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.

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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.