Felix Salmon

What Treasury’s thinking

By Felix Salmon
August 19, 2010

Treasury’s blogger meeting on Monday has been covered by quite a lot of the participants — see Lounsbury, Tabarrok, and Smith.

On Wednesday, there was another meeting, this time with professional, salaried bloggers, with a decidedly center-left bias. (Tim Fernholz, Mike Allen, Derek Thompson, Shahien Nasiripour, Nick Baumann, Ezra Klein, me. Matt Yglesias was literally left out in the rain, unable to get past Treasury security.)

I half understand why Treasury makes the distinction between the two types of bloggers, but Ezra and I both felt a little jealous that we had to compete with Mike Allen asking about politics when we could have listened to a detailed and wonky discussion between Steve Waldman and Tim Geithner on the subject of bailout incentives.

The discussion was all held on deep background, so I can’t quote anybody. I can tell you that Geithner looked healthier than the past couple of times I’ve seen him: I daresay he’s actually getting some sleep these days, which has got to be a good thing. I also learned a fair amount about how Treasury views the world.

The big picture, at least as I grokked it, is that although the recovery started off stronger than Treasury had hoped, the broad economy is still in a pretty weak position. The Fed is doing its part to try to keep a certain amount of momentum going, but fiscal policy is harder, because it needs the cooperation of Congress. And it’s far from clear what kind of fiscal legislation can be passed at this point.

On housing, the main message from the big conference on Fannie and Freddie is that there’s a broad-based consensus, Rick Santelli rants notwithstanding, that large-scale government participation in the housing market is necessary to prevent further house-price declines. And yes, Treasury would very much like to make sure that house prices don’t fall any more than they have already. There’s no Bush-style policy of trying to maximize homeownership, or anything like that, and indeed Treasury now seems pretty resigned to the fact that its much-vaunted loan-modification program is going to have only a pretty marginal effect, doing more to delay foreclosures than to prevent them. But the very powerful government guarantee on Frannie’s bonds is here to stay, you won’t be surprised to hear. And even delaying foreclosures can be a good thing if it helps to give the broader economy a bit of time to recover.

In terms of markets, Treasury has no worries about bond bubbles. If corporate debt is trading at low yields, that’s great: it makes it easier for companies to borrow money to employ more people. There also didn’t seem to be much concern about the failure of the Chinese yuan to strengthen visibly against the dollar, even after the authorities there said that they would allow it to do so. Of course the US wants to see a stronger yuan. But it seems happy for China to get there in a relatively slow and unpredictable manner.

On unemployment, there’s definitely concern that the longer people stay out of work, the less employable they become, turning a cyclical problem into more of a structural one. But again, it’s hard to see what Treasury can actually do about that, given political realities.

Finally, I detected a change of rhetoric on the subject of Basel III, as various end-of-year deadlines approach and seem certain to get missed. A few months ago, there was real hope that the US and Europe would be able to agree on tough new standards for bank capital and liquidity requirements. Today, there are real fears that they won’t be able to come to an agreement, and that the toughest standards acceptable to the Europeans will still be too lax for the Americans, whose banks are much better capitalized right now.

Negotiations are still ongoing, and no one yet is spending much time worrying about what might happen if they fail. The aim, very much, is to come out of the process with a set of strong global regulatory benchmarks. And the groundwork seems to be there: the Basel technocrats have done an excellent job of closing loopholes and defining both capital and liquidity in a rigorous manner. The only question now is to fill in the all-important blanks, and to agree on actual numbers for those ratios. That won’t be easy.

13 comments so far | RSS Comments RSS

” I daresay [Geithner]’s actually getting some sleep these days, which has got to be a good thing.”

Absolutely, any hour he’s not working is another hour he doesn’t get to screw-up the economy more.

Posted by klhoughton | Report as abusive

Right on. As my late father would say, Tim Geithner is ‘someone who has been educated beyond his intelligence’. Perhaps Tim can take a really long nap, or an even longer vacation.

Posted by Gotthardbahn | Report as abusive

“Treasury has no worries about bond bubbles” – holy global systemic instability, Batman!

Isn’t that treasury’s job number one, to worry about the soundness of the system? It is Geithner’s job to worry about bond bubbles, regardless of what the conclusion after analysis is.

Nearly every American has fears about the sustainability of American debt and borrowing. Isn’t it rather alarming that the man most responsible does not worry about it?

Did Geithner at least give a few reasons *why* he has no worries about bond bubbles?

Posted by DanHess | Report as abusive

Can you even imagine a country where a government operates routinely on “deep background” and the people are well-served by that government–or that press?

I can’t. Tell me, what would that country be like?

Posted by tinbox | Report as abusive

Felix… this was one of the best posts since your return from Alaska!


Posted by y2kurtus | Report as abusive

“And yes, Treasury would very much like to make sure that house prices don’t fall any more than they have already.”

Felix, is this goal really feasible? Housing inventory is again steadily increasing (http://tinyurl.com/23c2k9m) which should renew pressure on house prices.

What more can Treasury do to prevent further deterioration in house prices?

Posted by mhnec | Report as abusive

If “Treasury would very much like to make sure that house prices don’t fall any more than they have already”, then the Greenspan Put is still very much alive & well.

Posted by dedalus | Report as abusive

“Nearly every American has fears about the sustainability of American debt and borrowing.”

No, wrong. Only the ones who don’t understand macro and haven’t studied the causes of deficits do. Those are the majority, but not “nearly every American” is that ignorant.

Posted by dllahr | Report as abusive

@dllahr –

Your insult covers such luminaries as Warren Buffett, Bill Gross, Jeremy Grantham, John Paulson, Mohammad El Erian and many other thinkers much smarter than you, all of whom have questioned the sustainability of American borrowing.

Posted by DanHess | Report as abusive


You’re confusing consumer borrowing with Corporate borrowing. The current trend among corporations is not to spend and borrow too much, but to hold enormous cash reserves. They don’t want to spend money expanding capacity until the economy recovers. But the problem is, their refusal to spend money is a major cause of the recession.

A “bond-bubble”, is where the market systemically under-prices bond yields, incentivising corporate borrowing and spending. I don’t think we’re in such a bubble. But if we were, it would be great! It would allow us to get out of our chicken and the egg problem.

Posted by davidshor | Report as abusive

@davidshor –

I never said anything about consumer borrowing or Corporate borrowing.

Treasury said they don’t worry about a bond bubble and apparently diverted the conversation to Corporates. Nobody is worried about Corporates.

Folks are worried about Sovereign debt. My question to Felix, which he still has not answered yet was, what does Treasury think or say about its own debt?

Posted by DanHess | Report as abusive

Dan, Treasury’s view of its own debt is that the deficit needs to be brought down over the long term, but that’s doable. In the short to medium term, rates are low, so it actually makes sense to borrow at cheap rates now in order to get help the economy moving again and generating lots of tax revenue in the future.

Posted by FelixSalmon | Report as abusive

Treasury doesn’t borrow, as implied by dllahr. Treasury bonds are not the same as corporate bonds. Econ 101 — if it were taught correctly.

On a related note, which is more ridiculous — the notion of a bond bubble, or the notion that we can’t have a double-dip because the yield curve is so steep?

Posted by DetroitDan | Report as abusive

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