Taub and the Long, Bleak Story of Housing

Jennifer Taub's Other People's Houses is likely to be about as good a book as we are going to get by way of overview of the woes of the housing market over the last generation. Which is a pity because it might have been better.   It has some great virtues, of which more in a moment.   I suspect its primary problem is that the author set herself too ambitious a goal and wasn't able to get control of her material.

In particular, she decided it was necessary, in order to tell the story of the recent uproar, also to go back and (re)tell the story of the Savings and Loan debacle of the 80s.   I can understand her thinking here:  much of our late calamity does indeed have its roots in the S and L mess, and you can understand today better if you understand yesterday.  But there are similarities as well as differences and would be useful to try to isolate and identify those differences for whatever lessons they may offer. On the same theme, while we may not yet be ready for the last word on the Savings and Loan era, still, we ought to be in a position to impose some kind of framework (however simplistic) and to formulate some useful questions.  

  Taub doesn't do that, and so she is reduced to telling some individual stories.  Some of the stories are good, but there's no identifiable pattern to what she has put in and what she has left out.   Moreover in the nature of things, she winds up relying heavily on secondary sources: if you read Martin Mayer or William K. Black on the S and Ls (or, to one forward, Kirsten Grind on WaMu) you're going to find a lot here that you have read before (exhaustively footnoted, I should say--Taub is nothing if not conscientious about sourcing).

One irony is that, protean as her reach may be, it is remarkable how much she feels she has to leave out. Sometimes the choices appear just arbitrary. For example, she includes an account of the notorious "Keating Five"--the senators who earned themselves a moment's notoriety for their role(s) in seeking to protect the infamous Charles Keating, one of the poster boys of S and L bad behavior.  Yet she does almost nothing with the underlying Keating story.  Very well: she had to leave a lot out--but if Keating isn't important, how can the Keating Five be?

Perhaps a deeper structural flaw is that she tells the reader almost nothing about Michael Milken and the junk bond revolution.   Needless to say, I feel her pain: the Milken story is stuff enough for a book in itself (actually, there are several good ones).  I certainly can't blame her for not wanting to tackle it here--but if she doesn't tackle it, she can't really claim to be telling the whole story.

She also spends what I would regard as an undue amount of time on one Supreme Court case--Nobelman, well known to bankruptcy cognoscenti.  For those outside the inner circle, this is the case where the Supremes held that the Bankruptcy Code debars a Chapter 13 ("regular income") debtor from rewriting his home mortgage.  Taub disapproves.  She's strongly of the view that rewrites in troubled times. But here matters get complicated.      She also believes that rewrites should be done via the bankruptcy court.    After some waffling, I've pretty much come round to the view that rewrites are a good thing (see this).   But must it be done by the bankruptcy court?  Again, I think she might be right that it should be.  But I don't think it is a deal point: I would rather have seen her concentrate on rewrites per se, leaving the question of who and how as a side issue.   Linking the two as if they were necessary corollaries unduly complicates her argument. 

[And FWIW I think she was too hard on the Supremes.  The issue was a fairly straightforward matter of statutory interpretation.  I think they read it correctly (and the decision was nine-zip, so I am not alone).  But right or wrong, statutory interpretation is all they saw themselves as going.  So if Taub has a beef, it's really with the Congress that wrote the statute to begin with.]

But enough about stories  In contrast to the early chapters, I think far the best part of the book is, ironically, also perhaps the least salable.  That would be Chapter 14, her careful account of the institutional structure, both in the banks and in government, its slow, inexorable path to disaster.  She identifies five "links" (supine Fed; securitization;  collateralized debt obligations (CDOs) and CDOs-squared; credit default swaps (confusingly, CDSs); and leverage.  The tag lines will be familiar to anyone paying attention, but it is the richness of her detail that gives her account density and heft.  To this we can add her final chapter, in which she traces the failure of housing reform in the Obama administration--and lays the blame like a dead rat on the doorstep of the President himself (she tops it off with a useful aide-memoir of the arguments against mortgage rewrites, together with rebuttals).

There is, in short, a lot of good stuff here.  I'm glad I read it, and I'll go back to it. But at the end of the day, I think she does nothing so much as just prove how damn complicated the whole story is.

Chintzy afterthought:  the title is touching, but does it make any sense?  Her whole point (with which I would agree) seems to be that it is these people we are talking about, the owners, and that these are their houses, not those of anybody else.

The Best (Though Incomplete) Case Against the Bailout

House of Debt by Atif Mian and Amir Sufi seems to be receiving a warm reception.  Still, I'm not sure the reviewers have made clear what is truly distinctive about this important and original book.  What we have here, specifically, is a radically unfamiliar narrative of the Great Meltdown, together with the best account I've seen so far as to why the bank bailouts were a mistake.  It's an imperfect or at least incomplete account as I will try to show.  But still, it deserves a place in the curriculum for any study of just what went wrong and how.

For starters, then: M/S undertake to show that the Great Meltdown should not be understood as a crisis in financial system.  There was a financial crisis, granted--it began in September of 2008 and extended through all those months necessary to sluice out all the taxpayer dollars directed at saving the financial system.  Rather, the real Meltdown was was a crisis of debt.  It began more than two years earlier.  It generated to foreclosures and unemployment; it led to an unprecedented collapse in household wealth, particularly among those least able to bear it.

Ar first blush, one thinks that this analysis shouldn't be all so unusual.  It shouldn't be, but it is; just about every other account I've read of those dark days begin with "Lehman Week," when the eponymous investment bank collapsed into bankruptcy and when AIG and the GSEs and Merrill Lynch all passed through near-death moments.  Debt appears in all these accounts, of course--something had to trigger all the trouble.  It appears but it is a curiously abstract and offstage kind of monster, like the Maguffin in a Hitchcock movie.  It is left for M/S to show how turmoil in the real estate market drove people out not just of their homes but also their jobs;  Its a story that would have left a blot on the triumphal narrative of recent history even if (somehow) the banking crisis had never ensued

Having situated the debt crisis at center stage, M/S proceed to an even more provocative suggestion: that the bailout was a mistake, bad or misdirected policy unnecessary itself and probably at the expense of other policies that might have served us better.  Once again, this may sound familiar but it isn't.  Plenty of people have called for the bankers' heads, generally on  some variant on the theme of "greedy bastard."  Many defenses appear to finesse the "greedy bastard" issue, arguing that anything other than bailout would have destroyed the financial system, ruining both Wall Street and Main Street in the process.

M/S also sidestep the "greedy bastard" part of the case. They do argue that saving the banks was solving the wrong problem: that it misdirected resources and attention away from mortgages and related issues. Deal with mortgage, on this analysis, and we get the economy back up on its wheels again; ignore mortgages and we are stuck in a cycle of anemia.

Ah, but what about the larger consequences of ignoring Wall Street you will say).  Didn't you just say that saving Wall Street would have saved Main Street, and that letting Wall Street go would be an unspeakable calamity?   And this is where M/S get really interesting. They argue that there are really two banking systems at issue here: one, the mundane, boring payment system that keeps the fluids flowing through the body politic every day. the other is the business of mega-borrowing and mega-lending that gives Wall Street so much of it swashbuckling charm.   The government did need to step in and save the "fluid flowing" part of the banking system, the authors concede--and it did so.  But here is where it gets really interesting: once they'd saved the fluid-flowing system, they could safely have let the swashbuckling system just dangle from the yardarm.  No, strike that: not only could we have let the swashbucklers go: it would have been good to let them go. After all, the whole cause of the problem was that the bankers had made to many bad loans.  How would it improve them back into the business where they could make bad loans again?

And that, dear reader, is the case.  It's almost elegant, straightforward, and as a contribution to our understanding of the crisis, I'd say it is as helpful as anything since The Banker's New Clothes by Anat Admati and Martin Hellwig,  But there is, I concede a gap in the argument.  That is: I'm not as clear as I would like to be on the relationship between the two parts of the banking system. Can it really be that one could collapse without destroying the other. Perhaps so; I remember Alan Greenspan just a while back defending himself against the charge that he overhyped the market by saying that he only worked with short-term rates and that long-term rates were an independent story.    Maybe it is Greenspan we should call on to show us how random bankruptcy among major banks can be easily tolerated.

Coda:  M/S end their book with a spirited plea that we reconceptualize our banking system and vastly increase the role of equity as distinct from debt.  It is a beguiling argument and it does flow logically out of what went before. Still, it is ambitious enough that it probably requires a book of its own of which this one is, perhaps, just the teaser.

Geithner: A Pronouncement

We're back from socialist hell Paris where, I have to say, life seemed not  bit different the day after Marine Le Pen's 25-percent landslide than it did before.  Which means back to decent computer hardware (I'm in love with my iPad mini but as a blogging tool, it really doesn't have the chops).

I do have a few afterthoughts about France that i hope to post over the next few days but for the moment,  a word about Tim Geithner's memoir.  He's certainly receiving a lot of attention, most (not all) from those who want to tie him to an anthill and cover him with honey.  I can relate: I went into the book expecting to dislike him and--

--and, well, I still can't say I really want to sit down and have a beer with the guy.  Nor he with me either, I suppose, but I'm not that crazy about beer anyway.

Thing is, though, it is actually quite good book.  I'm sure there are some self-delusions and some careless errors. But for the most part, it's what you want in a memoir: detailed, intellectually honest, fact-driven record of how and why he did what he did.   He's also refreshing on his likes--Barney Frank, President Obama and lots of other people, really (there are many appreciative comments about his staff).  Also his dislikes--Neil Barofsky and perhaps Ed DeMarco; after that, really not much of anybody.  But no, not Elizabeth Warren--he seems to think she grandstanded him, but in the end, he seems to have enjoyed her company (I can believe both).  And not Sheila Bair, whom he treats with respect, although I'm still not sure he takes her as serious as she deserves to be taken.

I liked the book; this is not the same as saying I'm endorsing the message.  Let's agree that we've pretty much simplified the conflict over policy in recession management down to a sound byte question: bankers or homeowners, Wall Street or Main Street (or both, or perhaps even neither)?  Geithner's clear: he thinks saving the banks was unambiguously right.  He thinks his crowd got the tactics/strategy mostly right, although he certainly is willing to offer up regrets about particulars.  He thinks it is/was important to save Main Street also but that's the thing--he thinks they did do a lot to save Main Street.  He also thinks they did do a lot to help home owners. He would have liked to do more (damn that DeMarco anyway)--although he appears not to give home owner relief the same high priority as many of his critics.

I have to admit, I'm still on the fence on that one.  I'm still hung up on the great counter-factual: what would have happened had we not saved the banks?  And that is the great counter-factual: we don not and cannot know.   I gather there are people--Ludwig von Mises, Dean Baker, who say "let it burn."  And we can't prove they're wrong. And never will, either, because I can't imagine a world in which the political elite will have the will to do nothing while the banking system collapses around them.   I'm on the fence also because just today on the plane, I read what must be the most useful intelligent, thought-provoking challenges on the Geithner (etc.) program that I've seen so far.  I hope to say a word about that reading tomorrow  Meanwhile: agree with him or not, I think Geithner's book will endure as one of the indispensable primary-source documents of the whole sorry business.

Hank Paulson Says "I Ain't Yo' Mama"

Gearing up to read Tim Geithner's tell-all about his years on the bridge in the storm, I dusted off the pixels on the memoir of his colleague, Hank Paulson.  I expect I'll offer some side-by-side thoughts in a bit but for the moment, here's a fascinating not-quite-on-topic offering from Paulson on his management philosophy at Goldman Sachs:

Long hours at the office can cause problems at home, and this was a period of great stress in my marriage. I’d come home too tired to want to do much with the children when they were very young. We couldn’t afford to finish our bedroom, so we were living in an open loft, with the kids in rooms right next to us. I sometimes locked myself in the bathroom with Sports Illustrated to relax in quiet . Wendy made it clear I had to help out and get home earlier to give the kids baths, read a story, and put them to bed. With Gorter’s support, I began a pattern where I’d leave the office at 4: 30 p.m., run for the 4: 42 p.m. train, and be home at 5: 25 p.m. After supper, I’d read to the kids. I had them trained so I could zip through a bedtime story very quickly. One night Wendy came in and urged, “Slow down and read with expression.” I tried, but as soon as I did, both kids started crying: “No, no! Read like a daddy , not like a mommy.” Once they were asleep, I’d get on the phone and start talking to clients, who’d say, “Good Lord, you’re still in the office working?” When I tell this story about work-life balance, people say: “Paulson, you SOB, you worked people harder than anybody at Goldman Sachs.” Fair enough. But I always told folks at Goldman: It’s not your boss’s job to figure out your life.   You spend so much time planning your work schedule and your career, you need to make that kind of effort to manage your private life, too. Learn how to say no. Remember, you are not going to get ahead, in any case, being a grunt. 

Paulson, Henry M. (2013-09-03). On the Brink: Inside the Race to Stop the Collapse of the Global Financial System -- With Original New Material on the Five Year Anniversary of the Financial Crisis (Kindle Locations 1104-1106). Grand Central Publishing. Kindle Edition. 

It's a thought, baldly put.  Some will find it severe. But for several years, I've been telling law students--those who are going to the fancy firms, the ones that represent the likes of Goldman Sachs--that one of the ways in which they will be tested is in the determination of their capacity to manage conflicting, irreconcilable, unreasonable commitments. 

Comparison: a colleague whose name I shall not mention got his start at one of those fancy law shops. He quickly learned that there was an office poker game-no, wait, two office poker games: one for the big dogs and one for the puppies.  Your choice.  Anybody could join the puppy game.  Anybody could join the big dog game also but it was made clear to you that the big dog game was not for puppies and that if you went in there, you went at your own risk, with all that the term implies.  I suspect Hank would agree. 

Morgenson/Rosner on Fannie/Freddie etc.

The topic for the moment is Reckless Endangerment by Gretchen Morgenson and Joshua Rosner, which came out in 2011, so I'm only three years late.  The subtitle is "How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon."  You'll recognize immediately that--well no, with a title like that it might as well be about vaccines or tracking, and the title would suit anything new on the South Sea Bubble.   But no: this was the  big book about "the GSEs"--Fannie Mae and Freddie Mac--and their role, or lack of it, in the Great Meltdown.  

Still, you may recall--in the maelstrom of finger-pointing that inevitably followed on the collapse, there was a school of thought that it was all the fault of what I am pleased to call the "Bleeding Gums Murphy" school of financial analysis--that it was all the fault of some old black guy in Detroit who was so uppity as to suppose he could service a mortgage, and who thereby toppled a whole ninepins of  financial titans. Or more prosaically: the Community Reinvestment Act of  1977 (thank the cornpone Jimmy Carter) plus the delusional romanticism of lefties like (the black) Maxine Waters and (the light-in-the-loafers) Barney Frank whose never-met-a-payroll gullibility turned these same titans into the helpless pawns of their febrile dreams.

Though you wouldn't guess it from the title, I somehow got the impression that M/R offered more of the same.  I figured I was OD'ing at the time, so I put it at the bottom of the stack for more leisured consideration.

I finally got around to it this week.  In retrospect, I'm a bit sorry I didn't get to it before.  I'll admit that the book surprised me, in good ways and bad.  It is, as I guess I suspected, a deeply flawed book, but its flaws are not quite what I expected. But it has virtues, and some of them aren't quite what I expected either.

Executive summary: this is a book about "the GSEs," but only in a narrow sense.  First, by "the GSEs," the authors really mean Fannie--Freddie is mostly a sideshow.  And by Fannie, they mean the money machine ginned up by James A. Johnson, CEO of Fannie through the 90s and a master of bureaucratic slash and grab right up there with the best of them.   It also offers, somewhat disjointedly,  helpful narratives on a few--hardly all--of the other chapters in the long, sordid mortgage mania story.  Through all of this, M/R do a first-class jobs of plunging into the weeds of bureaucratic machination (both public and private) to show how it's done.  I see that Johnson has a degree from the Woodrow Wilson School. I don't know if they offer a concentration out there in Power and Intrigue, but if so, I'd say this chronicle of their distinguished alum deserves a place in the syllabus.

But back to the GSEs.   I said already how I had heard so many voices trying to explain away the Meltdown by demonizing the poor and the vulnerable, together with their wicked manipulators in Congress-and how I got the impression that M/R were singing in that particular choir.

Oddly enough, they aren't, actually.  The offer immensely valuable accounts of how Johnson built Fannie power.  But just about nowhere do they plug Fannie into the standard chronicle of blame.  Rather to the contrary, the plain fact is they provide next to nothing about larger context at all--these are gumshoe investigators we are considering, of core, not grand strategists.  Still, the remarkable thing is that based on their own evidence, the reader can draw a moral almost entirely the opposite of the familiar story.

Specifically: everything that M/R present impels the conclusion that it was not Congress that bullied the GSEs.  Rather it was just the other way around.  On the record here, it is clear that Johnson early figured out that he could exploit the politician's enthusiasm for low-income housing to help aggregate his own empire.   He could beguile them with the promise of more low-income housing; he could threaten them with the pains of hellfire if they dare not to cooperate; and he could bully them into submission if they began to slip out of harness.  But at all times, low income was never anything more than the velvet sock puppet on Johnson's iron fist.

So, go ahead and read it, if you are still absorbing stuff about the Meltdown.  I won't even say "read it with skepticism," because I can't even say there is a lot here with which I know how to quarrel.  Read it for the details; read it to stock your own bag of dirty tricks. But for deeper analysis--well, that's fine, not everybody can do every job.

Oh I Think I Get It Now...

Recall: my generation grew up in a world where deals chased money.  Since, oh, say, 1980, we've lived in a world where money chased deals.  Like, for example, Continental Illinois, which shoveled all its (our) cash down an array of ratholes.  Like Henry Kravis and the mother of all LBOs  (on which, it seems, he in the end also lost money).  Like Robert Campeau (boy, does anybody remember him?) who was somehow able to finance "The Biggest, Looniest Deal Ever," (and wound back in his mother's spare bedroom).  

Like the mortgage brokers.  Well no, wait.  Go back a bit in time.  Remember the early mortgage brokers from, say, the 80s?  Here was a guy who found a prospect who could use a loan.  He'd check the credit, he'd set some terms. Then he'd go looking for an investor who could put some money into the deal.   The investor would get his deal with his note.  Some of these brokers were crooks and a fair number of them wound up in bankruptcy.  For others, it was a living--a tough one, but a living.  But that's the thing: they were constrained by the amount of capital they could lay their  hands on.  Always looking for new money.  

Always, that is, until they were "discovered" by Wall Street and its pent-up sluice of cash.  These were the guys who transmogrified the loan brokering business--who found that anybody with a pulse and a laptop could be a broker; who ginned up Alt-A-minus, the sub-640 FICO and the whole cafeteria full of devices designed to get the borrower in through the window and the product out the door.  

You may remember: it all worked find until it didn't work any more and we are still picking up the pieces.  We've sloshed whole barge loads of money into the banks on the premise that if we All Believe in Fairies then Tinkerbell will Get Well Again.

Now this: here's Wolfgang Richter explaining how the new housing "bubble" is driven not by prospective homeowners but by Wall Street investors with more money than they know what to do with.  And  here is Sam Zell buying trailer parks.

There is a common theme here, yes?  I mean, in both cases, the trick is to capture the income stream of the poor schlepps who keep the fat cats juiced and comfy, yes?  In the old days you did it with mortgage payments.  Now you do it with rents.  Haveta live somewhere, they say, although "somewhere" can also include a corrugated refrigerator box under the expressway.  Meanwhile, folks, let's party.  Looks like the money will continue to flow.

Justin Fox on the Truck that Just Hit Us

Justin Fox's Myth of the Rational Market was much praised; I found it kind of meh, repeating and not necessarily improving on a lot of work done earlier by Peter Bernstein.  But his new Harvard Business Review piece on "What We've Learned from the Financial Crisis" is excellent, particularly the first section on macro.  The latter portion on "shareholder value" and the concept of the corporation is somewhat more diffuse, but then the topic itself is somewhat more diffuse.  Fox has always been good at exposition; I think he is developing a better feel for the place of economic ideas in the structure of the economics profession.  A must-read; or at least, as Abraham Lincoln probably did not say, "if you like this kind of article, this is the kind of article you will like."

Alan Blinder and the Treehouse Syndrome

Halfway through Alan Blinder's After the Music Stopped: The Financial Crisis, the Response and the World Ahead--it's a rewarding read, one of the best I've run across on the financial crisis so far (and I've read them in numbers way beyond the point of cost effectiveness).  I suspect what we've got here is the transcript of his "crisis" course for undergraduates--and that is no bad thing, not a bit worse than watching Yale on-line or some such.  It's far shorter on anecdote, much richer in analysis than the standard presentation.  For comparison, I think I've said before that you might rank these books in inverse order as indexed by the number of F-bombs: on this scale, it is important to report that Blinder is (so far) an F-bomb free zone, which I count as a plus.

Blinder also displays a gentlemanly nonpartisanship.  As a former Vice-chair of the Fed, he's obviously deep into the system and you'd certainly have to account him among those who believe that the system, within broad limits, works.  But is temperamental disposition doesn't inhibit his disapproval for so much of what went on before the great meltdown--of how much, to put it shortly, we brought it on ourselves (or at least "they brought it on themselves," which is different, but perhaps not greatly different).  He makes it clear, inter alia, that he does not buy into the "Barney Frank done it" school of crisis analysis--the school that blames it all on the Congressional Darth Vaders who made the banks their bitch and forced them to make lunatic loans to the unemployable and the illegal (though perhaps unfortunately, he doesn't linger to spell out the evidence on point).

In the same vein, it's clear that he thinks Paulson/Bernanke/Geithner made horrendous mistakes in the eye of the cyclone but he is inclined to be charitable in light of the consideration that they were making decisions unprecedented in scope and scale, and under the worst sort of pressure.

But I think one telling way to get a handle on Blinder's approach is to consider his presentation of the persistent conflict between Geithner at Treasury and the independent-minded head of the FDIC, Sheila Bair.  Blinder pretty much comes down on the side  of Geithner.  Given his natural civility, he speaks with none of the angry intemperance we got from Geithner himself (and speaking of F-bombs...).  But he makes it clear: Bair's insistence that bank creditors (as distinct from depositors) take some of the hit--that insistence, per Blinder. jeopardized the functioning of the entire system.

Ever fair-minded, Blinder does, in effect, concede that it's a couinterfactual and one that (absent the discovery of an alternate parallel universe) we'll never be able to test completely.  Okay so far, but let me offer two reservations.  One, a little more nihilism, please.  If you really are not sure that Bair was wrong, why not say you're not sure Bair was wrong and leave it at that?  I don't see an urgent need to legitimatize a position (Geithner's) of which you are less than convinced yourself.  This might be just the time to mimic the questioner on "Says You" who likes to say "could be that...could be something else."

And two--for myself, I'd feel a lot more comfortable with Geithner's no-creditor-left-behind policy if I trusted his motives.  That is,  I think all the evidence compels the conclusion that Geithner was driven by an almost manic determination to please the banks.  In short, if he was right, I'd say it is for the wrong reason.  

There is a kind of an irony here.   People who wish to blackguard Geithner frequently brand him as a former banker.  Of course he was nothing of the sort: he is one regulator type who never worked for a bank a day in his life.  But of course, this in itself may be the problem: could it be precisely his status as an outsider on the ground, gazing up the treehouse with admiration and envy?--thereby so much more willing to prostrate himself before the bullies on the block?

You might almost call it a reverse of the Joe Kennedy system.  Recall the flac that FDR got when he sent Kennedy, the old fox, to mind the chicken coop at the SEC.  Recall how FDR blithely dismissed the critics with the insight that it Takes One to Know One--and recall how correct he turned out to be.  

No such risk with Geithner.  And precisely for that reason, I would have been grateful had Blinder treated him with a bit more cynicism/skepticism.  In short, perhaps, been a bit less polite.

Inside Job: Outside Opinion

Chez Buce finally caught up with Charles H. Ferguson's Inside Job last night.  I see that  Rotten Tomatoes rates it  at 98 percent positive--critics; viewer is a mere 90.  I guess you can count me as (to coin a phrase) one of the two percent.  That is: it's not really awful, and it makes a lot of noncontroversial assertions.  Also a few really funny moment, particularly when a couple of guileless professors go all tongue-tied in trying to explain or justify their cushy consulting gigs.

But at the end of the evening, you find yourself asking: so, what did I learn?  The answer is exactly nothing.  You really aren't a bit wiser as to what, exactly, triggered the great uproar of '08--unless you count it as an answer to utter an expletive like "greed."  Aside from that--which, admit it, you could have done before you saw the movie--you are not a bit wiser than you were before,  perhaps less wise insofar as you think yourself moreso.  Put differently--I can't think of a single worthwhile question about the whole affair that was answered or even asked during the entire near-two hours.

By "worthwhile question," I mean things like: why did this crisis metastasize so much further and faster than any other in the postwar period?  What role (if any) can we assign to the government's "expand-homeownership" policies?   Was repeal of Glass Steagall really a factor (and if so, what factor?).  If the Feds had let Bear Stearns would the whole mess have ended more quickly and cheaply?  If the Feds had not let Lehman fail, would we have avoided the financial near-death experience?  What concatenation of factors led so many CEOs to blow up their own companies?  Why Iceland?  And while we are at it, why did Iceland recover so fast?

I could go on for pages, and I am sure there are a lot of questions  I wouldn't have thought of then.  I'm not so foolish as to expect ready answers--as the wise men say, we can't agree on the cause of the great depression yet, hard to expect we would have a handle on this its kid brother. But these are the sorts of questions that are worth our time and effort.

It may be that the topic is just too vast for a single film. Fine, then why not cut it down to size?  It may be the topic just doesn't lend itself to audio visual presentation.  But on this point, I'm not persuaded: I recall that PBS did a one-hour special back in '09 on the tussle over derivatives deregulation that was organized, crisp, to the point, and instructive.   Meanwhile, perhaps the final question about Inside Job is why anybody would watch it at all.

Grind on WaMu

I've just finished  Kirsten Grind's The Lost Bank about the collapse of WaMu and I'll give it a thumbs up--surely a worthy addition to the burgeoning stack of post-2008 books trying to figure out the license number of the truck that just hit us.  I've seen at least one review dismissing it as merely rehashing stuff from Wall Street and the Financial Crisis, the report of the Senate Permanent Subcommittee on Investigations,  which offers am account of WaMu as one of its "case studies."   There's a superficial appeal to that charge but I think it may miss the point.  True that Grind and the Senate committee are telling the same story. True also that Grind fleshes it out with a lot of anecdotes that you don't (and would want to) find in a committee report.  But the anecdote is not mere surplusage.  What she does do is put a lot of flesh on the bone. I'd gladly recommend it to (say) a student or any other visitors from a distant planet trying to get a feel for what it was like to live through both the good years and the bad.  She doesn't blink away the fact that the collapse of WaMu was a terrible misfortune for so many, particularly stockholders and investors.  She also doesn't hesitate to stress that, however far as it may have careened off the rails, WaMu began life as an indispensable enterprise of which its investors, its employees and its customers could be proud.

It's pointless to offer a fullscale review at this late date, but let me meditate for a moment on one issue for which I had a better feel myself.  My topic is the mystery man at the center of the story--Kerry Killinger, for so long the CEO, the man in charge as the bank took its long and ultimately disastrous voyage from small, dull, responsible community  bank to frantic high roller in the great financial casino.

For those who haven't been following:  WuMu began life a bit over a century ago and enjoyed--that would be the right word--a long life as a responsible (and profitable) public citizen.  It ran into trouble during the savings and loan crisis and fell under the leadership of a non-banker lawyer who had been its outside counsel and became its reluctant triage surgeon.  It appears that he, against long odds, restored the bank to health.  If Stride is to be believed, along the way he assembled a skilled, and cohesive management team who seemed to enjoy playing nice.

As I say, it was he who set the bank right--but it was also he who with great care and much reflection, selected his successor.  And he chose Killinger, who stayed at the helm of the bank for the next 18 yearas--that is until he was removed by the board of direcctors just days before the bank fell into bankruptcy.

Grind spends a lot of ink on what might seem to be the prehistory of the collapse as she narrates the whole trajectory of Killinger's leadership.  You watch the bank as it piles into the acquisition game--one game at which they actually seemed to be pretty good.  But that's "good" in the sense of "technically proficient"--they could make it happen in hours.  But you get the uneasy feeling that in substance, the deals are getting wilder and wilder.

Grind apparently didn't have access to Killinger himself, so we don't have much insight into his thoughts.  But I'm guessing that one day he woke up and realized he was in a game of eat or be eaten--that he couldn't stay a small, responsible, 30-year-fixed bank even if he wanted to; either he gobble up all his competitors or he himself would be gobbled up by somebody else (who would now be the subject of its own chapter in the annals of banking disaster, but that's a side issue).

You also get the sense that Killinger shared at least one important characteristic with the leaders of so many other banking disasters--a fatal allergy to bad news.  Bear Stearns' Jimmy Cayne at the bridge table; Stan O'Neal who just didn't seem to get the fact that "risk" meant the possibility of bad news as well as of high returns; Dick Fuld hunkered down in his bunker while the shells crash around him--the one thing all thee guys seem to share is a near-obsessive aversion to the dark side, and a dim view of anyone who tried to take them there.

As time went by and the problems began to burgeon, more and more of the old team began to peel away, I suspect that Killinger found himself more and more isolated in his own veil of folly--a locale where, for aught it appears, he enjoyed spending his time.   It is hard to say just what sort of moral you might draw from this kind of a story.  Maybe his predecessor made the wrong choice at the beginning.  Or maybe Killinger is just one of those guys who failed to grow into his new role.  They say these challenges can bring out unsuspected strengths in some people while others, they merely crush.  A Google search for Killinger tonight. turns up his name under the aegis of something called "Crescent Capital Associates."  The listing says that "the most recent annual report for Crescent Capital Associates, Llc is due on September 30, 2011" (italics added--huh?).  The address looks like it is probably Killinger's home.

Sheila Bair and the Slow Boring of Hard Boards

In her memoir of her service as head of the Federal Deposit Insurance Corporation, Sheila Bair tells  cute one on herself on how she emerged from a meeting with bank CEOs to be confronted by a gaggle of protesters who mistook her for a CEO.  One yelled: "How much did that suit cost that you have on?"

Bair recounts gleefully, "his jaw dropped when I responded truthfully that it had cost $139 at Macy's."

It's a moment to savor although I think it might impart meaning beyond what she seems to notice.  I've said before that I have thought   that one reason she had so much trouble getting along with all the other bank regulators is that they treated her like a grrrrl: cutting her out of critical negotiations, failing (or choosing not) to keep her informed, seemingly ignoring any of her own policy proposals.

I'll stick to that but I'll add: in this crowd, can you really take seriously a person in a $139 suit?

I guess I don't quite have my heart on this.  Truth is, I haven't any idea where Ben Bernanke or Tim Geithner get their suits, and indeed if they are spending a lot of  money on fancy threads, I'd have to wonder where it was all coming from.

Still, I think I'm right on fundamentals.  For good reasons or bad, Bair was never deploy the same heft as the rest of the crowd.  So in a lot of press accounts, and also in Steve Rattner's (mostly fascinating) account of his work in the auto bailout, she comes across as a pesky irrelevance who just didn't get it, who was willing to throw the entire economy into a shambles only to suit her own private vanities.

Shorter Sheila Bair: she is one of those who thought that the bailout should have been far less generous with  the shareholders and bondholders of the banks, far more willing to kick out old inculpated management, far more aggressive about capping sweetheart compensation deals for so many who helped to create the mess.  It's a position in which I am largely in sympathy  although I'll admit that it's a complicated complex of issues and that the devil is in a great many details.

By every account, the soft-on-bankers policy appears to be the handiwork of one who was not a banker himself--Tim Geithner, the bureaucrat's bureaucrat, who has survive so many storms to continue as Secretary of Treasury.  Her memoir is now the third memoir I've read by people who ran crosswise with Geither during the crisis times.  The other two--Neil Barofsky's Bailout and Jeff Connaughton's The Payoff.  Both are worthwhile reads in their way but both are heavy on their own frustration and disappointment with the administration's financial leadership, particularly as exemplified by Geithner.  [Noam Schieber's The Escape Artists  is similar in tone but it is reportage, not a memoir.]

Given this background,  one might well have expected Bair's book to be more of the same.  It is, sort of, but in the end it is, perhaps surprisingly, the least rancorous of the three.  Oh, no doubt she's frustrated with Geithner and his no-banker-left-behind approach  But this is a lady who has spent a good deal of her adult life on Capitol Hill: implicitly, you can tell she understands that you've just got to deal with some people whether you like them or not.  And she seems to take a certain pride in the fact that at the end, Geithner, even Geithner, comes to her farewell party--and makes a wry but not ungraceful joke about their difficult relationship.

Perhaps a second reason the book is not mired in disappointment is that   Bair won a fair number of incremental battles even if she did not win the war.  She seems to have been able to make some deals go the way she wanted them to go, and in particular when it came to the matter of reform, she seems to have played a large, albeit not dominant, role in shaping the Dodd Frank Act.  And one more reason for lack of ranker: although she may not have noticed it herself, she seems to have had an immense good time doing what she did.  At least by her own account, she seems to have been kept herself well briefed on every relevant issue.  Also, again by her on own account, she seems to have enjoyed the support of a loyal, talented and energetic staff who were delighted to fight the good fight alongside her.

So what you get in the end is not precisely story of triumph.  What you do have, however, is one of the better books I've read about how this kind of high-end policy scrum really works.  The tictoc can get a little numbing after a while--it has taken me about a month to get through the whole thing.  But I'll gladly keep it on hand as an offering as prep material for any student who finds himself lucky enough to get a chance actually to observe this kind of dustup in real time.

Two disconnected afterthoughts.  I said that Bair ran crosswise with Steve Rattner on the auto bailout.  Th issue was the use of FDIC resources to support the car companies.  In his book (Overhaul), Rattner make it clear that he found her obstructive, parochial and short-sighted; Bair in her book makes it clear she thinks she is being treated unfairly.   I though Rattner's book fascinating and I think in general he deserves top marks for his management of the bailout.  On the substance of the particular issue, I tend to side with her, not him.  I think her concerns were legitimate and she was right to push them.  In this case, then, I think it is he who is being parochial and short-sighted. On the other hand, I can hardly blame him.  It was his job to ram through the auto bailout and it is in the nature of things that he won't have an easy time understanding those who take a different view.

Second afterthought: on issues of grand strategy in the financial crisis,  the reader will have surmised that I count myself as part of the anti-Geithner faction.  I think his banker-protective policy--ring fence and coddle your friends, let everybody else go to smash--is bad politics and terrible policy.  I don't doubt his integrity or his seriousness of purpose: I just think he is catastrophically wrong.  Yet as DeLong likes to say, the cossacks work for the tsar.  If we have been stuck with this wrongheadedness for so long, it is because Obama wants him there.   Odd because in accounts by many people, Obama alone seems capable to entertain a much broader and more wholesome view. But for the foreseeable future, it is Geithner we've got and Geithner we will keep.  And that is because Obama wants it so.

Third afterthought: would be fun if Bair got the not to chair  the new Financial Stability Oversight Council, though.

Sheila Bair Displays Practical Good Sense

At least in the spin of her enemies (she had a few) Sheila Bair came across as the Lucy Van Pelt of the mortgage meltdown: as head of the Federal Deposit Insurance Corporation--the "other regulator," alongside Treasury, the Fed and the Office of the Controller of Currency--she was the one who didn't seem to get the memo.  Which memo?  Why, the one that said she was supposed to show up on demand and sign here, here and here, so the big kids could get on with their game.   This was never quite plausible (for one thing, if she was Lucy Van Pelt, who was Charlie Brown?).  But her troops never seemed to have the publicity firepower as her more austere overlords were able to deploy.

So naturally, one looked forward to a memoir from Mrs.Blair, to let her tell (or vent) her side of the policy differences that drove her into the dissenter's role as the A-team struggled so mightily to stay in front of thee onrushing waves.

Now we have it, and so far (I haven't finished it), I'd say she does herself proud.  It's ;perhaps not as entertaining--for which read "intemperate"--as Neal Barofsky's book about his time as inspector-general of TARP (link).  It may lack some of the sophistication that you might expect from a Wall Street Banker, fhe reader is left to her own judgment as to whether that is a defect of a virtue.  What it does display is that Bair had a coherent and clear-headed vision of what her regulatory responsibilities were and a Kansas girl's practicality in trying to meet them..   One gets the sense of her various qaualities at work in the passage below, where she tries to explain one of the great puzzles of the whole sorry episode--why weren't the banks more willing to do workouts on loans that they didn't stand a chance of getting paid off under any scenario.  Here she offers one of the most useful, practical, clear-headed analyses of the problem that I can imagine:

 Prior to the crisis, the job of a residential mortgage servicer consisted primarily of collecting mortgage payments and passing them on to investors. When a loan would occasionally default, the servicer would simply refer the loan to a foreclosure attorney. Servicers were not set up to deal with mortgage default because it happened so infrequently. Similarly, the agreements under which they operated compensated them based on a flat fee; they were not paid more for dealing with a delinquent loan, so their economic incentive was to do as little as possible with a troubled borrower. Indeed, during the go-go years leading up to the crisis,  competition among servicers for the fees generated by the burgeoning securitization market intensified, driving fees down further and making the business one purely of volume, not of effective servicing. Not surprisingly, under that flat fee structure and in the face of intense competition, servicers never invested sufficient resources to deal with significant delinquencies. There are minimal costs associated with collecting mortgage payments from performing borrowers and passing them on to investors. However, when a loan becomes delinquent, working with a troubled borrower to restructure a loan can be a time-consuming, labor-intensive process, particularly if each modification is individually negotiated. Servicers were not compensated for making the extra effort, so why bother?

 Actually, as we would soon discover, if anything, servicers had affirmative economic incentives to go to foreclosure quickly.  That was because when a loan they serviced became delinquent, they were required to continue to advance the mortgage payments to the investors out of their own pockets. If they modified the loan instead of foreclosing, they would be reimbursed by the borrower slowly, over a period of years, by taking out a small part of the borrower’s new monthly payment. On the other hand, if they went to foreclosure, they were paid immediately, off the top, from foreclosure sale proceeds. If you were they, which would you do?
 
 Why wouldn’t investors tell the servicers to modify loans? After all, if a foreclosure cost more money than a modification, it was the investors, not the servicers, who took the loss. But in point of fact, just the opposite happened, with some investors threatening to sue servicers over modifying loans. Why would investors want to sue servicers for trying to rehabilitate delinquent loans? After all, that would usually save them money over the cost of foreclosure. The answer to that question goes to the heart of what I believe was probably the single biggest impediment to getting the toxic loans restructured: the conflicting economic incentives of investors themselves.

 Remember the tranches we discussed? As you will recall, most mortgage securitizations were set up to provide the senior tranche— the triple-A portion of the securitization— with substantial overcollateralization. What that meant was that if a mortgage   defaulted, it had no impact whatsoever on the senior tranche— unless the defaulting mortgages exceeded 20 to 30 percent of the mortgage pool. However, here is the catch: because of the way in which many securitization documents were written, if, instead of a foreclosure sale, the loan was modified, the reduced mortgage payments flowed through to all investors in the securitization pool, meaning that everyone’s income was reduced, including that of the triple-A investors. 

So again,  would you do if you were a triple-A investor? If a loan becomes delinquent and the servicer modifies it with a 30 percent payment reduction, your portion of the payment flows from that mortgage will be reduced along with all the other bond holders. If, however, the servicer simply forecloses on the loan, even if the losses on foreclosure amount to 50 percent, you will still prefer the foreclosure because that entire loss will be absorbed by the lower tranches. From the standpoint of investors as a whole, it obviously makes more sense for the loan to be modified with a 30 percent loss instead of a 50 percent loss on foreclosure. However, from the standpoint of the triple-A bondholders, it makes more sense to foreclose. And the triple-A bondholders were more numerous and more powerful than investors and more powerful than investors holding the subordinate tranches.

 Bair, Sheila (2012-09-25). Bull by the Horns (Kindle Locations 1149-1181). Simon & Schuster, Inc.. Kindle Edition.

Why Spain is Different (And a Broader Question)

Read a couple of interesting pieces this week on what makes Spain Spain (link, link).  Hint:  six letters, begins with "F" and ends with "O" and in the middle we find an unfinished revolution, where the old crowd continues to enjoy ingroup privileges at the expense of everybody else.  Which might go a long way to explaining how a seemingly-grownup nation can run a youth unemployment rate of 50 percent.  All of which impels me to consider whether the Spanish experience is unique?  The obvious first point of comparison would be Greece and here I do think I see some striking differences.  Most notably  in wretched oversimplification, the problem has been that everyone was on the take: in the sense that everyone enjoyed a government job or some kindred benefit from the license raj that provided sufficient bread and circuses to keep the party in power.  

Beyond that--well, I guess you could say that when banking came to Ireland, a lot of the blessings tumbled over into the bogs, in the form of jobs, real estate deals and suchlike.  Italy--I guess Italy is the European country I think I know best but at the moment, I'm finding it hardest to figure out (is there a moral here?--ed.).  Heaven knows it had its secret societies, its Mafia skimmers and such like.  But I've always had the sense that in Italy everyone has an angle, albeit an angle that I may not understand (compare New York City doormen who seem to subsist in an ecology that no outsider can penetrate).

Oh and on this issue--as so many others--I can't even begin to make sense of my own United States.

But it does imbue the whole sorry bubble-bust episode with an overriding whiff of cui bono?  Surely the then crust of the finance class walked away with unimaginable  profits.  But some of the money spilled  out to various people in various ways.  It's another one of those questions that can be fun to consider precisely because we'll never sort it out.  But it seems to work differently in different places--that, at least is a kind of a start.

And Speaking of Books. (Grunwald on the Stimulus)

I suppose I ought to say a word about The New New Deal, Michael Grunwald's chronicle of the notorious Obama stimulus.  It's a worthwhile and important (if imperfect--see infra) book which to my eyes doesn't seem to be getting the buzz it perhaps deserves.

The book falls analytically into two sections, maybe two and a half.  The first is the chronicle of the assembly of the stimulus bill.  It's another account of the inner workings of the sadly dysfunctional White House economic team, providing further evidence of what you knew from elsewhere--that Larry Summers, while not entirely a Wall Street tool, was just not at all effective at his assigned task: i,.e.,  organizing, focusing and clarifying the Obama economic message.  Important for the record, but not exactly stop-the-presses news. Also further evidence, if we needed any, of how completely in the tank for the big banks was Tim Geithner.

The more important part of the book is the long, detailed and sometimes wearying catalog of all the stuff we did with the stimulus money.  I don't know of any other easily accessible source that comes close to detailing this record so completely.  So far so good, but this is where the trouble starts, because it quickly becomes clear that Grunwald's dominant purpose is to persude us that the stimulus program was just dandy and that the critics are all knaves and scoundrels.

Now, it so happens I am generally hospitable to that view.  I've never pretended to be strong macro, which may distinguish me from all the other know-nothings who do claim to be strong at macro.  But I'm generally sold on the idea that  this crunch may indeed be a problem that you can solve by throwing dollars at it.  Still--really, a little critical detachment wouldn't have hurt.  Note in particular: reading Grunwald it becomes clear that "the stimulus" was partly about revving the engines (but please don't say "shovel ready"again).  Yet it is equally clear that a good many of the projects were not short-stem stimulus at all--rather, just substantive innovations that Obama thought were A Good Thing that he might as well ram through while he had the chance.

It's hard top get too worked up about this: I can't imagine any president who wouldn't have yielded to the same temptation.  But I would have loved a more candid and critical account of whether the zeal for particular projects may have hurt the overriding goal of getting the economy going again.

The "half" story is the account of the policing of the stimulus, so as to prevent fraud.  Here Grunwald gives a shout-out to Joe Biden.  And once again, I am disposed to think Grunwald must be on the right track.  But the way he tells the story, the bells are ringing, the whistles blowing, and we're on the first train out of happy town.  All I'd say is that Grunwald has a lot of guts as a journalist to stick his neck out quite as far as he does on this one.  I suspect there's bound to be some contrary evidence as time rolls on, but Grunwald has staked out his position as the original yea-sayer, and I hope he can live with it if as and when the picture out to be not quite so sunny as he paints them.

Obama, Geithner and "No Banker Left Behind"

I've just now caught up with Noam Scheiber's The Escape Artists and it is just as good as the reviewers say it was (for one of the best, go here).  For crisp and coherent accounts of difficult economic concepts, this guy really is way above the common ruck.  But he brings me back to a favorite theme of mine: that Obama and his ilk are way too deferential to Wall Street.

I've taken some heat for that one  before from some of my friends who say no no, one of Obama's great virtues is that he is not part of the Wall Street cabal.  Wall of course, he is not.  But is that a virtue?  The more I see of him, the more I sense that Obama, whatever his virtues (many) and his intentions (good) simply does not have a feel for the way markets work.  It's precisely the reason why he is far too much  at risk of being mesmerized by those who (sound like they) know better.

But next, direct the spotlight to Tim Geithner.  Per Scheiber, Obama and Geithner are genuinely sympatico. But the terrible truth is that Geithner suffers from another strand of Obama's own hypnotizing virus. Recall that Geithner's great claim to fame is that he has never worked for "a bank" ("Federal Reserve Bank of New York," ironically, does not count).  Well yes, but one corollary of never having worked for a bank is that Geithner feels himself totally dependent on banks for his street credit.  Read a few pages of Scheiber and you get the feeling that this guy doesn't blow his nose unless he decides it will play well on Wall Street.

Plug in Larry Summers as chairman of the National Economic Council and you have somebody whose role is more complicated and perhaps easier to misunderstand. The vulgar (that would be me) would think--oh, Summers, he's sold out for the big consulting fees, he is just another shill for his corporate masters.  Per Scheiber, there is a large kernel of truth in that,  but the back story is more complicated.  It's not solely that he's a corporate tool (heh). The thing is, in a more general way he just wants to make sure he has a place at the power table--you get the sense he might have behaved much as he did were he buttering up to Joseph Stigliz, rather than Robert Rubin.  It's Summers who get to pass on economic advise to the inner circle. In Scheiber's telling, "pass on" means that Summers gets to listen to the great advocate of "more help for Main Street" Christina Romer, in her role as chair of the Council of Economic Advisers.  At the start, Summers agrees with her (Are you surprised?  One surmises that Romer may have been surprised).  But then Summers, no slouch at bureaucratic intrigue, puts Romer on ice (or more crudely, "shoves her out onto the ice floe").  Had he changed his views?  Evidently not on substance; but it appears he had made a judgment as to what would win, and he was afraid that if he stuck with (what he perceived to be) the loser, he would lose his street cred.

It seems that Summers' decision set the stage for a tragic misunderstanding.  Evidently Rahm Emanuel, still the chief of staff, figured the political decision was his, subject to input on the economics from Summers. But by the time it got to Rahm's desk, a political decision had already been made: Rahm just didn't know it.

So the winners here turn out to be Geithner, though he may not have known how or why, and Summers, for reasons of his own.  Romer it seems,  no matter how competent an economist, was not Summers' match at intrigue.  And Obama--and, ironically, Mr. Steeetwise himself, Emanuel--apparently didn't even know that they had been rolled.

There is an added irony here, way beyond the scope of Scheiber's book.  That is: I have no idea how good Romney is at bureaucratic intrigue (not very good, I suspect)--still when it comes to not being mesmerized by  big money, he is probably far better equipped than Obama.   He's been dealing with these guys all  his life and he seems to have taken them to the cleaners more than once.  Is this reason enough to dump Obama for Romney?  IMO, not by a long shot. Far better a serious but mediocre president, than a slapdash moneygrubber in thrall to a zoo full of knuckle dusters.  But it does make the point that politics, as well as being a dirty business, is also complicated.

You Don't Want Neil Barofsky Thinking You are a Pompous, Careerist, Lackey to the Banks

Elevator pitch for Neil Barofsky's  Bailout: "Mr. Smith Goes to Washington starring a guy with as highly actuated sense of right and wrong, and  the brass balls of an assistant U.S.Attorney from Manhattan."    Which latter is, of course, exactly what Barofsky was before somebody plucked him out of obscurity to make him the first inspector general of TARP, the benighted "troubled asset relief fund, so much the center of our narrative of the 2008 meltdown.

You really have to wonder who had the bright idea of giving him this job in the first place.  It's unlikely that any government official would have handed such a this guy this mandate had they entertained any notion of just how big a loose cannon (I use the phrase in the nicest possible sense) he might be.  In retrospect, you'd have to say they might have known.  Manhattan USDAs are not famed for winsome self-constraint, and in Barofsky, they picked a guy who had (if you believe him) faced down FARC guerrillas in Columbia--including one who (if you believe him) had been sent to kill him and relented only when she learned that there might be a spot for her in a witness protection program.

Whatever; but it couldn't been many days before they realized they had given the secret handshake to a guy disposed to assert the broadest possible definition of his mandate, and great enthusiasm to explore any opportunity that presented itself.   And in addition to his work with narco-warriors, he brought to the table an impressive background in the intricacies of financial fraud.  What he did not bring was equally impressive: he had zero ambitions for a Washington career.  By his own account (and the evidence richly supports him) he was a political naif. And if he had any humility, he must have left it in the commuter waiting room at Penn Station.

All of which makes for, if not else, a riveting read--one of the best first-person memoirs that I've read coming out of the crisis.* It's a ripping yarn in which you wouldn't want to be one of the legions whom Barofsky came to hold in contempt. His high-mindedness is somewhat defanged by the consideration that he is also severe with himself: it can be fun (by reason of rarity?) to read anyone who is so candid and forceful in owning up to blunders on his own.

Barofsky almost certainly defined the job more broadly than his handlers would have expected him to. He took on "audits"--the boring shuffle of paper that makes up so much of the life of inspectors general. Much more he seems to have preferred fullscale "investigations," and it was only a blink of an eye before he had clothed his staff with full law-enforcement powers--guns and badges--and making referrals for prosecutions.

Early in the book he takes note of so-called "media whores"--IGs who define their job their name in the paper. The phrase was not Barofsky's, but by the end of the book he more or less acknowledges that he pretty much became one himself: he concluded, almost certainly correctly, if he was going to have any impact at all, he had to make enough of an uproar that Congress and the press would pay attention.

So it is hard to go through it without accepting his conviction that he is one of the good guys. But dig down under the hood a bit and there are some interesting issues that bear further exploring. This is so in at least two respects.

First, as to the nature of the mandate. There can't be much doubt that an IG has a brief to work for prudent management: to try to make sure that government dollars are not stolen, neither by recipients, nor by government employees themselves.

But (second) "stolen" quickly morphs into "squandered," and "squandered" very quickly leads to the question of what the government is supposed to be doing with the money--in a word, to questions of policy. Subtleties like this don't seem to have bothered Barofsky a lot. By his view,this is a battle of--what shall we say?  Main Street versus Wall Street?  The Banks versus the little guy? Choose as you wish, but Barofsky clearly sees himself on the side of the Main Street, the little guy.   However sympathetic one may find him in this role (I find him very sympathetic indeed), still there is the question: who died and made you king?  How far is it your role to establish the agenda for the program?

One answer to that question might be: well from the start, the program had a dual mandate.  It had the job of assuring that the banking system did not fall off the cliff.  And it had the job of providing some succor for all the assorted innocents who fell victim to financial dysfunction.
 
If you grant that ambivalence, then you will be impressed by the next insight. Specifically--it's clear beyond any cavil Secretary of Treasury Tim Geithner has never seen it that way.  By all the evidence--not just Barofsky's--we can see that Geithner saw and sees his mandate under a banner that says "no banker left behind."  If some consumers get helped in the process, why that might be okay (or does Geithner even care that much?).  But it can't be anything more than an incidental and unintended side effect of the world according to Tim.

Insofar as Barofsky blew the whistle on this kind of blinkering, I think we can thank our lucky stars that he was on the job.  But the issue doesn't end there.  Even--especially--if you accept this kind of dual mandate, then  you have to face some questions of how or whether the two stakes can ever be reconciled.

Take HAMP, the Home Affordable Modification Program that got so many straitened debtors deluded with false promises of loan workouts.  I think everybody except the program's administrator's mother would now concede that HAMP is a classroom example of bad governance, poorly conceived and appallingly excecuted.  And Barofsky provides compelling evidence that Geithner saw it only as a device to help banks, not consumers.

But what if you decided that you do want to help debtors on underwater mortgages? Just exactly why do you want to help them?  And what exactly do you do?  The first question--why?--itself invites an ambivalent response. Are you doing it out of compassion?  But why compassion?  Aren't these just risk-takers who took a risk and lost?  And is compassion to these debtors compatible with compassion for other homeowners who did pay their bills and did not get whipsawed by the economy?  But maybe you are not doing it out of compassion; maybe you are only doing it because you think the economy needs it, in which case a different set of questions may arise.  And in general, if we give this relief, where does the money come from, and why?

Or take a somewhat less earthshaking issue that appears, nonetheless to be dear to Barofsky's heart: auto dealerships.  One facet of the Rattner auto bailout was that it generated a rash of dealer closings.  Barofsky is not at all happy with that decision which he thinks ill-founded or at least ill-thought-out.  And he is surely right that closing a dealership hurts, very likely the dealer and probably also the community he serves. But it's less clear how you allocate the costs/benefits of this sort of thing.  Barofsky floats (though he does not really embrace) the idea that the dealers took the fall for the employees--that there wasn't enough money to save both, and the (largely Democratic?) employee cohort at the expense of the (mostly Republican?) dealers.  That's certainly a possibility and I'm not sure how I'd come down on it myself.  My point is I'm not sure the issue was quite so much within Barofsky's brief as he seems to believe.

Concerns like this may seem nitpicky, mere lawyer stuff.  The hell with the fussiness, his friends will say.  Those are just excuses and evasions. Barofsky was a man of action.  Even or perhaps especially (they say) you read what his enemies say about him, you can see that he's a man of integrity who was doing what he felt was best for the system.  The hell of it is, I think his friends are right.

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*Others: Steve Rattner's Overhaul on his work in the auto bailout (sounds like Rattner and Barofsky are not the best of friends); Harry Markopois' No One Would Listen by a guy who seems to have gone half nuts trying to tell the world about Bernie Madoff before Bernie told on himself.

The Ritholtz League

You know about fantasy football and fantasy Supreme Court.   Barry Ritholtz takes it to a whole new level:

Chris Whalen and Josh Rosner have suggested putting together a causes of the crisis debate (I sarcastically described it as flat earth loons versus a data driven analysis), but there is merit in that idea. 

On my squad I select Bill Black and Mike Konczal, with a research team of Yves Smith, David Min, William Cohan and Janet Tavakoli. I am sure there are more folks to add to this, but that’s the debate squad I would go with.

Great, but I shouldn't think it would be that hard to become up with a fascinating team for the flat earth loons opposing squad. You'd start off with Peter "the poor people did it" Wallison, whose argument about the role of Fanny/Freddy looks sillier the further he digs himself in. Batting cleanup you would want John Taylor, whose book on his years as a China hand assured us that President W was a thoughtful and involved leader, the master of his brief. You'd certainly want Glenn Hubbard, who sometimes seems to forget that he was ever in the Bush administration. Although beyond that, I'm a little shaky on exactly who would be the best choice. Not Tyler Cowen who for all his free market pretensions seems more interested in being surprising than he is an being an ideological partisan. One is tempted to say Greg Mankiw although he too (though in a different way) always seems a bit too coy about his support for his own (apparent) principles. I'm tempted to throw in a less obvious choice--Mark Perry of Carpe Diem who may not have the star power of the others, but who has a turkey buzzard's eye for the offbeat or inconvenient datum.

Somehow I can't seem to resist being snide about my choices. I guess I'll have to accept that insight as a fault, but I think maybe this is the point: like it or not, I'd have to concede that these guys are heavyweights. But I do think almost all of them have a maddening knack for smoothing off the corners, for making their own work easier for themselves than it should be. Which is perhaps precisely why it would be fun to watch them go toe to toe with people who call them to account, who can make them face up to the difficulties of their case. Of course, perhaps the same can be said for team Ritholtz but that's fine; it could only make the encounter more interesting.

Which brings me back to the likes of fantasy Supreme Court. Law professors from time to time have directed their students to prepare a draft opinion in imitation of one or another high court judge. Of course this version cuts close to the bone because if you pick a pending case you can get some bracing feedback if and when the real judge comes out with his real opinion.

Lacking that directness, I'm still kind of wishing I were teaching a seminar in The Crisis right now, so I could make my students run a mock version of Ritholtz' hot stove league.  

In a Word, Bleah

Best short not-very-technical intro to the Euromess I've seen anywhere: link.

England and Whelan on FannieFreddie

Who caused the great metldown? There's a school of thought that blames it all on the GSEs--FannieFreddie--and their cockamanie project of providing access to housing for poor people.  Peter Wallison is the prime culprit here, but he gets help from plenty of people who ought to know better, like Gretchen Morgenson and Michael Bloomberg.

 I'm one who has always thought this a vulgar oversimplification: a mean smoke-and-mirrors attempt to deflect attention to more fundamental failures in the banking system. I'm sold on the idea that the GSEs are a mess, but it has seemed to me (I think I have said this before) that the problem is not their "public" role: the problem is that they behave too much like banks. 

 Comes now Robert Stowe England (via Chris Whelan) who seems to me to have it just about right. In Whelan's words (reviewing England's new book) "The housing GSEs and the Wall Street banks are one and the same:" As interpreted by Whelan, the GSEs are best understood as part of the whole complex of banking (or more broadly, "finance"). The GSEs may have been players--perhaps the players--but their role cannot be understood aside from the larger context. This seems about right to me. England (whose name is new to me) goes on the stack (bur wait a minute, why is the Kindle price $38.40?)

Madrick's Uneven Greed

Still can't make up my mind just what to think of Jeffrey Madrick's Age of Greed.  There were times when I found myself thinking that it was one of those books that should be on the pre-inauguration reading list of any new president.  At other times, I thought it old stuff, recycled--and patchy and incomplete at that, with not much (not even greed, really) by way of common theme.

I suppose the main difficulty is that it is patchy, in the sense that it is a collection of pretty much self-contained vignettes--each chapter bears the name of one or more persons, as if you were thumbing throw a collection of Time Magazine "Man of the Year" profiles.  Some are better than others.  Still, if you're looking for takeaways, I can offer at least two.  One--maybe this is the reason I want it on the pre-inauguration list--is the appalling incompetence of the 70s regimes in Washington--Nixon, Ford, Carter--all of whom seemed to flounder or lurch through turbulent economic waters that they never came close to understanding.  No one of the three seems to have had even the beginnings of a feel for economic policy on their own.  The advice they got was of varying quality, some pretty good.  But they all seemed to grasp impulsively at whatever seemed closest at hand no matter how it might relate to the advice of yesterday (or tomorrow).

Perhaps one exception: Carter the peanut farmer sincerely disliked "regulation" and through the instrumentality of Alfred Kahn, he conducted the first great wave of deregulation since the beginning of the New Deal--trucking, airlines, natural gas.  Since I'm generally a fan of that sort of thing, I'll give him points for that (but cf. banking, infra).  But on the macro issues--inflation--he seems to have had no more notion of what was going on than the guy with the newspaper kiosk out by the White House gate.  The much-lauded Paul Volcker plays a role at this point in the story, of course.  Madrick treats Volcker with due respect for competence, and for being almost unique among major economic policy heavyweights in truly not giving a rat's patootie about accumulating personal wealth.  But he makes it clear that Carter's choice of Volcker to head the Fed was something close to accidental, and that Volcker's implementation of anti-inflation policy was probably far more brutal than it needed to be.

The other takeaway involves the steady and inexorable dismantling of anything like government regulation of banking.  One of Madrick's best chapters is his account of Walter Wriston at Nat City, the arch-deregulator who solved most of his government constraint problems with the beautifully simple strategy of shootinig-from-the-hip first, asking questions later, as in "an ounce of apology is worth a pound of explanation" (except that Wriston's "apologies" rarely amounted to more than "oh--sorry.")    The large question is, how did they get away with it, the systematic abandonment of anything like government oversight of a quintessentially public business?   Sure, you can talk about pressure from the bankers (Wriston in particular); you can talk about the corruption of politicians (okay, let's talk about the corruption of politicians).    But the deeper trouble is that nobody had a good counter-story.    The collapse of the Soviet Union removed all but the most vestigial support for "socialism" in any guise.  And ironically, bank regulation had worked so well since the 30s that it had become more or less invisible to friend and foe alike.    Then came the Latin American collapse, and the savings and loan debacle, and the Asian meltdown and he dotcom bust and the housing bubble and o lord, what have I missed?

Oddly enough, after stuff like this, Madrick ends by kicking a hole in what he bills as his own central premise.   Sure, there was greed aplenty but isn't there always?   Sure, rich bankers played heads-I-win, tails-you-lose. So the fault was all in lousy incentives, government guarantees.  "But this argument," Madrick argues, "is exaggerated, implying that speculative bubbles are more rational than they are.  ...  The nature of herd behavior  is to cast common sense aside (emphasis added-ed;)... Moral hazard is among the causes of overspeculation but not likely the determining part.  Herd behavior is hardly rational."

So to the question, "what, were we all nuts?"  the answer may be, "in a sense, yes."  This may not be a very helpful answer, and no matter how persuasive, it isn't complete.  Still, Madrick's presentation, however partial, is a vivid and one hopes therapeutic reminder  of just how nuts we really were.