In the course of attempting to explain or criticize complex economic and financial issues, it usually becomes necessary to quote from the experts – often at length – to provide an understandable commentary. Nevertheless, it was with great pleasure that I read about a dust-up involving Megan McArdle’s use of a published interview conducted by Bruce Bigelow of Xconomy, without attribution. The incident was recently discussed by Brad DeLong. (If you are a regular reader of Professor DeLong’s blog, you might recognize the title of this posting as a variant on the name of his website.) Before I move on, it will be necessary to expand this moment of schadenfreude, due to the ironic timing of the controversy. On March 7, Time published a list of “The 25 Best Financial Blogs”, with McArdle’s blog as number 15. Aside from the fact that many worthy bloggers were overlooked by Time (including Mish and Simon Johnson) the list drew plenty of criticism for its inclusion of McArdle’s blog. Here are just some of the comments to that effect, which appeared on the Naked Capitalism website:
Megan McArdle? Seriously? I’ve seen so many people rip her to shreds that I’ve completely ignored her.
Is she another example of nepotism? Like Bill Kristol.
Basically yes, although not quite as blatant. Her old man was an inspector of contracting in New York City. He got surprisingly rich. From that he went to starting his own contracting business. He got surprisingly rich. Then he went back to New York City in an even higher level supervisory job. He got surprisingly rich. So Megan went to good schools and had her daddy’s network of influential “friends” to help her with her “job search” when she graduated. Of course, she’s no dummy, and did a professional job of networking with all the “right” people she met at school, too.
For my part, in order to discuss the proposed settlement resulting from the investigation of the five largest banks and mortgage servicers conducted by state attorneys general and federal officials (including the Justice Department, the Treasury and the newly-formed Consumer Financial Protection Bureau) I will rely on the commentary from some of my favorite financial bloggers. The investigating officials submitted this 27-page proposal as the starting point for what is expected to be a weeks-long negotiation process, possibly resulting in some loan modifications as well as remedies for those who faced foreclosures expedited by the use of “robo-signers” and other questionable practices.
Yves Smith of Naked Capitalism criticized the settlement proposal as “Bailout as Reward for Institutionalized Fraud”:
The argument defenders of the deal make are twofold: this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities. And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.
Team Obama had put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems. Timothy Geithner was even doing victory laps last month in Europe. To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.
But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs. But these losses exist already. The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.
The perspective taken by Edward Harrison of Credit Writedowns focused on the extent to which we can find the fingerprints of Treasury Secretary Tim Geithner on the settlement proposal. Ed Harrison emphasized the significance of Geithner’s final remarks from an interview conducted last year by Daniel Gross for Slate:
The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.
From there, Ed Harrison illustrated how Geithner’s roadmap has been based on the willingness to follow that logic:
More than ever, Tim Geithner runs the show for economic policy. He is the last man standing of the Old Obama team. Volcker, Summers, Orszag, and Romer are all gone. So Geithner’s vision of bailouts and settlements is the one that carries the most weight.
What is Geithner saying with his policies?
- The financial system was on the verge of collapse. We all know that now – about US banks and European ones too. Fed Chair Ben Bernanke has said so as has Bank of England head Mervyn King. The WikiLeaks cables affirmed systemic insolvency as the real issue most demonstrably.
- When presented with a choice of Japan or Sweden as the model for crisis resolution, the US felt the Japan banking crisis response was the best historical precedent. It is still unclear whether this was a political or an economic decision.
- The most difficult political aspect of the banking crisis response was socialising bank losses. All banking crisis bailouts involve some form of loss socialisation and this is a policy which citizens find abhorrent. That’s what Geithner meant most directly about ‘deeply unpopular, deeply hard to understand’.
- Using pro-inflationary monetary policy and fiscal stimulus, the U.S. can put this crisis in the rear view mirror. Low interest rates and a steep yield curve combined with bailouts, stress tests, dividend reductions and private capital will allow time to heal all wounds. That is the Geithner view.
- Once the system is healthy again, it should expand. The reason you need to bail the banks out is that they have expansion opportunities abroad. As emerging markets develop more sophisticated financial markets, the Treasury secretary believes American banks are well positioned to profit. American finance can’t profit if you break up the banks.
I would argue that Tim Geithner believes we are almost at that final stage where the banks are now healthy enough to get bigger and take share in emerging markets. His view is that a more robust regulatory environment will keep things in check and prevent another financial crisis.
I hope this helps to explain why the Obama Administration is keen to get this $20 billion mortgage settlement done. The prevailing view in the Administration is that the U.S. is in a fragile but sustainable recovery. With emerging markets leading the economic recovery and U.S. banks on sounder footing, now is the time to resume the expansion of U.S. financial services. I should also add that given the balance sheet recession in the U.S., the only way banks can expand is via an expansion abroad.
I strongly disagree with this vision of America’s future economic development. But this is the road we are on.
Will those of us who refuse to believe in Tinkerbelle face the blame for the next financial crisis?