Customer Reviews

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

5 star:		(8)
4 star:		(5)
3 star:		(1)
2 star:		(2)
1 star:		(1)

 

 

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.

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

I found this book most useful as the insider's view on the operation of FOMC. While it was fascinating to read about Libor-OIS spread and "black swan" in the market, much better and in-depth explanations about the root cause of this crisis and the potential for further damage can be found in Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and in Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts. Check also George Reisman's blog at [...]

In my view with all my regards to John Taylor he still didn't go deep enough to discover government regulations as CRA and its allegedly independent institutions as Fanny and Freddie, Federal Reserve Bank, and in particular Greenspan and Bernanke at FOMC as the root cause of both 2000 stock and 2006 housing market bubbles. Notably, in the FAQ chapter on his book on page 70 to the questioning of his model validity his answer is "... No model is perfect, but as I always say you need alternative model to criticize a model..." forgetting the bitter failures of the Central Planners of USSR and the Soviet Block to built a central planning economic system as a superior and better alternative to the free-market capitalism. What about if no model can be built as explained by G. Reisman, what about if by removing the government interference a true and unhampered laissez-faire capitalism can self-regulate better? Thus, instead of harsh criticism of FOMC that caused credit expansion they are found guilty only for deviation from the Taylor's rule. He gives too much credit to his rule as a major factor leading to the so called "Great Moderation" without ever mentioning regarding this period the irresponsible policies of several US administrations, WTO, and IMF, surrendering western world manufacturing base to the communist China and the rest of Far East under quite discriminatory and unfair rules, the quiet, and gradual restoration of Keynesianism by Greenspan since late 80's. The author's admission in several places that "...the empirical results are still preliminary..." and his honesty deserved the two starts but no more. John Taylor reminds me about Albert Einstein who never accepted the statistical nature of quantum mechanics and spent most of his life searching for "hidden parameters". For Taylor those parameters currently are Libor-OIS spread, Credit Default Swaps, Libor-Tibor Spread, and Libor-repo Spreads. Unfortunately, no "hidden parameters" or any artificial rule can help a free-market system that is severely hampered by too much government interventionism and the very existence of a number of federal agencies and institutions as FOMS, Federal Reserve Bank, Fanny and Freddy. My general impression about this book is still more about one Central Planner criticizing some other Central Planners that they didn't follow strictly his rule.

As unquestionably John Taylor is one of the best recognized and largely influential economist on the side of Big Government, I'm very curious what criticism he has to offer in regards to George Reisman's theory Capitalism: A Treatise on Economics humbly called Miseanism after his great teacher and mentor Ludwig von Mises. It doesn't look too strange to me that George Reisman's critical views seem ignored by the leading and in-favor economists as Taylor, Sommers, Krugman, Stiglitz much the same way as the Soviet Block economists ignored the works of Ludwig von Mises.

"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.

The physicist Richard Feynman is reputed to have argued that an "expert" is someone who can thoroughly explain a complicated subject to beginners. Those self described "experts" incapable of making their subject accessible, are, he maintained, probably not real experts at all.

Stanford economics professor John Taylor, who formulated "the Taylor Rule", a rule for guding Central Bank monetary policy, provides a critical review of recent policies that is truly expert in the Feynman sense.

Taylor argues that the Federal Reserve's low interest rate policies is the root cause of the current crisis. Not in the sense that low interest rates are inherently distorting, but in terms of the impact of rapid change. US interest rates tumbled over the course of a year, as the Fed responded to the challenges of the burst of the Dot Com bubble and 911. Taylor argues (via "counterfactuals") that a more gradual decline would have avoided the catastrophic consequences.

Regardless of specific diagnoses, Taylor's book is concise, easy to read and well argued. I read the book in three easy sessions of under an hour each. Taylor provides references to more technical material and his use of graphics and illustrations is clear, relevant and to the point. Taylor makes his arguments comprehensible to newcomers without losing any sophistication or relevant technical detail.

Taylor's approach should be the model for the serious engagement of the public on critical public policy matters. But don't hold your breath.

This book contains a few good ideas, expressed simply and clearly. It explains some of what caused the 2008 financial crisis. But he exaggerates a good deal when he claims he has "provided empirical proof that monetary policy was a key cause of the boom".

He provides clear evidence that counterparty risk was a more important problem than lack of liquidity, and has some hints about how counterparty risk could have been handled better. But that doesn't say much about whether policies to deal with liquidity problems were mistaken - I doubt that many of the people pushing those liquidity related policies were denying that counterparty risk was a problem.

I've been convinced since before the crisis that having the Fed follow the Taylor Rule would have been better than the monetary policy that we actually had. But the details of the rule seem somewhat arbitrary, and I'm disappointed that the book doesn't provide much explanation of why the Taylor Rule is better than alternative rules.

I've found a link on Taylor's blog to an article (The Taylor Rule and QE2 By David Papell) which compares it to some alternatives which seem motivated primarily by a desire to rationalize more monetary or fiscal stimulus. But what I want to know is whether it's possible to create a rule that is more countercyclical without being more inflationary.

I have an intuition that it's not too hard to improve on the inflation component of the rule. The CPI seems to have many drawbacks, such as being slow to reflect changes. I suspect Taylor's inflation coefficient of 1.5 is larger than what an ideal rule would use in order to make up for the delays associated with using the CPI. When I'm estimating inflation for my investment decisions, I pay more attention to the ISM price index, the money supply (MZM), commodity prices, and stock prices. And the ISM Purchasing Managers Index should provide more up to date evidence of the "output gap" than GDP figures. A version of the Taylor Rule which emphasized those should react more quickly to changes in the economy.

Taylor does a good job of objectively analyzing the current crisis and dispelling the perception that it was caused by a lack of liquidity.

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.

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.

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.