Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis (HOOVER INST PRESS PUBLICATION) [Hardcover]

John B. Taylor (Author)

Book Description

Publication Date: February 25, 2009 | Series: HOOVER INST PRESS PUBLICATION

AN EMPIRICAL ANALYSIS OF WHAT WENT WRONG

Throughout history, financial crises have always been caused by excesses--frequently monetary excesses--which lead to a boom and an inevitable bust. In our current crisis it was a housing boom and bust that in turn led to financial turmoil in the United States and other countries. How did everything deteriorate so suddenly and dramatically? In Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis, Hoover fellow and Stanford economist John B. Taylor offers empirical research to explain what caused the current financial crisis, what prolonged it, and what worsened it dramatically more than a year after it began.

The author tells how unusually easy monetary policy helped set the crisis in motion, as interest rates at the Federal Reserve and several other central banks deviated from historical regularities. He explains monetary interaction with the subprime mortgage problem, showing how the use of these mortgages, especially the adjustable-rate variety, led to excessive risk taking. In the United States this was encouraged by government programs designed to promote home ownership, a worthwhile goal but overdone in retrospect. Looking ahead, the author suggests a set of principles to follow to prevent misguided actions and interventions in the future.

Editorial Reviews

Review

Big problems confront us, and responses of immense size are on the table. We desperately need a solid and fact-based analysis so that we get the prescription right. John Taylor provides just that. A must-read for everyone involved. --George Shultz, former secretary of Treasury, State, and Labor and Budget Director

John Taylor is one of the very few who points out the errors that the Federal Reserve made during this difficult period and also shows how they could avoid them. Members of Congress should read this book instead of looking for scapegoats in the wrong places.--Allan Meltzer, author of The History of the Federal Reserve

If you want to read a very short book on how we got into the financial crisis, I don't think you could do better than John B. Taylor s Getting Off Track. --Michael Barone, U.S. News & World Report

A sobering book by a Stanford University economist demonstrates not only how the feds caused, misdiagnosed and mishandled the financial crisis, but also how their responses continue to make matters worse. --Robin Goldwyn Blumenthal, Barron's Magazine

A nifty little book --Susan Lee, Forbes.com

This is a very readable book. Taylor takes the complex and sophisticated research he and colleagues have done over the last several years and translates it into language, accompanied by charts, that is easily absorbed. --
John M. Mason, SeekingAlpha.com

Cogent, thorough and compelling, Taylor sums up his argument in his subtitle: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis. Take a moment to absorb that. Although we're told every day that the crisis arose from failures in the free markets--that it represents a crisis of capitalism itself--an eminent economist has now stepped forward to say, in effect, Nonsense. The markets didn't fail, Taylor argues, the government did. --Peter Robinson, What Caused the Crisis? Forbes.com

If Milton Friedman and I had written as persuasive an analysis as this, one year—rather than 30 years—after the Great Depression began, the United States might have had a typical recession rather than the greatest downturn in history. --Anna Schwartz, author, with Milton Friedman, of The Great Contraction, 1929–1933

This short volume does a masterful job of tracking the stunning financial market and macroeconomic events of 2007 and 2008, and it provides an organizing framework that will enable the specialist and novice alike to examine these events in a coherent setting. --James Poterba, Mitsui Professor of Economics at MIT and President and CEO of the National Bureau of Economic Research

If Milton Friedman and I had written as persuasive an analysis as this, one year—rather than 30 years—after the Great Depression began, the United States might have had a typical recession rather than the greatest downturn in history. --Anna Schwartz, author, with Milton Friedman, of The Great Contraction, 1929–1933

This short volume does a masterful job of tracking the stunning financial market and macroeconomic events of 2007 and 2008, and it provides an organizing framework that will enable the specialist and novice alike to examine these events in a coherent setting. --James Poterba, Mitsui Professor of Economics at MIT and President and CEO of the National Bureau of Economic Research

About the Author

John B. Taylor is the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University. He has served as the director of the Stanford Institute for Economic Policy Research and was founding director of Stanford's Introductory Economics Center.

Taylor's fields of expertise are monetary policy, fiscal policy, and international economics. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on President Ford's Council of Economic Advisers in 1976, as a member of President Bush's Council of Economic Advisers from 1989 through 1991, as economic adviser to the Bob Dole presidential campaign in 1996, and as economic adviser to the George W. Bush presidential campaign in 2000. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Undersecretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation.

In 2007, Taylor was awarded the Adam Smith Award from the National Association for Business Economics (NABE) for his work as a groundbreaking researcher, public servant, and teacher during a career of more than 30 years and his outstanding leadership in the field of economics. Taylor was also awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury and the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, The Stanford Institute for Economic Policy Research awarded Taylor with the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Product Details

• Hardcover: 92 pages
• Publisher: Hoover Institution Press; 1st edition (February 25, 2009)
• Language: English
• ISBN-10: 0817949712
• ISBN-13: 978-0817949716
• Product Dimensions: 5.4 x 0.5 x 8.3 inches
• Shipping Weight: 9.6 ounces (View shipping rates and policies)
• Average Customer Review: 4.0 out of 5 stars  See all reviews (19 customer reviews)
• Amazon Best Sellers Rank: #61,683 in Books (See Top 100 in Books)
  • #38 in Books > Business & Investing > Economics > Money & Monetary Policy

More About the Author

John B. Taylor is the George P. Shultz Senior Fellow in Economics at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University. He chairs the Hoover Working Group on Economic Policy and is director of Stanford's Introductory Economics Center.

Taylor's fields of expertise are monetary policy, fiscal policy, and international economics. His book Getting Off Track was one of the first on the financial crisis; his latest book, First Principles, develops an economic plan to restore America's prosperity.

Taylor served as senior economist on President Ford's and President Carter's Council of Economic Advisers, as a member of President George H. W. Bush's Council of Economic Advisers, and as a senior economic adviser to Bob Dole's presidential campaign, to George W. Bush's presidential campaign in 2000, and to John McCain's presidential campaign. He was a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001. From 2001 to 2005, Taylor served as undersecretary of the Treasury for international affairs where he was responsible for currency markets, international development, for oversight of the International Monetary Fund and the World Bank, and for coordinating policy with the G-7 and G-20.

Taylor received the Bradley Prize from the Bradley Foundation and the Adam Smith Award from the National Association for Business Economics. He was awarded the Alexander Hamilton Award for his overall leadership at the US Treasury, the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. At Stanford he was awarded the George P. Shultz Distinguished Public Service Award, as well as the Hoagland Prize and the Rhodes Prize for excellence in undergraduate teaching. He is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Taylor formerly held positions as professor of economics at Princeton University and Columbia University. Taylor received a BA in economics summa cum laude from Princeton University in 1968 and a PhD in economics from Stanford University in 1973.

Most Helpful Customer Reviews

43 of 49 people found the following review helpful

4.0 out of 5 stars Easy Money, Hard Times March 6, 2009

By D. W. MacKenzie

Format:Hardcover|Amazon Verified Purchase

Much of the popular media has jumped to conclusions that so called Neoliberal policy, has failed, and Keynesian economics has prevailed. Yet many economists remain skeptical about the popular view of the crisis. John Taylor has provided interesting and compelling evidence that easing of credit by The Federal Reserve in recent years caused the boom that led to the Subprime Crisis. This book is important because the media and some economists have blamed this crisis on laissez faire far too quickly, often without citing any real evidence. Taylor shows how actual inquiry into the facts contradicts so much of what you hear from the popular press. Taylor and the Hoover Institution deserve much credit for publishing a book of this quality so quickly.

24 of 29 people found the following review helpful

4.0 out of 5 stars A Monetarist Perspective of the Financial Crisis March 14, 2009

By Andrew L. Hill

Format:Hardcover

The author, John Taylor, is the originator of the policy guideline that was later labeled the Taylor Rule. His commentary on the subject is held in high regard in Economic circles and he has a lifetime of study and experience in this arena.

The book is focused on the "mistakes" made by the Federal Reserve since 9/11 and the subsequent consequences. The author makes good use of graphs to show historical trends and effects of policy decisions. The book is written with an objective tone and is easy to understand. It is short and can be read in 2 hours. There is a nice Frequently Asked Questions section in the back to cement the authors case.

I gave the book 4 stars instead of 5 because it was not clear what was the cause of all of the policy errors by the federal reserve. An increasing minority of persons suspect political motives are the culprit as the Federal Reserve is not entirely independent. The book is a good critique of the policy decisions of the current decade and a defense of Monetarism and Central Banking in general.

For a good critique of Monetarism, I recommend Thomas Woods book.

Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

14 of 16 people found the following review helpful

3.0 out of 5 stars Correlation or Causality? February 16, 2010

By Mark Eversfield

Format:Hardcover|Amazon Verified Purchase

"Getting Off Track", by John B. Taylor, examines the hot topic of the role the Fed played in creating the current economic crisis.

The book begins with and examination of the popular opinion that the Fed created the latest recession by keeping interest rates low which created a real estate bubble.
I have serious comments on the assumptions made in this book and the need for further research before attributing cause of the current recession to one organization.

John Taylor begins his book with the idea that the recession was compounded by the Fed's loose monetary policy. Taylor describes the scenario of the Fed keeping interest rates low to encourage home ownership. If you read the experience of the person pulling the economic levers at that time, Alan Greenspan, you get an entirely different view of what was going on. In Greenspan's book the "The Age of Turbulence" there is a chapter called the "Conundrum" where Greenspan describes the problem the Fed had back in 2004 of raising interest rates. The Fed was concerned about the real estate bubble and tried raising the Federal Reserve rate on ten year bonds. When the Feds increased the reserve rate, the 10 year rate initially increased, but then precipitously declined back to its original level. The Feds tried this again in 2005 with the same results. Remember this was written before the recession. Greenspan's explanation for this is that liquidity from China, among other factors, kept long term global interest rates low.

Taylor challenges the notion that liquidity from China contributed to the Feds inability to increase long term interest rates. John does this by including a graph on page 7 of the book that comes from an International Monetary Fund report on world liquidity. The graph shows global investment and savings as a percentage of GDP moving in tandem over time with investment slightly higher than savings. The conclusion drawn from the graph is that world investment was actually higher than savings so therefore interest rates could have been higher than what the US experienced. What the reader doesn't know is that the IMF report states that global interest rates are historically low due to low investment demand and not due to central bank monetary policies.

Furthermore, the chart from the IMF report is a global perspective while the world's financial markets are made of many, not just one market. The distribution effects of relative economic and geopolitical changes have different effects on different markets. Australia never experienced the low interest rates that North America and Europe experienced. The targets of Chinese investment focused on the USA and Europe and missed other countries. So although the world level of investment and savings may be equal, the distributional effects can be different depending on the country you are in.

There are a couple of other interesting questions that come out of this study. The relationship of North American interest rates and European interest rates is raised by the question, "Does North America influence Europe or does Europe influence North America?" A more important question is "What role does China play in influencing the two?" With close to two trillion dollars of Chinese liquidity flowing into the United States, this has some impact on the Fed's ability to control monetary policy. The US Fed would be digging a hole in the ocean facing Chinese foreign investment.

John Taylor explains that counterparty risk was one of the explanations for the crisis. A lot of the book describes correlations of risk markets vs non-risk markets to demonstrate that increasing risk factors were the cause of the crisis. My question is, "Why did counterparty risk become one of the reasons for the default in the first place?" The answer comes from former Fed Chair Paul Volker. Wall St. and unregulated Credit Default Swaps (CDS's) were the reason for the increase in counterparty risk, not monetary policy. When the Banks were no longer responsible for the defaults on a mortgage, and were actually given an incentive to sell the mortgage to another party, the liability for the default was defused over many parties and therefore multiplied to cause unknown risk. Monetary policy was the treatment not the cause of increased counterparty risk.

The current recession was the result of a confluence of factors, not just the US Fed. China's emergence into the global sphere of economic influence, Wall St.'s efforts to combine commercial and investment banking, the Fed's efforts to let hedge funds stay unregulated in registering transactions, and Greenspan's fanatical efforts to let "The Market take care of fraud" are just some of the combining factors that lead to our current economic crisis.

This book is an important first step in the examination of the causes behind the current recession but more work needs to be done on causality.

Mark Eversfield.