Afternoon at the Treasury

by on August 17, 2010 at 8:29 am in Economics, History, Law | Permalink

Yesterday, Tyler, myself and a handful of other economics bloggers had a chance to discuss the economy with Treasury Secretary Geithner and other treasury officials. Here are a few random notes.

There was deep skepticism about the financial industry and about reform from some of the bloggers. More let’s say “radical” approaches such as Treasury taking an equity stake in underwater homes or giving everyone a guaranteed income were brought up. I was surprised to find myself on the side of the more conservative Treasury officials who cogently argued that such reforms were neither politically viable nor likely to work.  Treasury gave a good argument that reform had been deep and meaningful.

A few good lines from a senior treasury official as I recall the gist:

  • “Markets believe we can borrow. The public doesn’t. We need both to move forward on the fiscal front."
  • “Businesses are investing in a way that shows more confidence than they are talking.” (graph here, see the last year or so AT) 

There was a recognition that the Fed could do “dramatic” things but a sense that the theory here was uncertain and untested.

The best question of the day came from Tyler. The discussion was on the financial reform bill and how it changed the incentives of players in the financial industry by creating more risk for them. Tyler interrupted with “What I really want to know is how your incentives have been changed! What is to say that next time the decision will not be made to again bailout the bondholders?”

As Tyler said after an earlier visit, Geithner is smart and deep. Geithner took questions on any topic. Bear in mind that taking questions from people like Mike Konczal, Tyler, or Interfluidity is not like taking questions from the press. Geithner quickly identified the heart of every question and responded in a way that showed a command of both theory and fact. We went way over scheduled time. He seemed to be having fun.

1 Chip Hessenflow August 17, 2010 at 8:43 am

This is the reason for reading your blog! Insights! Insights! Insight! Thank you.

2 Will August 17, 2010 at 9:02 am

Could you please update this post with links to any other blogger that discusses this meeting. I find this meeting fascinating and I would like to see others take on the discussion.

3 Flattus Maximus August 17, 2010 at 9:19 am

“Did you eat their cookies?”

Well, he obviously drank their Kool-Aid.

4 Tyler Cowen August 17, 2010 at 9:23 am

I thought the best remark from a Treasury person was something like: “The biggest risk is that no one wants to take risk,” although I believe that is not an exact wording.

No cookies this time, the Perrier was first-rate, however.

5 Niknaknoo August 17, 2010 at 9:33 am

Sure we might be able to borrow, the question is can we pay it back!

6 thehova August 17, 2010 at 9:41 am

For our divisive times, Tim Geithner has a pretty amazing reputation. I’ve never heard a respected source write disparagingly about him.

7 j r August 17, 2010 at 9:51 am

“Milton Friedman wanted to give everyone a guaranteed income via a negative income tax. Much more efficient to give people money to spend as they wish than to subsidize consumption of particular things such as housing.”

Yes, but in subsidizing consumption you guarantee everyone in DC an income.

8 V August 17, 2010 at 10:05 am

Would be good if someone could grab some video next time, he speaks like he’s talking to a 5th grade teacher when he talks to regular media.

9 Bill August 17, 2010 at 10:12 am

Bondholders should pay for their own insurance, or, for that matter, companies should pay for their own insurance, just as the insurance industry does through guaranty fund associations in each state. Insurance companies prefund a pool for possible failure, and remain on hook to help policyholders of failed institutions. This keeps carriers very interested in oversight, regulation, and solvency review.

A version of this was part of the original financial reform bill, but it was taken out at the insistence of a minority.

10 dearieme August 17, 2010 at 10:33 am

If he’s so smart how come he was caught fiddling his tax returns?

11 ZBicyclist August 17, 2010 at 10:38 am

“Geithner … showed a command of both theory and fact”

That’s a dangerous combination, especially Geithner believes it himself.

The “facts” are always limited and the “theory” is never quite right.

12 Yancey Ward August 17, 2010 at 10:43 am

Alex,

That was the best question? Really? We already know the answer to it.

13 Kid Dynamite August 17, 2010 at 10:50 am

tyler – the Powers That Be need to understand that there is a reason that there is a risk that people won’t want to take risk: the Government has bastardized and changed the rules of the game so viciously and so many times that it makes it incredibly hard to take risk, out of fear that the rules will be changed again. Did you miss me at the meeting?

14 Joe August 17, 2010 at 11:34 am

Quotes like this….

“Markets believe we can borrow. The public doesn’t. We need both to move forward on the fiscal front.”

…make me think that politicians and “experts” are in colusion. “I am going to put some words together, and you pretend like it means something, then you do the same. If anybody asks for specifics we will scoff at them.”

15 Candide August 17, 2010 at 11:49 am

That was so deep and serious I couldn’t even understand a single point except Geithner is very deep, smart and serious.

Surely,this is the best of all possible worlds and we are ruled by the best, kindest and smartest of all possible governments.

16 E. Barandiaran August 17, 2010 at 11:59 am

Alex (and also Tyler), please tell me if Geithner in his answer to Tyler’s question addressed this issue:
http://www.nationalreview.com/exchequer/243893/bobby-bailout-casey-put-taxpayers-hook-teamsters-shenanigans

17 Bill Stepp August 17, 2010 at 12:02 pm

Why not rename your blog “Court Intellectuals in the Service of State Power”?

18 Sumnerite-in-training August 17, 2010 at 12:05 pm

Did anyone ask about NGDP targeting?

19 The Epicurean Dealmaker August 17, 2010 at 12:23 pm

More proof that access is the opiate of the commentariat?

20 xysmith August 17, 2010 at 12:35 pm

“It’s something he should have known better on, but it’s a bland enough mistake: FICA is usually handled automatically, and unlike the conventional income tax, you don’t get a 1040 at the end of the year reminding you that you were supposed to do it.”

That’s what they give employees a nice little sheet informing them of this fact and have them sign it indicating that the employee understands their obligations to pay that themselves. If it wasn’t for the fact that Geithner signed a piece of paper indicating he knew this, you’d be totally right.

21 Gabe August 17, 2010 at 1:04 pm

So Geithner gives 1 trillion of taxpayer(us) money to banksters…who then use the money to buy bonds, which the taxpayers(us) will pay interest on to the banksters…and Geithner tells us how wonderful things are because the “market” is willing to lend us money?!

and you tell us this is all wonderful?

22 Gabe August 17, 2010 at 1:17 pm

I don’t think many here have ever read the “old Art Bell forums”, perhaps this statement of yours reveals more about you than us.

23 Gabe August 17, 2010 at 1:48 pm

“He seemed to be having fun. ”

That is because of the oral pleasures you guys were giving him.

24 Undergrad August 17, 2010 at 3:54 pm

I wonder why it seems impossible to have a civilized conversation about economic policy these days? TC and AT post their thoughts – benign at the very worst – on a meeting with treasury officials and, all of a sudden, the “holier than thou” crowd comes out swinging.

As an undergraduate student I find it striking that such a large number of mid-career “economists” are so juvenile in their criticism of all things which fail to suit their worldview. For the sake of the “dismal science” I implore you to realize that there is a younger generation watching, and learning, from your very example. We will already have to pay a dear financial cost for your less-than-perfect stewardship, please don’t make us face a dearth of civility as well.

25 Undergrad August 17, 2010 at 4:18 pm

Maximus,

Thank you for verifiying my concerns.

26 Keith August 17, 2010 at 4:27 pm

Flattus —

You can always tell a Milford man.

Undergrad —

I’m also an undergrad, and I’m equally skeptical/frustrated with the profession. I’ve had four years now, and not one of my professors got into any detail about the financial crisis, and the fact that the various economic ideas/models we were being taught said very little about the crisis. I know this isn’t exactly the same thing you were talking about, but it’s still frustrating.

27 wlu2009 August 17, 2010 at 5:11 pm

E. Barandiaran,
I somewhat understand your point, but I would respond that this blog is not a textbook or journal submission. The ideas aren’t always entirely fleshed out. The idea is to illicit discussion. One of the brilliant things about blogging is the ability to share preliminary thoughts about a topic or start a discussion.

On another point, the hostility here is amazing. Alex is essentially saying “Tim Geithner is smarter than a lot of people give him credit for and I appreciate the fact that he took a number of questions from professional economists and bloggers.” Why that upsets people astonishes me.

On a third point, I really don’t understand how “makets think we can borrow, the public doesn’t” represents any kind of conspiracy. The market treasury market is the biggest in the world with hundreds of thousands of buyers and sellers. Saying this current low yields are results of a conspiracy is accusing one of, if not the most deep, broad, liquid markets in the world of being horribly inefficient.

28 Tyler Cowen August 17, 2010 at 5:39 pm

Alex doesn’t like it when I say this, but “politics isn’t about policy.” Some of you are self-submitting yourself as monuments to the glory of Robin Hanson. Robin thanks you!

29 BKarn August 18, 2010 at 1:17 am

“I’m also an undergrad, and I’m equally skeptical/frustrated with the profession. I’ve had four years now, and not one of my professors got into any detail about the financial crisis, and the fact that the various economic ideas/models we were being taught said very little about the crisis.”

You’re four years in, you say, and you don’t have an inkling of the glaring fault with your frustration as described here?

30 Andrew August 18, 2010 at 5:17 am

“I don’t see why this is so hard to understand. Rates are very low, suggesting that market participants aren’t nervous about the deficit, yet…”

We are just coming off one of the biggest lender miscalculations of borrowers ever and yet people are completely sure that the flight to safety is entirely rational. I’m not saying it necessarily isn’t, but some people haven’t even seemed to consider the possibility.

31 Chaitanya August 18, 2010 at 2:41 pm

My only question is whether Krugman was invited (this would be indicative of whether the Admin is willing to engage with the acerbic “Professional Left”)

32 Michael Pippenger August 18, 2010 at 3:26 pm

Yes, if one looks at Nominal Gross Investment the recent increase in Gross Investment looks pretty solid. But this social statistic is only useful if rescaled either as a share of GDP or calculated on a real per capita basis. When rescaled as a share of GDP, the numbers are pretty weak. The recent increase in Investment is almost solely due to a rebound in Inventory Investment which has leveled off as a share of GDP for the previous 2 quarters. As a share of GDP, Fixed Nonresidential Investment bottomed out in Q1 2010 at 9.53% and was 9.62% of GDP in Q2 2010. Big Woop! Fixed Residential Investment as a share of GDP has been flat since Q2 2009 at around 2.5%. So, I see no reason for optimism at this point.

33 Jeesh August 25, 2010 at 1:45 pm

The only reason that Geithner appeared to understand both facts and theories is that the people asking him had even less command of facts and theories. Talk about a retard’s list of economists, might as well let Rand Paul and Sarah Palin and Al Sharpton into the room.

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