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Nighttime Must-Read: Felix Salmon: Tim Geithner as Unreliable Narrator

Felix Salmon: Tim Geithner as Unreliable Narrator: "Geithner makes simple declarations...

...which are easily fact-checked. So let’s turn to pages 79-81, where Geithner is covering his early tenure as the president of the New York Fed....

In my very first public speech at the New York Fed in March 2004, I tried to push back against complacency, telling a room full of bankers that the wonders of the new financial world would not necessarily prevent catastrophic failures of major institutions, and should not inspire delusions of safety on Wall Street. I even cited my favorite theorist on financial irrationality, the leading promoter of the idea that periodic financial crises are practically inevitable.

“These improvements are unlikely to have brought an end to what Charles Kindleberger called ‘manias and panics,’ ” I said. “It is important that those of you who run financial institutions build in a sufficient cushion against adversity.” …

This is Geithner at his most prescient and heroic. He enters a hidebound wood-paneled institution where coffee is brought to his desk on a silver tray while briefings involved precious little discussion or debate; and in his very first speech he... speak[s] truth to entrenched financial power... 'push[es] back against complacency' and warn[s] against the rise of the shadow banking system....

But here’s the thing: we can read the speech....

The increasingly greater role played by the capital markets in the financial intermediation process relative to banks — both relative to the past and compared with most other major economies — has improved the capacity of our system to handle stress. Loans and securities held by commercial banks today account for less than 20 percent of overall U.S. credit market debt, roughly two-thirds of their 1975 levels....

Geithner was saying that the shadow banking system is getting bigger, that the banks the NY Fed regulated were accounting for a smaller and smaller part of the total financial system — and that this was a positive development. Geithner wasn’t warning his audience about the risks of shadow banking, he was extolling it, on the grounds that it had 'improved the capacity of our system to handle stress'....

There are two big worrying things here. The first is that Geithner didn’t see the crisis coming.... The second, which is just as bad, is that with hindsight, Geithner sees this speech as being prescient and heroic — that it’s something to be proud of, rather than sheepishly ashamed of.

As I read the rest of Geithner’s book, then, I’m basically forced to treat the author as an unreliable narrator. Geithner might seem to be straight-up and guileless, but his report of this speech shows that he can remember things — even things which are easily found on the internet — in an extremely self-serving manner...

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