As the private equity bubble inflated during the first half of 2007, a period defined by record acquisitions by the world’s largest buyout firms, the Federal Reserve took notice.

In a transcript of the Fed’s March 2007 meeting, Janet L. Yellen, then president of the Federal Reserve Bank of San Francisco, appeared troubled by the frenzied private equity deal-making that had taken hold on Wall Street.

Despite the recent turmoil in equity and mortgage markets, a reassessment of overall risk has yet to occur. We are still in an environment of low long-term yields, ample liquidity and what appears to be a generally low level of compensation for risk. For example, I recently talked with the principals of several major private equity funds, who were not just amazed but also appalled about the amount of money their industry has attracted. [Laughter] One partner said that he would have no difficulty immediately raising $1 billion. Indeed, one of his biggest problems is would-be investors who get angry at him because he is unwilling to take their money.

Ms. Yellen also highlighted the perverse incentives that were perhaps driving private equity executives to raise ever more money.

My contacts suggest that some private equity firms with similar assessments of the shortage of profit opportunities are less restrained and do take additional money, partly because of the large upfront fees that are generated by these deals. So just as we have seen in mortgage markets, the bubble in private equity, as my sources characterize it, and the overabundance of liquidity more generally raise the risk of a sharp retrenchment in credit and higher risk spreads with associated risks to economic growth and, conceivably, even financial stability.

A couple of months later, in June, Randall S. Kroszner raised similar concerns during the May meeting. Mr. Kroszner highlighted what he saw as potentially reckless lending practices by Wall Street banks, who were tripping over each other to lend private equity firms money to help finance their debt-heavy deals. He also noted the loose financing terms, called “covenant-free” or “covenant-lite” loans, that had became popular.

In particular, there are concerns about banks chasing private equity deals going covenant-free. In many of my discussions with private equity folks, instead of saying, well, bring us on more capital, those contacts are the ones saying that the banks are pushing them to take greater leverage than they otherwise would want. Now, if that isn’t the fox guarding the henhouse, I do not know what is. You want the banks to be the disciplinary force, and that they would potentially be taking on very large risks is a real concern.

In July, as the private equity boom was cresting, the Blackstone Group went public, yielding nearly $2.5 billion in cash for the firm’s two co-founders, Pete Peterson and Stephen A. Schwarzman. And Kohlberg Kravis Roberts & Company filed for an initial public offering that month, but the firm was stopped in its tracks when the credit bubble burst.

(A special hat tip to Jennifer Rossa, editor of financial newsletters at Bloomberg News, for spotting the Fed’s private equity discussion.)