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Hubbard to Geithner: You're lying

A new controversy has emerged over former Treasury Secretary Tim Geithner's memoir, "Stress Test: Reflections on Financial Crises." And it has nothing to do with whether Geithner went far too soft on Wall Street at the expense of Main Street.

Instead, the controversy centers around a passage in the book in which Geithner quotes top Republican economist Glenn Hubbard—then a senior advisor to the Mitt Romney presidential campaign—saying "of course we have to raise taxes, we just can't say that now."

Timothy Geithner and Glenn Hubbard.
Adam Jeffery | CNBC
Timothy Geithner and Glenn Hubbard.

According to the book, which went on sale Monday, Geithner and Hubbard exchanged words at an Economic Club of New York Dinner in 2012. In the exchange, according to Geithner, Hubbard complained that the Obama administration had not embraced the Simpson-Bowles deficit reduction plan. Geithner writes that he told Hubbard that the administration would consider Simpson-Bowles as soon as Republicans agreed to raise taxes.

Hubbard reportedly responded: "Well, of course we have to raise taxes. We just can't say that now."

The problem with the exchange? Hubbard says it never happened.

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The Columbia University business school dean and one-time candidate to lead the Fed told POLITICO on Sunday night that Geithner was "lying" about the exchange:

"He's going to go out and say what he wants," Hubbard told POLITICO's MJ Lee. "It just happens to be a lie." He added: "Geithner is making it up.… It's pretty simple. It's not true."

Geithner did not initially respond to a request for comment for the POLITICO story. I also reached out to Geithner's representative on Sunday night for comment on Hubbard's claim. The spokeswoman, Jenni LeCompte, responded via email Monday morning: "Mr. Geithner's memory on this exchange is crystal clear. He stands by his account in STRESS TEST."

So it looks like for now the issue is at a "he said/he said" standoff, unless Hubbard decides to retract his claim that Geithner is lying.

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It's possible the recounting of the tale is some kind of misunderstanding and that Hubbard said that any long-term deficit-reduction plan would have to increase revenues in some way, though perhaps not by raising marginal tax rates but instead by the faster growth some say would result for lower government debt.

But according to Geithner, Hubbard explicitly endorsed raising taxes.

And that's a very big deal.

Because it essentially confirms what many on the left believe about Republicans, that they know the U.S. needs to raise taxes more on the wealthy. They just won't admit it publicly because their base would go nuts.

This is also what fuels tea party conservatives' distrust of establishment Republicans such as Romney, former Florida Gov. Jeb Bush and others. Many of them believe that if the GOP nominates more traditional, mainstream candidates for the House, Senate—or God forbid president—they will ditch their campaign promises as soon as they get into office and raise taxes across the board and take other measures that would infuriate the GOP base, such as limiting gun rights or endorsing same-sex marriage.

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Democrats may argue that Hubbard is only mad because Geithner caught him telling the truth and now the conservative economist is scrambling to walk back his comments.

That would be a more plausible scenario if the person in question were not Hubbarda highly respected academic economistand if the denials were less absolute.

It is no small thing that Hubbard has accused a former Treasury secretary of blatantly lying about such a critical exchange. Because either Hubbard endorsed raising taxes or he didn't.

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If he didn't, if he said something more palatable to the right such as accepting higher tax revenues as a result of taking other actions to reduce the deficit, Geithner needs to say that and issue a correction in future editions of the book.

But now it is Geithner who says Hubbard is the one who is lying about the exchange.

This is not something that's likely to just go away. Because alleging that top, mainstream Republicans have a secret plan to raise taxes is an explosive charge that smolders beneath much of the current tension in our political system.

—By Ben White. White is POLITICO's chief economic correspondent and a CNBC contributor. He also authors the daily tip sheet POLITICO Morning Money [politico.com/morningmoney]. Follow him on Twitter @morningmoneyben.