I’ll pick this up tomorrow.


  • matt says:

    “…US Treasury from the handouts that they gave us…”

    Taking handouts from the Treasury? You’re the same as the banks :D

  • Jim says:

    I find it hard to believe that (most of) you guys do not understand the system is broken beyond repair and continued intervention only delays, and increases, the impending crash and burn.

    Not knowing the level of Govt reps at the meeting, and assuming they were not top level, it is understandable that they are still living in fantasy of ignorance. I must assume the top guys know the end game and are in the process of sucking out every last cent while they still can.

    I will remind you that we are facing a global crisis which is primarily a currency problem…
    assuming we overlook all the fraud and corruption.

  • James Dailey says:

    Hello David,

    Were there any questions or explanations as to why the taxpayer was required to bailout bond holders of these large institutions? Except for Lehman, every other holding company bond holder has been bailed out at tremendous cost and likely wreaked havoc via moral hazard.

    Thanks for the insight.

  • What if you did tell who was there from Treasury? What would be your sanction or punishment? What is the threat??????????????

    • David, it would be breaking my word. I know the identities of a number of anonymous bloggers. I don’t disclose that. I sometimes counsel people with marital problems — their problems are confidential. I sometimes get material nonpublic information — I give it to my attorney and keep quiet.

      I have private data on and from many of my readers; I only disclose what they want. Same for underwriting clients. The Treasury is no different in my opinion — they set the rules. I have had insurance regulators ask my opinion on confidential matters. I keep quiet.

      Often, bearing responsibility means keeping confidences. In my case, I don’t need access to the Treasury — I have happily lived without it, and probably will in the future. The US Treasury will probably not like what I write, but at least I will write it politely.

      File a FOIA, I’ll bet you could get the data. Then blog your success. Go for it.

  • mulp says:

    Why do you focus on too easy housing credit and its tax deductability? What about the even higher interest rate credit card and better yet the legal loansharking called payday lending at 500%+, neither of which is tax deductible. And lots of those with subprimes seem to be retired, low income, or unemployed so they get no tax benefit from mortgage interest.

    I agree that the mortgage tax deduction should be phased out somehow, but that isn’t sufficient to explain the crisis. Just as F&F can’t explain it given both have roots going back more than half a century and we didn’t see these problems until we had deregulation and an executive that happily turned blind eyes on borderline or actual fraud. After all, the Fed had a lot of authority it didn’t use to restrict none bank mortgage lending that would be clearly criminal fraud if a bank did it as systematically as the investment bank mortgage boiler room mortgage originators.

    But what seems to me is the far bigger threat of the debt used by corporate execs to avoid having to obtain capital from selling stock to investors who might find the returns on capital too low to justify the venture. Or the factoring of receivables and inventory.

    We are no longer a capitalist economy, but a debtist economy.

    We should phase out the individual mortgage interest deduction after phasing out the interest deduction for corporate debt of all kinds, and drive corporations back to being capitalists.

    • The residential housing market is the biggest debt market in the US. That is why I focus on it.

      As for corporation losing interest deductibility, I say fine, but let’s make dividends tax deductible. Let’s equitize the system.