Ryan Avent on Tim Geithner: Fed 2008 Transcript weblogging

Ryan Avent: Federal Reserve transcripts: The Great Recession! It’s right behind you! : “Was [Geithner] a villain or a hero?

More the latter if you ask me. But above all he was a human—experienced in global finance, yes, but even so—trying to assess the plausibility of the occurrence of an event well outside the lived experience of everyone in that room, and faring reasonably well all things considered…

The context is the 2008 Federal Reserve transcripts. Avent quotes Geithner in December 2007, calling him “among the more alarmist members of the FOMC:

I don’t think the past four to six months have been kind to those who have argued that this was just a mild and transitory bump…. Monetary policy will probably have to be eased further…. We will probably need to continue to adjust our various liquidity instruments. We may need to encourage some institutions to raise more equity sooner than they otherwise might choose to do…. We also need to be careful to keep thinking through more adverse scenarios…. We need to be cognizant that the market is torn between two quite plausible scenarios. In one, we just grow below potential… in the other, we have a deep and protracted recession…. There are good arguments for the former, the more benign scenario, but we need to set policy in a way that reduces the probability of the latter, the more adverse scenario…

He does this in response to me quoting Steven Perlberg quoting Geithner from January 2008:

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… are starting to soften their link to the dollar…. That’s a good thing. U.S. external imbalances are adjusting…. That’s all good…. 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…. [S]ome 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…. We expect very little growth, if any, in the first half of the year before policy starts to bring growth back up to potential…

And says:

In January he may have entertained broader thoughts about the resiliency of the American economy. But by March Mr Geithner was incisive about the nature of the trouble facing the economy:

I understand that there is a huge amount of uncertainty about estimates of equilibrium, but we can’t be facing both the most serious risk of a financial crisis and of a deep, prolonged recession in 50, 30, or 20 years and at the same time the risk of having a very substantial rise in underlying inflation over the medium term. It seems to me that we are going to have one or the other…. I think we have to be confident that, if we end up being successful in averting the risk of a very, very dangerous, damaging spiral in the financial markets with the consequences of a very deep recession or a deeper recession than in the early 1990s, then we will be able to deal with the likely consequences that we will have more inflation and less moderation than we now anticipate. I guess I don’t understand why we would not be confident in that…. I don’t think this is easy. Like many of you, I think that it would be great if we got away with [a cut in the federal funds rate of only 50 basis points], but I think that is not tenable—not even close…. If we do the right thing, does that mean it takes the pressure off [Congress]? Maybe, but probably not so much. But it can’t constrain us from doing what is appropriate now.

To which I would respond by quoting Geithner just a little bit later:

It is very hard to make the judgment now that the financial system as a whole or the banking system as a whole is undercapitalized… some people are out there saying that. Based on everything we know today, if you look at very pessimistic estimates of the scale of losses across the financial system, on average relative to capital, they do not justify that concern.

And Gretchen Morgenson says:

To Mr. Geithner, the nattering naysayers raising alarms about the financial system’s soundness were a bigger problem than the one that they were trying to draw attention to. “There is nothing more dangerous in what we’re facing now,” he said, “than for people who are knowledgeable about this stuff to feed these broad concerns about our credibility and about the basic core strength of the financial system…

Let me say that this simply adds to my confusion. Geithner is on the left of the FOMC in December 2007. He is on the right of the FOMC in January 2008. What happened between December 2007 and January 2008 to shift him from a voice saying “we need to do more than we are doing” to “the future is probably brighter than our consensus”? And then what happened between January 2008 and March 2008 to move him both left–that we were “facing both the most serious risk of a financial crisis and of a deep, prolonged recession in 50, 30, or 20 years”–and right–that “very pessimistic estimates of the scale of losses across the financial system” “do not justify… concern” that “the financial system as a whole or the banking system as a whole is undercapitalized”, and that the biggest threat was “people… feed[ing] these broad concerns about our credibility and about the basic core strength of the financial system”?

Tom Hoenig Richard Fisher had a view: that the big threat was inflation and the enabling of moral hazard, and that the risks of a long and deep recession should not stampede the Federal Reserve into excessive stimulus. Eric Rosengren and Janet Yellen had a view: that those worrying about inflation were crying “Fire, fire” as a 40-day rain began. Ben Bernanke had a view: that inflation, the enabling of moral hazard, and recession were all threats, and that current Fed policy as adjusted month-by-month was close to the sweet spot.

What was Tim Geithner’s view? And why did it appear to swing so much?