I Am Sorry. What Was Tim Geithner Looking at in January 2008?: Saturday Focus: February 22, 2014

Steven Perlberg: Tim Geithner January 2008 FOMC Minutes: “The World Is Still Looking Pretty Good”: “In January 2008–right as the U.S. economy entered a recession–the former Federal Reserve Vice Chairman (and later Treasury Secretary) was still very optimistic….

Here’s Geithner:

You know, we have the implausible kind of Goldilocks view of the world, which is it’s going to be a little slower, taking some of the edge off inflation risk, without being so slow that it’s going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good. Central banks in a lot of places are starting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That’s a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That’s all good, I think. As many people pointed out, the fact that we don’t have a lot of imbalances outside of housing coming into this slowdown is helpful. There’s a little sign of incipient optimism on the productivity outlook or maybe a little less pessimism that we’re in a much slower structural productivity growth outlook than before. The market is building an expectation for housing prices that is very, very steep. That could be a source of darkness or strength, but some people are starting to call the bottom ahead, and that’s the first time. It has been a long time since we’ve seen any sense that maybe the turn is ahead. It seems unlikely, but maybe they’re right. In the financial markets, I think it is true that there is some sign that the process of repair is starting. Having said that, though, I think it is quite dark still out there…. Like everyone else, we have revised down our growth forecast. We expect very little growth, if any, in the first half of the year before policy starts to bring growth back up to potential.

It was much darker than Geithner originally predicted.

Indeed…

What was he looking at in January 2008 to say that?

The point is reinforced by the fact that the Tim Geithner and Company Tendency were using expert Fed-watcher John M. Berry to send out that same message even as of the end of the month, even as the Fed loosened and market expectations of what the interest rate would be in June 2008 jumped down by 175 basis points:

John Berry (January 31, 2008): Fed May Raise Rates Before Summer Ends: “Federal Reserve officials, focused on heading off a recession, once again did what financial markets demanded by cutting their target for the overnight lending rate by a half percentage point… on top of a 75 basis-point reduction only eight days ago… left the target at 3 percent….

‘Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity’, the statement issued by the Federal Open Market Committee. ‘However, downside risks to growth remain’. Investors in fed funds futures contracts immediately assumed that was an indication the target would be cut again by another 25 basis points at the next FOMC meeting on March 18, or by 50 or maybe even 75. Actually, by mid-March, it might be clear that the U.S. economy isn’t in as much trouble as a lot of investors think it is… 2008 may see a replay of 1988, when the Fed quickly raised rates to control inflation after the growth scare caused by the October 1987 stock market crash dissipated. The sheer size of the Fed’s easing may ensure that…

What were the rest of us thinking back in January 2008? One of the nice things about having a weblog is that I can no longer fool myself into thinking that I was smarter than I was. So let us go look and see:

**January 27, 2008: I watch the Washington Post spread more misinformation and confusion:: The stupidest thing published by the Washington Post so far this year: Steven Landsburg arguing… government cannot stimulate the economy because Say’s Law… if the government could boost aggregate demand, it could only boost aggregate demand in Asia… a recession is a healthy thing that should be encouraged…. From a historian of economic thought’s perspective, the piece is a confused and incoherent mishmash of Say’s Law, Hayekian over-investment theory–plus a strange and rarely seen doctrine going back to Nassau Senior on the handloom weavers about how only the spur of immediate poverty and privation could get the lower classes to move to new industries…

January 22 Paul Krugman sees a bad recession already baked into the cake:Deep? Maybe. Long? Probably:

I still keep reading articles asserting that the last two recessions were brief and shallow. Formally, that’s true. But both were followed by prolonged “jobless recoveries” that felt like continuing recessions…. There’s every reason to think that the same thing will happen this time… a huge overhang of excess housing inventory… it’s not at all clear what will fill the gap left by weak housing and consumer spending. There’s still the question of how deep…. I can see the case for arguing that it will be nasty. The 1990-91 recession was brought on by a credit crunch, the 2001 recession by overinvestment; this time we’ve got both. I guess we’ll see. In any case, whatever happens will probably last quite a while.

January 17: People Should Not Provoke the Krugman!: [Krugman] is annoyed by Ben Bernanke’s insistance that any recession will be effectively over before we are sure that it has begun:

Not so fast – Paul Krugman – Op-Ed Columnist – New York Times Blog: One assumption in Ben Bernanke’s testimony today was that if a recession happens, it will be over soon, so stimulus has to come fast or not at all. It’s by no means clear that this is right. To be fair, I think it’s right to caution Congress not to do anything now that won’t come in quickly. But both recent history and the nature of our current problem suggest that we may be in for more than a few bad months. It’s true that the 2001 recession was officially very short. But the economy felt weak for much longer than that…

January 17: Recession probable but not yet baked into the cake

January 15: Jared Bernstein and Larry Mishel forecast a long recession:

Better Late than Never | TPMCafe: Allow us to quickly offer one more wrinkle—a really important one—to the ongoing debate about economic stimulus: we all want a quick, timely package to offset what, with each new data release, looks like a recession. But even if the process takes awhile, a stimulus package will still be very much worth pursuing…

January 11: KQED Forum: Are We in Recession?: “Yes. That, at least, is the way to bet. I cannot see the Christmas sales numbers and think otherwise…

January 11: Bank of America Is Brave: Well, well. Bank of America to buy Countrywide this morning. That’s pretty brave of them. We wish them luck, and hope that there are no really unpleasant surprises left in the box.

January 10: Let Me Line Up with Alex Tabarrok Against Congressional Fiscal Stimulus: I reserve the right to change my mind, but at the moment I am with Alex: stabilization policy is typically the Fed’s business, and right now I see no reason why it should not be left to Fed.

January 7: Paul Krugman: From Hype to Fear:

The unemployment report on Friday was brutally bad. Unemployment rose in December, while job creation was minimal — and it’s highly likely, for technical reasons, that the job number will be revised down, showing an actual decline in employment. It’s the latest piece of bad news about an economy in which the employment situation has actually been deteriorating for the past year. It’s no longer possible to hope that the effects of the housing slump will remain “contained,” as one of 2007’s buzzwords had it. The levees have been breached, and the repercussions of the housing crisis are spreading across the economy as a whole. It’s not certain, even now, that we’ll have a formal recession, although given the news on Friday you have to say that the odds are that we will.

So, yes, Geithner started out January 2008 well behind the curve, and far, far to the right of the expectations of the Yellen Tendency and others with beliefs marked-to-market.

And–whether it was the vulnerability of the “too big to fail” money-center banks, the state of financial system, the state of aggregate demand, the state of the labor market, or the dysfunction of the Republican Party–I do not think that he ever managed to catch up to the curve.

Why not?

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