Immatthewj, Im thinking it was mid 80's...?
Maybe it was during his Guitar Town heyday, @winoguy17 ?
I know that he went on to say something to the effect of "Townes Van Zandt is the best songwriter in the whole world, and I'll stand on Bob Dylan's coffee table in my cowboy boots and say that." I heard him interviewed sometime after that and he walked it back a bit, saying that at the time Townes was in a rough period and that he was just trying to bolster him up. I saw another interview on youtube, and Steve said that Townes said something to the effect of being appreciative, but considering Bob Dylan's bodyguards, maybe he ought to reconsider. Steve said that he has seen Bob Dylan's bodyguard and he wasn't worried because he (the bodyguard) was nothing special.