Thursday, August 19, 2010

The Humpty-Dumpty Housing Market And All The Treasury's Yes-Men

Did the Treasury invite anyone who wasn't a yes-man to their recent, off-the-calendar meeting o' the blogger minds? It looks like the closest they came to doing so was invited guest John Lounsbury, a PhD/CFP with approximately 47,000 followers on and a bit of a wet noodle when it comes to pushing the Treasury department around.

In response to Wenzel's inquiry ("Who the hell did Treasury invite into this room?"), Mr. Lounsbury has been kind enough to provide us with the answer:
I was privileged to attend a meeting at the Treasury Department in Washington on Monday afternoon, August 16. The two hour plus meeting was hosted by Senior Treasury Officials. There were three discussion leaders:
  • Michael Barr, Assistant Secretary for Financial Institutions, led the first 45 minutes;
  • Matthew Kabaker, Deputy Assistant Secretary for Capital Markets, next 45 minutes;
  • Secretary Timothy Geithner led the final 45 minutes of discussion, which actually went overtime from the scheduled 30 minutes.
Other senior officials present:
  • Mary John Miller, Assistant Secretary for Financial Markets;
  • Jake Siewart, Counselor to the Secretary;
  • Lewis Alexander, Counselor to the Secretary.
There were seven guests. In addition to yours truly, they were (alphabetical order):
  • Tyler Cowen, Holbert C. Harris Professor of Economics at George Mason Univ. (Vita) and a contributor to The New York Times and Slate, as well as co-author of Marginal Revolution blog.
  • Philip Davis, a top ranked Seeking Alpha contributor and publisher of Phil’s Stock World.
  • Michael Konczal, Roosevelt Institute Fellow, Rortybomb blog author and Seeking Alpha contributor.
  • Yves Smith, who publishes the widely followed Naked Capitalism blog.
  • Alex Tabarrok, Bartley J. Madden Professor of Economics at George Mason Univ. (Vita) and co-author of Marginal Revolution blog.
  • Steve Waldman, Interfluidity blog author and Seeking Alpha contributor.
I don't read or have familiarity with all of them but definitely put Cowen, Tabarrok and Smith in the "bootlicker/enabler" camp, as I've detailed myself here and here.

Today, Lounsbury penned a follow-up post to the article linked to above in which he shared "Further Thoughts on My Treasury Meeting", in which he covered a topic that he apparently overlooked on the first pass, Treasury's policy concerning the housing market (doh!):
Treasury officials several times emphasized that they recognize there are still many more potential foreclosures to come. I conclude that they are not delusional about the magnitude of the remaining tenure of the housing bubble and its aftermath. I took the occasion to try to explore Treasury’s thinking. One thing Treasury folks mentioned was a responsibility to support efforts to ensure that citizens can get adequate housing. I found that very curious but let it pass because I had a larger objective, which I was able to get to shortly thereafter. But, before getting there, let me just say that I think a more appropriate statement would have been that policy should not interfere with citizens’ ability to get satisfactory housing rather than support those activities. Semantics? Perhaps. But, to me the distinction is important. [emphasis in the original]
It's funny that Lounsbury assumes the best and posits the idea that Treasury simply made a semantic error in stating that they feel they are responsible for actively ensuring citizens have access to "adequate" housing, rather than making sure they're passively out of the way of individual's allocating those resources on their own.

While I am well aware that politicians, government bureaucrats and other hucksters trying to serve the Greater Good with OPM are wont to beat the living hell out of their official language every now and then, this is not an example of calculated carelessness with language but rather precise, explicit communication of intent through clear, frank language. You've got to be a card-carrying member of "Mankiw's Club For People Who Are Not Interested In Jumping To Extremes Or Questioning Anyone's Motives Or Saying Anything That Might Possibly Be Construed As Anything Other Than The Most Polite, Thoughtful Constructive Criticism" to miss that and instead assume that Treasury just made a little English error.

Lounsbury then makes a startling discovery... that Treasury is actively engaged in a policy motivated by Free Lunch-economics:
The important point that we eventually reached involved the underlying strategy of HAMP and other foreclosure prevention programs implemented by the Federal government. The Treasury statements indicate they clearly had an objective of spreading the time line for foreclosure over a longer time frame than would have otherwise occurred. I offered a paraphrased summary statement to find if I had understood policy correctly. There is no transcript but it I offered something like this:
Policy was directed at deferring what might have been 5 million (an arbitrary number for discussion purposes) foreclosure completions in 12-18 months to 5 million foreclosures over 36 or 42 or 48 or 54 months. This was done to lessen the economic shock of massive action. Do I have the essence of the policy?
The response was something like: and also avoid some foreclosures that would otherwise have occurred.

My reply:
Then add to my previous statement that policy possibly reduces the number of foreclosures ultimately experienced by 5 or 10%, if successful. In other words, 5 million foreclosures might be reduced to 4.5 million or 10 million foreclosures might be reduced to 9 million, if the foreclosure prevention programs achieved a high level of success.
I think there was affirmative response, but I admit there was not an aha! moment. At least I am confident that my summary was not contradicted, so I will continue to feel I understand policy.
There are costs involved in any policy decision. As misguided as it is, however, the idea that the foreclosure crisis could be spread over a longer period of time to reduce the "sudden impact" shock of it is decidedly less insane than the idea that foreclosures that would happen could be transformed into foreclosures that won't without any real repercussions. In other words, it's one thing to say, "Well, we're going to have 5 million foreclosures no matter what, but maybe we can effect whether they happen tomorrow or over the next few months" (this policy can "succeed" but at what cost?) versus "Well, it looks like we're going to have 5 million foreclosures, but with the right program in place we can actually reduce that number to 4.5 million!" (this policy can "succeed" today but will ultimately fail tomorrow, and again, there is an enormous unseen cost involved).

While you have to give a round of applause to a guy who, confronted by something that makes absolutely no sense when he first hears it -- Treasury's policy on actively supporting the housing market -- nonetheless continues whistling past the graveyard, smiling all the while, it would be unfair to call Lounsbury a total dope. He got the important parts right from his Afternoon At The Treasury-- the policy is all about kicking the can down the road and providing a taxpayer-financed "carry trade" for bank earnings:
The housing discussion crystallized again for me the overall policy direction that started with the previous administration and has continued with the current one. I have joined many others in using the term “kick the can down the road”. That is in fact the formal policy. It is nowhere written in bright lights, but that is the fundamental basis of policy.

With housing, the policy has been to diffuse a foreclosure problem over a longer time frame to reduce economic shock. With finance, the policy has been to create a “workout” time line for large banks to “earn” their way out of balance sheet problems.

The problem with this approach is, of course, that the Federal deficit basically funds the “earnings” of the banks. The FED provides new money that the banks can borrow at near 0% and the banks then buy Treasuries that pay higher interest rates. The “earnings” that the banks get from this “carry trade” process is achieved by the further indebtedness of the citizenry through the increased national debt.

This is not a growth policy. Treasury guys stated that the long term potential for the economy might be near 2.5% real growth, but that we are experiencing (going to experience?) a post stimulus slow down. Treasury does not appear to be delusional about the sluggish growth prospects for the economy. The question of a recessionary double dip was not broached, but I don’t think any opportunity was lost – Treasury would not have ventured into that realm had we attempted it, in my opinion.
Which is why the Treasury did their level best to only invite Yes-Men; no need to ever suffer the awkward silence that would ensue should someone have actually thrown a fastball right into the preening, show-off, jacked up on steroids hitter's head.


  1. Death by a thousand paper cuts...give me the guillotine please.

  2. whasa matter, Taylor?

    Jealous that you're not meaningful enough to get invited?

    To ANY of the multiple-times Treasury has hosted these roundtables?