An insight into US Treasury fire-fighting policies

I had earlier pointed to a must read account into US Treasury operations in this crisis. It was written by Phillip Swagel formerly U.S. Treasury Department.

I came across this interview of Neel Kashkari, the man who one of the key persons in the Paulson Treasury team. It also gives you a feel of the pressure in Us Treasury and the touch choices Fed-Treasury had to make to combat this crisis.

The tough choices which had to be made:

Knowledge@Wharton: Help us understand, since you had such an insider’s view of the whole process. As different signs of the economic crisis became apparent and large institutions began to face problems, how was the decision-making process within Treasury and the Fed managed, and how did you develop your strategic response to these situations?

Kashkari: There was very, very close collaboration between Treasury and the Fed, between Secretary Paulson, Chairman Bernanke and then-New York Fed President Geithner. I would call us co-equal partners, where we were literally looking at every tool available and trying to figure out what would be the right policy response for the country — not looking at it from a Treasury perspective or a Fed perspective. I think that collaboration and that trust were absolutely essential. 

As the crisis progressed, our tactic shifted. We started out pushing the private sector to raise capital and to recognize losses, hoping that the private sector could adjust and deal with the housing correction on its own. At some point, it became apparent that it couldn’t, and when we realized that risk, we began contingency planning — Treasury and the Fed together — on what we would do if the government had to step in to stabilize the private sector.

Knowledge@Wharton: But how, for example, were decisions made about whether an institution should be allowed to fail or whether it needed a rescue?

Kashkari: Ultimately, that was the combined judgments of Treasury and the Fed — Secretary Paulson, Chairman Bernanke and then-President Geithner at the New York Fed. There was no one test that we looked at. It was a combination of understanding that institution, and understanding how connected that institution was to other institutions. What stresses and strains were in the credit markets and the financial markets? What was the state of the economy? 

If you look at Bear Stearns as an example, it is very possible that if Bear Stearns had run into similar trouble two or three years ago, it may have been allowed to fail. But given the state of the credit markets and the broader economy, the decision was made that we needed to step in to prevent a collapse and arrange the merger with J.P. Morgan. So there is no one metric I can point to. Ultimately, it’s the combined judgment of Treasury and the Fed that made those decisions. 

On Moral Hazard:

Knowledge@Wharton: Did you have any debates on issues, for example, like moral hazard? And how did you arrive at consensus?

Kashkari: We talked about a moral hazard all the time from the earliest days of the credit crisis. It’s known publicly that we offered a perspective that if the government had to step in to help stabilize Bear Stearns, that the Bear Stearns shareholders should not be rewarded for that, specifically because of the moral hazard issue. So it’s something that we’ve been aware of the entire time. At the end of the day though, the test was: Is the cost of the action more or less than the cost of inaction? When the cost of inaction is potentially so damaging to our economy and to every American citizen, then it’s an easy decision to make even if it’s an unpleasant decision to make.

The toughest challenge:

Knowledge@Wharton: So clearly that goes to the heart of the toughest part of your job, I would imagine. What would you say were your main challenges and how did you overcome them?

The hardest part was communicating the very complex issues that we were dealing with. The vast majority of Americans had nothing to do with creating this crisis. They didn’t buy homes they couldn’t afford or make risky investments. Yet, because the credit crisis has triggered the recession, it affects every single American family. So everyone is suffering because of this. Trying to explain to the American people why we have to step in to stabilize an institution that made bad decisions with the money of the American people is extremely complex, and our programs are so complex that we have really struggled with that communication challenge. That’s been the hardest part of this.

Knowledge@Wharton: That’s very interesting. And it’s absolutely true, I would guess, that the PR challenge was probably the hardest one. In fact, I saw in the Washington Post that they recently described you as the sponge for Congressional anger. In terms of coming up with your own communication strategy, did you consciously choose not to have too many press conferences and so forth? Or did you weigh the pros and cons between having a high communication strategy and a low communication strategy? How did you think about that?

Kashkari: I didn’t do any television interviews until I left Treasury, and even since, I’ve only done one with Charlie Rose and now this interview. I was focused on getting as much information out to the people, and to the markets, as possible. So I focused my own personal communications on major speeches that I gave once every couple weeks and then on testimony when I testified before Congress. I testified five or six times an average of four to five hours each time. If you would go back and read my speeches or my testimony, it was very detailed because in a crisis, in my experience, people want information. They want to know what we’re doing, the details of what we’re doing and why we’re doing it. So I tried to provide as much detail as possible. 

In hindsight, I don’t know if that was the right answer, because while I was providing tremendous details on what we were doing, we were struggling to get some of our broader messages out to the general population in terms of why we had to take this action and what the consequences are if we don’t take this action. If I could do it again, I might change my communication strategy and focus less on details and more on the broader messages. Many experts were asking us for details. I think a lot of my communication was focused on meeting their needs rather than meeting some of the broader needs of why we were taking these actions.

This is excellent stuff. How do you communicate in times of crisis? It is easier said than done. There are just so many issues.

I had written a very detailed post on the same issue a while back. The main challenge for policymakers remains to fight the crisis but to explain the fighting is no mean task. It requires tremendous skill (how, why, what, etc need to be explained in simple words) and luck as well.

As Kashkari says, he tried to give too many details and the broad message was lost. Even in Sweden’s 1992 crisis it was quite tough to communicate but they found a way. I think Us clearly erred initially of being too ad-hoc and opaque about its actions. Asa result, people stopped trusting the policymakers’ messages and whenever they talked to boost markets, markets ran the other way.

Anyways excellent insights. After reading these accounts, I get one main message -It is much easier to write and teach about proper economic policies. It is much tougher to actually implement those teachings and principles

2 Responses to “An insight into US Treasury fire-fighting policies”

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