I’m late to Phillip Swagel’s must-read account of the history of the financial crisis through the eyes of a Treasury official; David Wessel and Nemo have good summaries.
I got through a chunk of Swagel’s paper on the plane on the way over to London, and I haven’t finished the whole thing yet, but there’s no doubt it provides an eye-opening view of how the Washington sausage is made. One theme running through the paper is that of tension between all manner of Washington agencies: Treasury was constantly at war not only with Congress but also with the White House, with the Fed, and with the FDIC.
And that’s not even counting the Treasury departments which were at war with each other: Swagel says that the MLEC, for instance, an abortive attempt to solve the SIV problem in
1997 2007, was widely disparaged even within Treasury, and he clearly was opposed to the second Citigroup bailout, too.
It’s worth remembering that all of this infighting came at the end of a famously disciplined administration which had had the best part of eight years to sort out any glitches and get everybody pulling in the same direction. Today, by contrast, most senior Treasury positions are still unfilled, the White House has a great deal of interest in the minutiae of economic policy, thanks to the presence there of Larry Summers and others, and in general Obama likes to encourage debate — which is another word for disagreement.
The lesson here, I think, is not to place too much faith in Treasury. No matter who’s in charge, there will always be a multitude of institutional constraints which prevent it from (a) putting in place what it considers to be the ideal policy, and (b) executing efficiently any policy which is put in place. And anything which goes for Treasury, of course, gets multiplied by an order of magnitude if you start looking at any efforts to achieve multilateral coordination. As Swagel puts it, “there is an evident gulf in the understanding of policy actions in moving from Washington to New York or Boston; this deficit of clarity grows only more severe across borders and oceans”.
This is something for anybody who was disappointed in the results of the G20 meeting to bear in mind. It might not have produced the ideal policy response, but even if it had done, you can be sure that there would have been all manner of nasty slips and stumbles in the attempted execution.