WASHINGTON -- A set of recently released transcripts of internal Federal Reserve communications includes a burst of profuse praise from then-New York Fed President Timothy Geithner directed toward then-Fed Chairman Alan Greenspan.
"Mr. Chairman, in the interest of crispness, I've removed a substantial tribute from my remarks," Geithner said during a Jan. 31, 2006, meeting of the central bank's Federal Open Market Committee. Attendees responded with laughter, according to the transcript.
"I am most appreciative," Greenspan replied.
"I'd like the record to show that I think you're pretty terrific," Geithner said, prompting more laughter. "And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative."
Geithner's probability estimate was a bit off. Today, Greenspan is the subject of criticism from all corners -- notably including U.S. Circuit Judge Richard Posner, a Ronald Reagan appointee -- for his refusal to combat or even recognize the predatory lending-fueled housing bubble.
For several years leading up to 2006, Federal Reserve Governor Edward Gramlich had warned Greenspan and other central bank officials about dangers brewing in the subprime mortgage market. Gramlich left the Fed in 2005, but Greenspan declined not only to attempt to pop the ballooning housing bubble, but even to try to regulate abusive lending. Posner and others have denounced Greenspan's decision to keep interest rates low for a very long time as a monetary policy failure, which, combined with his refusal to enforce consumer protection regulations, allowed that bubble to ossify into an economic wrecking ball.
At the time Geithner praised Greenspan, the Fed chairman was widely respected among conservatives and neo-liberals, but concerns were already circulating about the potential implications of the subprime mortgage problems. Within months, Ben Bernanke would replace Greenspan as Fed chair and make a host of reassuring comments in the media about the subprime debacle being "contained."
Greenspan, an acolyte of novelist-philosopher Ayn Rand, eventually acknowledged before Congress that his "ideology" was not equipped to handle the rapacious behavior of major banks during the housing bubble.
"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Greenspan told then-House Oversight Committee Chairman Henry Waxman (D-Calif.) in 2008. "I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact."
Eighteen months after Geithner offered his private praise for Greenspan, two Bear Stearns hedge funds failed, setting off a massive credit crunch among the nation's lenders. A year after that, Lehman Brothers failed, ushering in the worst recession since the Great Depression.
But in early 2006, Geithner saw mostly clear skies ahead.
"[T]he economy looks pretty good to us, perhaps a bit better than it did at the last meeting. With the near-term monetary policy path that's now priced into the markets, we think the economy is likely to grow slightly above trend in '06 and close to trend in '07," Geithner said. "On the darker side, we have the familiar concerns about potential adverse shocks, energy supply disruptions, terrorism, etc. But even in the absence of these events, we face a fair amount of uncertainty about key elements of the forecast. The prevailing expectation of a gradual moderation in housing prices and a relatively small increase in the saving rate could prove too optimistic. Private investment growth could slow further, productivity growth could disappoint, risk premiums could rise sharply. And, of course, that could happen even in the absence of a major deterioration in the growth or inflation outlook. But this, on balance, still leaves us with what looks like a relatively balanced set of risks around what is still a quite favorable growth forecast."