Geithner had it all wrong in 2006

Timothy Geithner is President Obama’s Secretary of the Treasury. According to the U.S. Department of the Treasury website, here is Geithner’s job description”

The Secretary of the Treasury is the principal economic advisor to the President and plays a critical role in policy-making by bringing an economic and government financial policy perspective to issues facing the government. The Secretary is responsible for formulating and recommending domestic and international financial, economic, and tax policy, participating in the formulation of broad fiscal policies that have general significance for the economy, and managing the public debt. …”

One would hope that someone with this important economic power and position might be a decent economist, or at least have the wisdom to listen to others who are. In this regard, the Federal Reserve last week released transcripts of its 2006 meetings, which is a typical disclosure after a five-year waiting period. During all of 2006, current Secretary of the Treasury Geithner was the Vice Chairman of the Federal Open Market Committee (“FOMC” – the group that sets monetary policy) and President of the Federal Reserve Bank of New York.

As a brief history reminder, the Great Recession started in 2007. Real estate prices started to decline in 2006, and led the 2007 economic decline.

The Federal Reserve’s 2006 transcripts demonstrate that the Federal Reserve Board of Governors, including particularly Mr. Geithner, did not understood what was happening in the economy. The Federal Reserve had plenty of good data that warned of an economic crisis, but they ignored or misinterpreted the information.  Although the bulk of the Federal Reserve members should be criticized, this blog entry focuses on Mr. Geithner because he is the one who is now the Secretary of the Treasury and is involved with all of the important responsibilities listed above.

During 2006, there were eight FOMC meetings. In each of the meetings, Mr. Geithner gave a report regarding what the Federal Reserve Bank of New York thought was occurring in the economy. In each case, Geithner thought economic growth was occurring nicely, and that the major risk was inflation, that was being caused by too much economic growth and demand. Quotes from Geithner from each of the FOMC eight meetings in 2006 appear below.

As 2006 progresses and the data gets worse, it is interesting to see Geithner stubbornly ignored the data and staff recommendations. Geithner completely missed the effect of housing on the economy and made growth projections that were wildly wrong.

In the January 31 meeting, Geithner heaped praise on outgoing Fed Chairman Greenspan. Currently, Greenspan is not viewed with the same level of genius as Geithner indicates:

I’d like the record to show that I think you’re pretty terrific, too. 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 then surveys the state of the economy as follows:

The 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 now priced into the markets, we think the economy is likely to grow slightly above trend in ’06 and close to trend in ’07.”

During the March 27-28 meeting, Geithner states:

The major source sources of uncertainty in our forecast are the size of the wealth effect we might see accompanying any slowdown of housing, …We view the risk to the growth forecast as roughly balanced … On the growth front, as I said, we think the underlying pace of demand growth is pretty strong, and we don’t see any signs yet that would point to evidence of a significant slowdown. … We expect consumption growth to remain reasonably strong. Stronger income growth offsets the expected deceleration in housing-price appreciation and the effect that it might have on consumption. ”

During the May 10 meeting, Geithner states:

We expect real growth to rise in the vicinity of its potential rate – 3 ¼, 3 ½ percent – throughout ’07. … We may be under estimating the momentum in final demand growth. I think it is important to note that it is hard to find evidence … of a substantial growth slowdown. “

From the June 28-29 meeting Geithner states:

We expect real GDP growth to follow a path pretty close to potential in the balance of ’06 and -07. …

We don’t see the incoming data, the anecdotes, and the recent developments in financial markets as supporting the view that real growth is likely to stay significantly below potential over the full forecast period. We had already anticipated the slowdown in residential investment that has now materialized; therefore, we didn’t see that as a basis for revising down our forecast. We believe the changes in household wealth in general have less effect on consumption than the Board staff believes, and as a result we expect more of a deceleration in growth. We expect stronger employment growth too, and have a stronger view of the rate of growth in private investment going forward. The world economy still looks pretty robust to us. So overall, in our view, this supports a forecast for the economy to be growing at a rate a bit over 3 percent over the next year and a half.”

From the August 8 meeting Geithner states:

The economy still seems, to us at least, likely to grow at a reasonably good pace over the forecast period, somewhere in the vicinity of 3 percent. … This is a very favorable forecast, and we have to recognize, of course, that the economy is going through a set of extremely complicated transitions, including a large, adverse, sustained relative price shock of uncertain duration and a substantial adjustment in asset prices that is now concentrated in housing. …

I have a few points on the growth outlook. The economy has clearly slowed, and the composition of growth within the United States and here relative to the rest of the world has changed. These changes were inevitable, and if they continue to occur smoothly, they seem desirable and necessary. As a share of aggregate demand within the United States, residential investment had to contract and consumption had to slow. And U.S. domestic demand had to slow relative to domestic demand growth in the rest of the world. … In our view, most signs at present point to fundamentally healthy economic conditions. …

Businesses have the resources and the motivation to sustain fairly strong rates of investment growth. Structural productivity growth, even post-revision, still seems strong. Inventory levels remain relatively thin, and the tentativeness that characterized much of the expansion in terms of investment and hiring should be a source of some comfort. Global demand is still quite strong, of course, and together these forces will offset part, but not all, of the weakness coming from the adjustment in housing and consumption growth.”

From the September 20 meeting Geithner states:

Growth has obviously slowed. The second half is likely to be relatively weak, but the only place we see pronounced weakness is in housing. And we expect a return to moderate growth going forward. … In terms of numbers, we expect the real economy to grow at around its 3 percent potential rate in ’07 and ’08. …

On the growth outlook, we’re seeing a somewhat greater adjustment in residential investment than we anticipated, but this has not yet induced or been accompanied by a significant weakness outside housing. Of course, the outlook for the economy as a whole should not be particularly sensitive to … residential investment. What seems more important, of course, is the potential effect of what’s happening in housing on consumer and business spending. We just don’t see troubling signs yet of collateral damage, and we are not expecting much. “

From the October 24-25 meeting Geithner states:

Our view of the national outlook hasn’t changed much since September. … We expect growth to return to a level close to 3 % in ’07. … relative to September, we see somewhat less downside risk to growth and somewhat less upside risk to inflation, but as in September, I think inflation risks should remain our predominant concern. “

From the December 12 meeting Geithner states:

We still expect growth to move back to potential in the first half of next year and stay in the vicinity of potential, which we think is around 3 percent …The current weakness in the economy still seems principally to stem from the direct effects of the slowdown in housing on construction activity and related parts of the manufacturing sector as well as from the reduction in automobile and auto-related production. As things now stand, the softer-than-expected recent numbers don’t’ argue, in our view, for a substantial reassessment in the risks of the outlook.

We think the fundamentals of the expansion going forward still look good,”

Geithner consistently had it all wrong. Unfortunately, there is no indication that he is any smarter or wiser now than he was in 2006.  Also unfortunately, President Obama is still relying on this guy.


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