On Monday the Treasury Department (various officials, including Geithner, in shifts) had an informal meeting with eight prominent finance or economics bloggers. I’ve only read the accounts by Tyler Cowen, Steve Waldman, and Yves Smith; Waldman names all of them and links to other accounts. This is Smith’s sum-up:
“[T]hese guys are very smooth, very smart, and seemed quite sincere, which made it difficult to discern how much they really did believe and how much of what they said they had to say because they need to defend official policy and maintain confidence. Let’s face it, they get prodded and roughed up by big dogs with some frequency. There was nothing we asked that would be new. They’ve covered this ground with other people of more consequence and therefore have answers ready. We are a pretty unimportant audience (yes, they did bother making time for us, but let us not kid ourselves on how far down the food chain bloggers are) and we cannot argue from a position of advantaged information, so it was inevitable that we would not get beyond standard responses.”
I give Treasury big points for acknowledging us bloggers and inviting some pretty severe critics, such as Smith. I separately give them points for being good at their jobs. They understand that public opinion matters; they understand that bloggers have some influence on public opinion, if not that much; they understand that it’s a little harder to criticize someone after you’ve met him and he’s given you free cookies (“The free cookies were good and fresh, with a warm, fluid chocolate interior.” – Cowen; note also that when the bank CEOs went to Washington in March all they got was water, no cookies.); and even if they couldn’t possibly have expected to change anybody’s mind, they understand that it’s better to talk to your critics than to avoid them. Waldman talks about some of the techniques used to make the attendees feel like they were being treated as special guests.
On a substantive point, Waldman said this:
“A Treasury official pointed out that eliminating ‘too big to fail’ doesn’t solve the problem, since institutions can be systemically important because of their interconnections and roles along a wide variety of dimensions. I responded that ‘too-big-to-fail is too stupid a criterion,’ but pointed out that it would be possible to progressively tax several of the various markers of criticality so that it becomes uneconomic for an institution to remain indispensable.”
I think this whole “interconnectedness” theme is a clever rhetorical trick — a way of defusing the “too big to fail” argument by making a correct but ultimately minor point. I agree that if you simply cap balance sheet assets, that will not be enough. Technically speaking, a derivatives dealer can have ZERO balance sheet assets yet have an unlimited amount of open derivatives positions. If my memory of When Genius Failed is correct, LTCM just before its collapse had about $130 billion in assets and $1.4 trillion in open derivatives positions (that’s market value, not notional [wrong, see below]) on top of $4 billion in capital.
But who said that “big” in “too big to fail” had to mean balance sheet assets? When I say “big,” the concept I am referring to is the overall shadow the institution casts over the financial system and the amount of collateral damage it would cause were it to fail. That damage can take various forms: debt that becomes worthless, derivatives positions that can’t be closed, hedge fund collateral that can’t be pulled back, etc. So call it “too interconnected to fail” or “too systemically important to fail” if you want, but you haven’t made the problem go away. The only thing you’ve done is pointed out that it can be tricky to measure overall importance, but none of us ever denied that to begin with.
Update: Sorry, I checked, and that $1.4 trillion was notional value, not market value.
By James Kwak