On February 28, 2006, Timothy Geithner— then president of the Federal
Reserve Bank of New York and now secretary of the Treasury—addressed
the topic of risk management in the U.S. financial system, in a speech
to the Global Association of Risk Professionals in New York. It was a
few months before the very top of the massive housing bubble. How did
things seem when viewed from the top?
“We are now in the midst of another wave of innovation in finance,” he observed. “These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively.”
“These changes,” he continued, “have contributed to a substantial improvement in the financial strength of the core financial intermediaries and in the overall flexibility and resilience of the financial system in the United States. And these improvements in the stability of the system … have probably contributed to the acceleration in productivity growth in the United States and in the increased stability in growth outcomes.”
These statements, so ironic in retrospect, seemed plausible at the time, though they reflected an obliviousness to the looming disaster.
Still, the speech was not merely optimistic, but also complex. “These generally favorable judgments require some qualification, however,” Geithner pointed out. “These changes … have not eliminated risk. They have not ended the tendency of markets to occasional periods of mania and panic.”
This is so right, but does not mention that the markets were, at that very moment, at the height of an immense credit mania.
Read more: http://www.american.com/archive/2012/september/geithners-view-from-the-top-of-the-bubble
“We are now in the midst of another wave of innovation in finance,” he observed. “These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively.”
“These changes,” he continued, “have contributed to a substantial improvement in the financial strength of the core financial intermediaries and in the overall flexibility and resilience of the financial system in the United States. And these improvements in the stability of the system … have probably contributed to the acceleration in productivity growth in the United States and in the increased stability in growth outcomes.”
These statements, so ironic in retrospect, seemed plausible at the time, though they reflected an obliviousness to the looming disaster.
Still, the speech was not merely optimistic, but also complex. “These generally favorable judgments require some qualification, however,” Geithner pointed out. “These changes … have not eliminated risk. They have not ended the tendency of markets to occasional periods of mania and panic.”
This is so right, but does not mention that the markets were, at that very moment, at the height of an immense credit mania.
‘We still face considerable uncertainty about how market liquidity will behave in the context of a major deterioration in credit conditions or a sharp increase in volatility.’Geithner offered this sensible and sophisticated analysis: “In a context of very low realized credit losses, low expectations of future default risk, a high degree of confidence in the financial strength of the major banks and investment banks … we know less about how these markets will function in conditions of stress.” Thus: “The most sophisticated tools available for measuring potential losses have less to offer than they will with the benefit of experience with adversity.” And: “We still face considerable uncertainty about how market liquidity will behave in the context of a major deterioration in credit conditions or a sharp increase in volatility … and this uncertainty is hard to quantify and therefore hard to integrate into the risk management process.”
Read more: http://www.american.com/archive/2012/september/geithners-view-from-the-top-of-the-bubble
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