Tim Geithner Contemplates The Looming Credit Crunch in December 2007

A blog about business and economics.
Jan. 18 2013 10:48 AM

Tim Geithner Contemplates The Looming Credit Crunch in December 2007

NEW YORK - MAY 17: U.S. Treasury Secretary Timothy F. Geithner speaks on President Obama's approach to deficit reduction at the Joan Shorenstein Center on Press, Politics, and Public Policy at the Harvard Club of New York City on May 17, 2011 in New York City.

Photo by Michael Nagle/Getty Images

Back in December of 2007, Tim Geithner was President of the New York Federal Reserve Bank and Vice Chairman of the FOMC and worried a bit about the prospects of a looming credit crunch. Stockton is the Fed's head of research:

VICE CHAIRMAN GEITHNER. May I ask one follow-up question? In the note for the Board that you circulated on Monday, Dave, you said that the magnitude of the credit crunch you’re contemplating is roughly comparable to the unusual weakness of private spending seen during the headwinds episode of the early 1990s. So I was curious. It is sort of interesting because you think that capital at banks going into this period ismuch stronger than going into the 1990–91 period. Corporate balance sheets, based just on the crude leverage ratios, are much healthiertoday than they were then. On the other hand, banks are a smaller share of the financial system, and you could say that the nonbank part looks kind of weak. The FHLB is growing very dramatically, taking up a fair amount of the room left by the shrinking of the nonbank sector. I don’t know. GSEs have less room to grow. It’s sort of mixed. It’s complicated. I was curious about how you thought about the comparison. You didn’t seem to like the comparison.
MR. STOCKTON. So the headwinds of the 1990–91 period—that was a calibration we used for the “credit crunch” scenario in the Greenbook.
VICE CHAIRMAN GEITHNER. Oh, it’s just the alternative scenario. I misunderstood. I’m sorry.

This isn't a Yoda-like level of prescience or anything, but it does show that Geithner had at least one eye on the crucial issue of the growth of the "non-bank" elements of the financial system ("shadow banking" in today's parlance) and its vulnerability to problems. Later he goes on to describe the risk of "a deep and protracted recession driven as much by financial headwinds as by other fundamentals" and argues that "we need to set policy in a way that reduces the probability of the latter, the more adverse scenario."

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



The Self-Made Man

The story of America’s most pliable, pernicious, irrepressible myth.

Michigan’s Tradition of Football “Toughness” Needs to Go—Starting With Coach Hoke

Does Your Child Have “Sluggish Cognitive Tempo”? Or Is That Just a Disorder Made Up to Scare You?

The First Case of Ebola in America Has Been Diagnosed in Dallas

Why Indians in America Are Mad for India’s New Prime Minister

Damned Spot

Now Stare. Don’t Stop.

The perfect political wife’s loving gaze in campaign ads.

Building a Better Workplace

You Deserve a Pre-cation

The smartest job perk you’ve never heard of.

Don’t Panic! The U.S. Already Stops Ebola and Similar Diseases From Spreading. Here’s How.

Parents, Get Your Teenage Daughters the IUD

The XX Factor
Sept. 30 2014 12:34 PM Parents, Get Your Teenage Daughters the IUD
  News & Politics
Sept. 30 2014 6:59 PM The Democrats’ War at Home Can the president’s party defend itself from the president’s foreign policy blunders?
Sept. 30 2014 7:02 PM At Long Last, eBay Sets PayPal Free
Sept. 30 2014 7:35 PM Who Owns Scrabble’s Word List? Hasbro says the list of playable words belongs to the company. Players beg to differ.
  Double X
The XX Factor
Sept. 30 2014 12:34 PM Parents, Get Your Teenage Daughters the IUD
  Slate Plus
Behind the Scenes
Sept. 30 2014 3:21 PM Meet Jordan Weissmann Five questions with Slate’s senior business and economics correspondent.
Brow Beat
Sept. 30 2014 4:45 PM Steven Soderbergh Is Doing Some Next-Level Work on The Knick
Future Tense
Sept. 30 2014 7:00 PM There’s Going to Be a Live-Action Tetris Movie for Some Reason
  Health & Science
Medical Examiner
Sept. 30 2014 6:44 PM Ebola Was Already Here How the United States contains deadly hemorrhagic fevers.
Sports Nut
Sept. 30 2014 5:54 PM Goodbye, Tough Guy It’s time for Michigan to fire its toughness-obsessed coach, Brady Hoke.