Good to know that he was one of the foresightful ones

[jducoeur]

At the forefront of concerned regulators is Timothy Geithner, president of the Federal Reserve Bank of New York and one of the financial world's most powerful voices. In a speech in Hong Kong on September 14th, Mr. Geithner praised the banking industry for becoming more robust, overseeing growth in the number and size of lending firms and innovating in credit instruments. These, he said, had "strengthened the efficiency and resilience of the overall financial system."

But he gave warning: "The same factors that may have reduced the probability of future systemic events, however, may amplify the damage caused by, and complicate the management of, very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the larger ones."

That snippet is from The Economist, September 23rd 200*6*, in a now quite sobering three-page examination of the growth of credit innovation. Fully two years before it became fashionable to do so, this article laid out the pros and cons of the new credit-default swaps and related instruments, talking about the rise of the shadow credit economy. Geithner is the most-cited person in it, pointing out that the complexity and opaqueness of the new mechanisms were likely to cause big problems down the road, calling for bigger capital cushions and improved transparency, and indicating that he thought more supervision was likely needed.

One wonders if he had any clue that, when those problems arose, he would wind up the person on the hot seat to deal with them. Probably not, and being able to see a runaway train coming doesn't mean that you're going to able to lasso it. But it does increase my respect for the man a notch, that he was beginning to sound the alarm when most in the industry were still slapping each other on the backs for having made the world a better place...