Tiny Tim and the Ghost of Bubbles Past

In his Senate confirmation hearing today Timothy Geithner tipped his hat to the ideas we hold dear here. His written remarks said: 

"Well-designed financial regulations with strong enforcement are absolutely critical to protecting the integrity of our economy."

So what are we to make of his actual record?

As President of the New York Federal Reserve Bank during the worst of the toxic mortgage lending and investment bank securitization, Geithner showed no obvious interest in consumer protection and he seemed virtually clueless that what was happening in the mortgage market could have systemic effects on the economy.

At the March 23, 2007 Credit Markets symposium hosted by the Federal Reserve Bank of Richmond, just a couple of months before the implosion of two Bear Stearns' hedge funds, he made the following comments:  

The latest wave of credit market innovations has elicited some concerns about their implications for the stability of the financial system, concerns similar to those associated with earlier periods of rapid change in the financial markets. Will the most recent credit market innovations amplify credit cycles, contributing to "excessive" lending in times of relative stability, and then magnify the contraction of credit that follows? Will they introduce greater volatility in financial markets? Will they create greater risk of systemic financial crisis?

These concerns have been heightened in some quarters by the problems currently being experienced in the subprime mortgage sector. It will take some time before the full implications are understood and the full impact can be assessed. As of now, though, there few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as a whole.

Indeed, economic theory and recent practical experience offer some reassurance against both these specific concerns and more general worries about the implications of credit market innovations for the performance of the financial system. . . .

But the bipartisan Wall Street consensus marches on. The questions, such as they are, will be about the irony of the head of the Treasury and his "innovative" treatment of his tax obligations.

We know we're in trouble when the best questions come from the blithering curmudgeon Senator Bunning. The Hill reports it this way:

"Mr Geithner has been involved in just about every flawed bailout action of the previous admininstration," Bunning said. "He was the front-line regulator in New York when all the innovations that recently have brought our markets to their knees became widespread.

"He went along with the flawed monetary policy decisions of Alan Greenspan and Ben Bernanke...and he stretched the law beyond recognition to bail out Bear Stearns," Bunning added.

Too bad that the President's advisers didn't have some of those thoughts before they nominated him.

Bankbane