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 by asking whether or not Perry Mehrling style reform, serious structural backstops, dismantling or narrow banking reconfiguring of shadow banks was needed.
Treasury in general thought that the buffers and new capital requirements would be more than enough to handle any problem resulting from 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 to 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 that 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 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 $50 billion 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 $50 billion 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 factors that it is August, the informal manner of the meeting and a news cycle that 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.
Mike Konczal is a Fellow at the Roosevelt Institute.