A few days ago, I finished up Ron Suskind's Confidence Men. It's a pretty entertaining story that the Pulitzer Prize-winning Suskind tells about the failures of the Obama Administration's economic policy through the administration's first two years. First, a few notes on Suskind. He won his Pulitzer for his remarkable account of DC Public Schools in A Hope in the Unseen. Since then, he's mostly moved on to political intrigue. He wrote two books on the Bush Administration, The Price of Loyalty and The One Percent Doctrine, which savaged the decision-making process in the Bush White House. He's written for the Wall Street Journal and Esqure, so he's very much a journalist in the way he writes.
So there's two things about this book that stick out to me. The first, hoisted from Amazon.com reviews, is the perspective from which Suskind writes. The assumption seems to be that Suskind is savaging the Obama Administration from the right. People who take that tack either didn't read the book, or didn't comprehend a thing. Suskind, despite his Wall Street Journal pedigree, is very much a conventional Democrat, and his perspective is that Obama brought back the same people who pushed the deregulatory agendat that took hold of the country over the past three decades to his Administration, leading him to push policies that have been proven failures instead of re-regulating (as an aside, this, unlike the "Obama is a super socialist who is dangerously growing our government" is at least semi-coherent; the "Kenyan socialist" nonsense is either the WSJ/National Review crowd either being intentionally dishonest, or showing how tremendously stupid they are) . In essence, he splits potential appointments Obama might have made into two teams-- an "A" team (that Suskind likes) headed by consumer rights advocate, Harvard Law professor and Senate candidate Elizabeth Warren and former Fed chairman Paul Volcker, and a "B" team led by former Treasury secretary and Harvard president Larry Summers and former New York Fed president Tim Geithner.
The problem with the division is that, even internally, it's incoherent. Start with Summers. It's very obvious that Suskind interviewed Summers and didn't like him. That's nothing new. Summers is famously prickly, and a bit (well, probably a lot) of a jerk. He's arrogant and dismissive of those he deems to be unworthy of his time. But anyone who's ever worked with Summers uniformly attests one thing-- he's also absolutely brilliant. Suskind gives that short shrift, dismissing Summers as "frequently wrong" (without getting into specifics beyond "he didn't want to regulate derivatives in '98") and "unable to accede intellectual ground that he can't defend." Those are pretty broad charges, and, if Suskind's going to make them, he better answer for them. But he doesn't. Instead, he makes them, then moves on to the next point. This is problematic because Suskind spends much of his discussion of Summers talking from on high about the ideas of a man whose views he, frankly, doesn't understand. That leads to a pretty odd literary style-- he makes grand accusations, doesn't bother to support them with much beyond bombastic rhetoric and anonymous one-liner quotes from "colleagues," and then moves on as if the initial point is self-evident. The whole exercise ends up being, even internally, utterly incoherent. One of his major points is that Summers has a remarkable ability to take two sides of an argument, choose one he thinks is correct, then marshal support for it even when it turns out to be wrong. Suskind uses that as his explanation for how Summers squeezed out the ideas of Christina Romer (then the chair of Obama's Council of Economic Advisers) in favor of his own regarding the size of the stimulus the Administration passed in early 2009. There are two problems with this account. First, as has been pretty well-documented, Summers and Romer were on the same side of the argument. So, somehow, Summers had a remarkable ability to marshal support for conclusions that turned out to be wrong... which explains why the Administration decided on a policy course that differed from the one which he advocated. Second, there's the personality issue. Suskind paints Christy Romer as something of a wallflower (a major theme of the book is that women were treated with hostility in the Obama Administration). This one REALLY doesn't pass muster. Anyone who's worked with Romer at Berkeley can testify that she is not one to back down. But the book portrays her as being swept aside by Summers and Geithner... and then complaining as if she's been victimized. This is deeply unfair to Romer... and pretty damning for Suskind's account.
But probably an even bigger problem with Suskind's book is that he wants to make qualitative claims about policy-- that some policies that the Administration pursued were wrong, and that others might have been better. That's a perfectly reasonable position. But if you're going to make claims about the rightness and wrongness of policy, you better have a really good explanation for why one policy is wrong and your preferred policy is right. Suskind doesn't just give this vital element short shrift-- he ignores it altogether. He treats it as self-evident that Warren and Volcker were right on the policy, while Geithner and Rahm Emanuel were dangerously wrong. And that might work if he were able to put together a powerful argument to that effect. That argument, frankly, isn't exceptionally difficult-- Paul Krugman and Joe Stiglitz frequently argue, very coherently and persuasively, about the inadequacy of the Administration's economic policy. But Suskind ignores this altogether. And this missing element becomes even more problematic when you go through the book and realize that, despite his WSJ pedigree, Suskind doesn't understand a lot of basic finance. Now, I'm not one to look down my nose at people who don't have some knowledge about a particular topic-- God knows, I'm ignorant about most things. But, if I don't know about something, I avoid taking a strong stance on it. Suskind does the opposite-- he treats things he has no knowledge of as self-evident, then goes on to eviscerate those he argues against as disingenuous or even stupid. That's, needless to say, a pretty absurd tactic. Now, because I don't want to be a hypocrite, here are some examples.
First, Suskind repeatedly refers to Tim Geithner as the former "chair" of the New York Fed. For anyone who can look it up on Wikipedia, the New York Fed doesn't have a chair-- the Board of Governors in DC does. Ben Bernanke is the chairman of the Fed; Geither was the President of the New York Fed. That one is the most obvious, and it's just a factual error, but it's pretty indicative of Suskind's basic reporting failure. Another is his statement that a collapse of Merrill Lynch would be even more significant than Lehman Brothers' collapse because Merrill, Morgan Stanley and Goldman Sachs (the three investment banks that, at the time, were bigger than Lehman) were all about three times Lehman's size. This is complete baloney. I have no clue where Suskind gets the "three times the size" claim, but it's laughably off. A financial institution's size is normally measured by its assets. Lehman's assets were between $600 and $700 billion when it filed for bankruptcy. By all accounts, Morgan Stanley was between $800 and $900 billion, and Goldman was somewhere between $900 billion and $1 trillion. Bigger, yes. Three times bigger? Not even close. But then he makes less obvious mistakes that are, substantively, even worse. He refers to Collateralized Debt Obligations (CDOs) as "derivatives" (they're not; they're asset-backed securities), refers to swaps as a way that companies finance themselves, in a category with commercial paper and repos (that's laughably wrong; swaps are derivatives that are used either as hedging or speculative tools; you can't fund operations by buying a swap). Later, he talks about Bear Stearns dying because its counterparties were "shorting" their repo durations. This is incoherent. What Suskind meant was that they were shortening their repo durations (meaning that Bear was borrowing for a period of days instead of weeks or months in the repo market). Shorting refers to a transaction that earns a profit if the value of the referenced asset drops. While this was probably a simple typo, it leads me to think that Suskind wrote the financial sections of his book by stringing together terms he saw in the WSJ and the Financial Times without bothering to understand what they actually mean (like a little kid who hears her parents use big words and then uses them incorrectly).
While I think Suskind recognizes this shortcoming most of the time, and uses terms rarely enough that you could fill in the gaps in what he's saying enough to get to the right conclusion, when he does go for a full-length explanation, it shows just how clueless he is. There are two cases which are most egregious that I'll focus on here. First is from a conversation he has with Geithner about the rogue mortgage lender Countrywide's problems. I'll quote the whole thing, just to put it into context:
"That was really interesting," Geither later reflected, "because Countrywide had no idea what its exposure was, no understanding of what it had gotten into. And the fact that the market was unwilling to fund Treasuries if Countrywide was a counterparty was the best example of how fragile confidence was and how quickly it turned."
Translation: the market would not even lend Countrywide cash to buy Treasury bonds, the safest investment in the firmament. CDOs, MBSs, or similar types of mortgage-based collateral that Countrywide was using to roll over its repo loans were suddenly seen as impossible to value or sell in August 2007, meaning it was illiquid. The whole point of collateral is that it can be taken [...] and sold in liquid markets for cash. Countrywide's intended use for the borrowed funds -- to go out, like Sal Naro, and buy Treasuries and shore up its balance sheet or use them as collateral for emergency bank loans-- was irrelevant. Its collateral was no good.
Suskind then goes on to ridicule Geithner for thinking that Countrywide's problem was one of "confidence." The problem with this is that it is stunningly wrong. Not in a "that's not what they did" way, but in a "there's no coherent reason they would have done anything Suskind described them as doing" way. First, he misunderstands the most basic aspect of the repo market. Countrywide wasn't, as he says, trying to get the market to fund their Treasury purchases-- it was trying to borrow in the repo market with Treasuries it already held as collateral. This is a critically relevant distinction that Suskind completely butchers. Borrowing unsecured in order to buy Treasuries is completely absurd-- it's essentially giving away money, and no one would ever do it. No institution is going to have to pay a lower interest rate than the US Treasury for similar-duration bills. So if I borrow $100 from the bank to buy that amount in 10-year Treasury bills, I'll earn 2% interest, but I'll have to pay substantially more. If I can't pay, the bank will seize my Treasury bills as collateral. So, best case, I lose the spread between what I have to pay to the lender and the interest that I get on Treasury bills. Worst case, I default and the bank seizes the Treasury bills. It's a lose-lose proposition. And borrowing to buy Treasury bills doesn't "shore up the balance sheet" like Suskind says-- it weakens it even further by adding higher-yielding liabilities (the loans to buy Treasuries) while buying lower-yielding assets (Treasury bills). What Geithner's statement actually means is that lenders wouldn't even make loans to Countrywide that were secured by Treasuries already held on Countrywide's books. What this shows is that creditors had so little faith in Countrywide's credit that they wouldn't even lend when the collateral was the safest securities on the planet (Treasuries). This shows exactly what Geithner says it shows-- that the market had essentially no faith in Countrywide's creditworthiness, and didn't want to go through the hassle of fighting Countrywide to seize its collateral if the firm went belly-up the next day. The simple story here is that, if Suskind can't understand the practice Geithner is talking about, he has no grounds on which he can criticize Geithner's actions.
Even worse is Suskind's bungling of the difference between equity holders and debtors. Here's the relevant text:
The key to the equation was that, as in all bankruptcies, creditors would take a haircut [...] Geither, on this point, would not budge. Debt was sacrosanct. No creditor would suffer. [FDIC head Sheila] Bair was equally intransigent. Secured creditors, such as equity holders, of course, wouldn't be wiped out, but they had to face consequences for lending money to an institution whose recklessness had led to its demise.
This is stunningly bad. The underlined part (the underlines are mine) is where he strikes out. Secured creditors and equity holders are NOT the same thing. They're not even close to the same thing. In fact, they're not even related. Equity holders are those who own a portion of the company. They're stockholders. An equity is a stock. Secured creditors are lenders who lend against collateral that the company owns. So if I buy, say, GM bonds, I DON'T have an equity. I am an unsecured. If I give GM a line of credit that is secured by its factory (meaning that, if GM doesn't pay, I can seize the factory as collateral and sell it to get my principal back), then I am a secured creditor. Suskind conflates someone who lends against collateral with a stockholder. They're not even remotely close to being the same thing. What the discussion is about is whether unsecured creditors should have been paid in full. Geithner argued that they should be. Sheila Bair argued that the bank ought to be resolved in a procedure that looks like bankruptcy, where claimants are paid in order of their priority (secured creditors can seize collateral, then unsecured creditors are paid off to the extent possible, THEN equity holders might get some of the leftovers, though that's unlikely). Without taking a position on whether Bair or Geithner is right, Suskind simply doesn't understand the debate.
And, at heart, that's what makes the book and its conclusion so hard to take seriously. Geithner wants to cast heroes and villains. And in a narrative, that's all well and good. But if you're doing that, you sure as heck better make sure you've got firm ground to stand on intellectually. And Suskind just doesn't have it. So, even if reading the book is entertaining (and it mostly is; Suskind's a fine storyteller), one who does so should ignore any explanations and conclusions at the risk of becoming seriously misinformed.
No comments:
Post a Comment