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A Review Of “The Financial Crisis...” By John B. Taylor

454 words - 2 pages

GF500: A Review of “The Financial Crisis...” by John B. Taylor
Perry Shipp
Kaplan University
GF500: A Review of “The Financial Crisis...” by John B. Taylor

John B. Taylor is a long-time economist and professor of economics at Stanford University. In his article, “The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong,” he explains what caused, prolonged, and worsened the 2008-09 U.S. financial crisis (Taylor, 2009). Once Professor Taylor explains his opinions on the financial crisis, he offers a set of protective principles to help set monetary policy for the future.
According to Taylor, the main cause of the financial crisis was monetary excesses brought by a ...view middle of the document...

The bust followed because the boom was unsustainable.
By tracking the LIBOR index during the crisis, Taylor shows how the Fed prolonged the problem by misdiagnosing the reason for the increased spreads. He says they focused on increasing liquidity in the economy when counter-party risk was the real culprit. With his graphs, Taylor is able to discount each of the three actions taken by the Fed, including the Term Auction Facility, the temporary cash infusions, and the initial cuts in interest rates through 2008.
Professor Taylor then uses the LIBOR index to explain how government policy made the crisis worse. He shows how the ad hoc support for financial institutions such as Bear Stearns, Lehman Brothers, and AIG created uncertainty. By rescuing some institutions and not others without particular or stated reasons, it lead to an increase in the counter-party risk mentioned above. This created added uncertainty in the market which made business and investment decisions very difficult.
In conclusion, Taylor shows that the federal government had a primary role in the financial crises in 2008-2009. He completes his article with three suggestions to help offset future crises. He recommends that monetary policy sets principles for interest rates like those used during the Great Moderation, properly diagnoses financial problems before future government interventions, and creates clearly stated plans for providing fiscal assistance to financial institutions.
References
Taylor, J. (2009). The financial crisis and policy responses: An empirical analysis of what went
wrong. NBER Working Paper 14631, Retrieved from http://www.nviegi.net/teaching/taylor1.pdf

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