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Geithner!

Yves Smith of NakedCapitalism on Guithner (2007)

www.nakedcapitalism.co...

Sunday, March 25, 2007
New York Fed President Timothy Geithner's Not-So-Reassuring Speech


Compared to other Fed presidents, Timothy Geithner is straightforward and more than usually willing to talk about bad things. So when he gives a speech that is comparatively upbeat, as he did earlier this week ("Credit Markets Innovations and Their Implications") it should be reassuring.

So why did this speech bother me? It wasn't as if Geithner was overselling his case. He described both the risks (more credit issuance outside the banking system; more debt held by institutions with a propensity to trade rather than buy and hold) and the benefits (greater range of product, better pricing of risk, more diversified portfolios among investors) and thus deemed financial innovation to be a plus.

Perhaps I have an eye for problems, but I saw in Geithner's straight-up-the-center description plenty of cause for worry. First, banks, the financial institutions that are most closely regulated, hold only 15% of the "nonfarm nonfinancial" debt outstanding (remember financial institutions do lend to each other, so that is excluded). By contrast, hedge funds are becoming increasingly important players, and their investing operations are unregulated, unsupervised, and largely unreported. So while the Fed has good information about what its banks are doing, and can send in extra examiners when warranted, it has no idea what is up with the biggest players in the credit markets...