Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis

by John Brian Taylor

Book Overview

In this concise volume, leading economist John B. Taylor offers empirical research to explain what caused the current financial crisis, what prolonged it, and what dramatically worsened it more than a... This description may be from another edition of this product.

• Format: Hardcover
• Language: English
• ISBN: 0817949712
• ISBN13: 9780817949716
• Release Date: February 2009
• Publisher: Hoover Institution Press
• Length: 92 Pages
• Weight: 0.35 lbs.
• Dimensions: 0.5" x 5.4" x 8.3"

Customer Reviews

Analytically rigorous antidote to Krugman

One of the most common views of the financial crisis of 2006 to 2008 is that it is similar to the Great Depression of the 1930s. Perhaps the best known exponent of this view is Paul Krugman, who published a best-seller called Return to Depression Economics, which explicitly made this case. The Great Depression, of course, was caused by a severe shortage of liquidity, and was -- or could have been -- solved by a great deal of deficit spending or other types of fiscal or monetary stimulus of the economy. In this book, John B. Taylor demolishes this glib comparison between the 1930s and now. As he shows, the current crisis is due to two separate government failures. First, in the early stages of the real estate boom, the Federal Reserve held interest rates too far down for too long. This excessive monetary stimulus set up off the housing boom. Second, when the crash came, the government misunderstood it. Most policy-makers thought that the problem was a shortage of liquidity and the solution was more financial stimulus. In reality, the problem was the major banks and other financial institutions held too many high-risk assets, whose value was deeply suspect. This problem, of course, was linked to the earlier problem. The banks had too many risky assets, because, during the housing boom, the excessively low interest rates encouraged lenders to relax credit standards, which they did. This is a truly superlative book. I would not call it an easy read; you will not like it unless you can stomach serious economic analysis. At the same time, by the standards of technically rigorous economics, it is very well written. First, it is very short, less than 100 pages. Second, while Taylor uses plenty of jargon, he usually explains what the terms mean. A total novice in economics probably could not follow the argument, but, if you have a basic grounding in economics, it is not that hard to follow.

MV=PQ

John Taylor shows how discretionary monetary policy led to this crisis. While I am not sure whether monetary policy explanation can explain why we got crisis now and this big, I think Taylor shows pretty conclusively that expansionary monetary policy greatly amplified the crisis. His study, together with the work of others such as Friedman, Schwartz, Lucas etc. should finally be taken notice of in Washington. In particular, the policy of the FED should be tied more firmly to rules rather than discretion. The best would be to reduce the role of the FED to fighting inflation, because money is neutral in the long run, while in the short run, monetary policy based on the current double mandate of smoothing out the business cycle and keeping the inflation down, often leads to credit misallocations such as the one that led us to this crisis.

excellent book

This is an excellent book. The presentation is very clear and the arguments are convincing. Hope to see the author to write a more elaborated version with all the technical details filled-in.

Cause, not Effect

The author is well qualified and situated to comment on mistakes made at the Fed in the last 10 years. His observation on low interest rates that were cause, not the effect or symptoms of our current financial problems is simple and straightforward, and therefore more likely to be correect than more convoluted theories. Whether the Taylor rule should be policy or a guide, it's apparent that Greenspan's reasoning in keeping rates so low for so long was faulty. I'm not sure that the irrational exuberance we have had to fear in his time at the Fed was Greenspan's own.

Moral Hazard

Professor Taylor's "Getting Off Track" is a masterpiece of brevity & clarity. And we should not be surprised that the Taylor in the "Taylor Rule" would be first to diagnose what went wrong and do it so quickly. I agree w/ Professor Taylor that Govt caused, prolonged, and worsened this crisis and, I believe even Treasury Secretary Geithner agrees w/ Professor Taylor. Here's an excerpt from his recent interview on the Charlie Rose Show. Please judge for yourself: Geithner: "But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just hugh boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful." Rose: "It was too easy." Geithner: "It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time." Rose: "Now, that's an observation. The mistake was that monetary policy was not by the Fed, was not... Geithner: "Globally is what matters." Rose: "By central bankers around the world." Geithner: "Remember as the Fed started -- the Fed started tightening earlier, but our long rates in the United States started to come down -- even were coming down even as the Fed was tightening over that period of time, and partly because monetary policy around the world was too loose, and that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know, we all bear a responsibility for that. I'm not trying to put it on the world." And here's specifically why I also agree w/ Professor Taylor that Govt created this crisis: Figure 1 on pg 3 of Professor Taylor's book clearly documents Govt's changes to the fed funds interest rate between 2000-2006; first down from 6.5% to 1% between 2000-2003, then flat at 1% for approx. 12 months between 2003-2004, then back up to 6.25% between 2004-2006. And, this chart shows how the Govt's interest rate cuts fell "well below what historical experience would suggest policy should be" when compared to the previous 20 year period. Moreover, and equally significant, these cuts were the largest deviation & for the longest time period since the 1970s. To be clear: residential mortgage rates are determined by bonds traded daily, based on supply & demand (and MBS bond yields, to be precise), w/ in the market. While I'm NOT suggesting there is a 100% positive correlation between fed fund rate changes & the actual residential mortgage rates themselves, I AM saying that it was the credit expansion that resulted from these Govt fed fund rate changes which increased the spread between fixed and adjustable rate mortgages from 50 basis points in 2000 to 230 by mid 2004. And as Figure 1 of Professor Taylor's book shows, it was during this same period that the fed funds rate was cut from 6.5% to 1%. This credit expans