A Review of “the Financial Crisis...” by John B. Taylor

In: Business and Management

Submitted By perryshipp
Words 454
Pages 2
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 loose-fitting monetary policy. Through the use of several graphs, he explains that the Federal Reserve caused the lending bubble because they did not follow the “Taylor Rule” and its inflation-based policy for interest rates. The Fed needed to raise interest rates sooner to minimize the “boom and bust” in the housing market. Low interest rates and the pressure on Fannie Mae and Freddie Mac to increase home sales prompted the boom because it spurred the sub-prime mortgage market. 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…...

Similar Documents

Financial Crisis

...Financial Crises: Theory and Evidence Franklin Allen University of Pennsylvania Ana Babus Cambridge University Elena Carletti European University Institute June 8, 2009 1. Introduction Financial crises have been pervasive phenomena throughout history. Bordo et al. (2001) find that their frequency in recent decades has been double that of the Bretton Woods Period (1945-1971) and the Gold Standard Era (1880-1993), comparable only to the Great Depression. Nevertheless, the financial crisis that started in the summer of 2007 came as a great surprise to most people. What initially was seen as difficulties in the US subprime mortgage market, rapidly escalated and spilled over to financial markets all over the world. The crisis has changed the financial landscape worldwide and its costs are yet to be evaluated. The purpose of this paper is to concisely survey the literature on financial crises. Despite its severity and its ample effects, the current crisis is similar to past crises in many dimensions. In a recent series of papers, Reinhart and Rogoff (2008a, 2008b, 2009) document the effects of banking crises using an extensive data set of high and middle-to-low income countries. They find that systemic banking crises are typically preceded by credit booms and asset price bubbles. This is consistent with Herring and Wachter (2003) who show that many financial crises are the result of bubbles in real estate markets. In addition, Reinhart and Rogoff......

Words: 11555 - Pages: 47

Financial Crisis

...O C C A S I O N A L PA P E R S E R I E S N O 1 2 3 / F E B R UA RY 2 011 THE INTERNATIONAL MONETARY SYSTEM AFTER THE FINANCIAL CRISIS by Ettore Dorrucci and Julie McKay OCCASIONAL PAPER SERIES NO 123 / FEBRUARY 2011 THE INTERNATIONAL MONETARY SYSTEM AFTER THE FINANCIAL CRISIS by Ettore Dorrucci and Julie McKay1 NOTE: This Occasional Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. In 2011 all ECB publications feature a motif taken from the €100 banknote. This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science Research Network electronic library at http://ssrn.com/abstract_id=1646277 1 European Central Bank, Ettore.Dorrucci@ecb.europa.eu, Julie.McKay@ecb.europa.eu. The views expressed in this paper do not necessarily reflect those of the European Central Bank. The authors would like to thank, outside their institution, A. Afota, C. Borio, M. Committeri, B. Eichengreen, A. Erce, A. Gastaud, P. L'Hotelleire-Fallois Armas, P. Moreno, P. Sedlacek, Z. Szalai, I. Visco and J-P. Yanitch, and, within their institution, R. Beck, T. Bracke, A. Chudik, A. Mehl, E. Mileva, F. Moss, G. Pineau, F. Ramon-Ballester, L. Stracca, R. Straub, and C. Thimann for their very helpful comments and/or inputs. © European Central Bank, 2011 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany...

Words: 33129 - Pages: 133

Financial Crisis

...09-093 July 22, 2009 The Global Financial Crisis of 2008 – 2009: The Role of Greed, Fear and Oligarchs Cate Reavis Free enterprise is always the right answer. The problem with it is that it ignores the human element. It does not take into account the complexities of human behavior. 1 —Andrew Lo, Professor of Finance, MIT Sloan School of Management The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. 2 —Simon Johnson, Professor of Entrepreneurship, MIT Sloan School of Management, Former Chief Economist, IMF On October 9, 2007 the Dow Jones Industrial Average set a record by closing at 14,047. One year later, the Dow was just above 8,000, after dropping 21% in the first nine days of October 2008. Major stock markets in other countries had plunged alongside the Dow. Credit markets were nearing paralysis. Companies began to lay off workers in droves and were forced to put off capital investments. Individual consumers were being denied loans for mortgages and college tuitions. After the nine day U.S. stock market plunge, the head of the International Monetary Fund had some sobering words: “Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” 3 1 2 3 Interview with the case......

Words: 10022 - Pages: 41

Recent Financial Crisis

...Current financial crisis Economic growth involves metamorphosis of the financial system. Forms of banks and bank money change. These changes, if not addressed, leave the banking system vulnerable to crisis. There is no greater challenge in economics than to understand and prevent financial crises. The financial crisis of 2007-2008 provides the opportunity to reassess our understanding of crises. All financial crises are at root bank runs, because bank debt—of all forms—is vulnerable to sudden exit by bank debt holders. The current crisis raises issues for crisis theory. And, empirically, studying crises is challenging because of small samples and incomplete data. *Written as a contribution for Trade, Globalization and Development: Essays in Honor of Kalyan Sanyal, edited by Sugata Marjit and Rajat Acharya (Springer Verlag; forthcoming). Some of this essay draws from material in my book Misunderstanding Financial Crises (Oxford University Press; forthcoming November 2012). I worked at AIG Financial Products as a consultant from 1996-2008. I thank Doug Diamond, Bengt Holmström, Arvind Krishnamurthy, and Guillermo Ordoňez for comments.1 1. Introduction Economic development does not result in the elimination of financial crises. The recent financial crisis of 2007-2009 in the United States and Europe shows that market economies, however much they grow and change, are still susceptible to collapse or near-collapse from financial crisis. This is a staggering......

Words: 13324 - Pages: 54

Financial Crisis

...October 28, 2011 The Efficient-Market Hypothesis and the Financial Crisis Burton G. Malkiel* Abstract The world-wide financial crisis of 2008-2009 has left in its wake severely damaged economies in the United States and Europe. The crisis has also shaken the foundations of modern-day financial theory, which rested on the proposition that our financial markets were basically efficient. Critics have even suggested that the efficient--market–hypotheses (EMH) was in large part, responsible for the crises. This paper argues that the critics of EMH are using a far too restrictive interpretation of what EMH means. EMH does not imply that asset prices are always “correct.” Prices are always wrong, but no one knows for sure if they are too high or too low. EMH does not imply that bubbles in asset prices are impossible nor does it deny that environmental and behavioral factors cannot have profound influences on required rates of return and risk premiums. At its core, EMH implies that arbitrage opportunities for riskless gains do not exist in an *Princeton University. I am indebted to Alan Blinder and to the participants in the Russell Sage Conference on Economic Lessons From the Financial Crisis for extremely helpful comments. 2 efficiently functioning market and if they do appear from time to time that they do not persist. The evidence is clear that this version of EMH is strongly supported by the data. EMH can comfortably coexist with behavior finance, and the insights of......

Words: 11209 - Pages: 45

Who Is Responsible for the Financial Crisis

...Enough!!! Who is responsible for the Financial Crisis? Everyone who tries to answer this question just points fingers, and the ones who are being pointed to, react by saying: “Hey, it wasn’t me or my company, I trusted the system,” or “I relied on somebody else’s judgment.” Some people blame the consumers for spending too much; some blame the banks for their lending practices, while others blame the credit agencies for their vague ratings. But by now, we are completely sure of one thing; the housing bubble was one factor that generated this financial crisis. So, who is to be blame for creating the housing bubble? According to John Taylor’s article, “How Government Created the Financial Crisis,” lax policies implemented by the Federal Reserve (Fed) caused the financial crisis. As a response to John Taylor’s opinion, Alan Greenspan’s article, “The Fed Didn’t Cause the Housing Bubble”, defends the Fed’s policies and places the fault on mortgage rates, such as long-term or fixed mortgages, as the real cause that triggered the Housing bubble. Even though John Taylor’s, a professor of Economics at Stanford, and Alan Greenspan’s, a former chairman of the Federal reserve, opinions are strongly supported by facts, I’m truly fed up of hearing excuses and finger pointing about the current financial crisis. The fact is that both the Fed’s policies and the rates on mortgages initiated the housing bubble, and I can’t reject either explanation. However I believe that it is time...

Words: 1166 - Pages: 5

2000 Financial Crisis

... 2008 FINANCIAL CRISIS Name Course Date 1. Background The financial crisis commenced in August 2007 after the preceding inflation. The crisis became more defined throughout 2007 and gained momentum in 2008. This took place even after the financial regulators and the central banks’ tireless attempts to tame the situation. It is alleged that the main factors that influenced its manifestation include corruption, fraud, speculation, greed, bankers and bankers’ bonuses. However, the academic discourse, politics or media has been unable to solve the mystery surrounding the main causes of the crisis[1]. The mystery is academically relevant to the world of research just like the Great Depression, whose causes are still being discussed. Other sources believe that the crisis might have been as a cause of human failures especially following the refusal to bail out the Investment Bank Lehman Brothers. The housing bubble was the immediate trigger of the 2008 financial crisis. The following were the triggers under the housing bubble. I. Subprime lending A subprime mortgage is the mortgage that is readily acceptable without imposing strict measures of standard on it. Before the 2008 financial crisis, there existed a fierce competition between mortgage lenders. The competition between the mortgage lenders ensued from the struggle for market share and revenue. It also took place in tandem with limited supply of creditworthy borrowers which put......

Words: 4957 - Pages: 20

2008 Financial Crisis

... 2008 FINANCIAL CRISIS Name Course Date 1. Background The financial crisis commenced in August 2007 after the preceding inflation. The crisis became more defined throughout 2007 and gained momentum in 2008. This took place even after the financial regulators and the central banks’ tireless attempts to tame the situation. It is alleged that the main factors that influenced its manifestation include corruption, fraud, speculation, greed, bankers and bankers’ bonuses. However, the academic discourse, politics or media has been unable to solve the mystery surrounding the main causes of the crisis[1]. The mystery is academically relevant to the world of research just like the Great Depression, whose causes are still being discussed. Other sources believe that the crisis might have been as a cause of human failures especially following the refusal to bail out the Investment Bank Lehman Brothers. The housing bubble was the immediate trigger of the 2008 financial crisis. The following were the triggers under the housing bubble. I. Subprime lending A subprime mortgage is the mortgage that is readily acceptable without imposing strict measures of standard on it. Before the 2008 financial crisis, there existed a fierce competition between mortgage lenders. The competition between the mortgage lenders ensued from the struggle for market share and revenue. It also took place in tandem with limited supply of creditworthy borrowers which put......

Words: 4957 - Pages: 20

Causes of the Financial Crisis 2008

...CORPORATE FINANCE 307 LITERATURE REVIEW Student Name / ID: Chay Yu Xi 15907811 Jacqueline Teo Hui Yun 15805054 Ting Heng Huat 14973837 Tutor: Leo Kee Chye Tutorial Day / Time: Monday / 2pm Table of Contents Abstract The Tech Bubble Introduction Lowering of Interest Rates Adjustable Rate Mortgage Securitization Mortgage Backed Securities Collateralized Debt Obligation Credit Default Swap Government Reaction and Policies Emergency TARP Repercussions Basel Disadvantages Future Policy Requirements Controversy Conclusion Reference List Review of the causes of the 2008 Financial Crisis in US. Abstract This paper seeks to summarize a stream of research that has delved into the major causes of the financial crisis in 2008. More precisely, we will be looking at a combination of causes such as the sub-prime mortgage crisis, the mortgage backed security, the collateralized debt obligation as well as how the incidental credit-default swap contributed to the incident. This paper will begin from analyzing the past, when it happened and how it built up and resulted in the financial crisis. The significance of this literature review seeks to give a simplified explanation of the financial crisis of 2008 and will be useful for the people unversed in economics or finance but wish to have a basic understanding of its causes and history. The Tech Bubble During the early 2000, numerous companies and individuals bought new......

Words: 7947 - Pages: 32

John Taylor Outline

...1. What caused it? 1. What caused the financial crisis: a. Classic explanation- monetary excesses that lead to booms or busts (housing boom/bust in recent criss ) 2. What caused the monetary excess? a. Evidence that there was monetary excesses before housing boom and bust: Loose fitting monetary policy regarding interest rates- large deviation from the Taylor rule that was shown to have worked in the past, especially during the Great Moderation. b. Reason for deviating from taylor rule: interest rate was low to address the fear of deflation 3. Argument: extra easy policy was responsible for accelerating the housing boom and thereby ultimately leading to the housing bust a. As a result of the unprecedentedly low interest rates, the number of housing starts drastically increased (figure 2). The counter factual line shows what the rate of housing starts would have been if the Taylor line had been followed.. The resulting bust is very easy to see. If this is not evidence enough, the CPI inflation also increased by 60% (3.2% - well above the recommended 2%). 4. Alternative explanations- a. global savings glut (excess of world saving) pushed interest rates down 2002-2004. However, there is no evidence of this b. In actuality there was a savings shortage during this period (figure 3). US was actually running a current account deficit during this period, meaning that saving was less than investment. 5. Monetary policy in other countries a. Global deviations:......

Words: 1331 - Pages: 6

Financial Crisis

...FINANIAL CRISIS 2008 AND CORPORATE GOVERNANCE The business world is questioning whether Corporate Governance has become a mere catchphrase, divorced from the contentious problems it is supposed to solve… MEMBERS: AYUSH KUMAR-030 NIPEKSH I MAHAJAN-082 PRABHAV MISHRA-0 PRATEEK KUMAR-096 VAIBHAV JAIN-164 “Why should a financial engineer be paid four, four times... to a hundred times more than the real engineer? A real engineer build bridges, a financial engineer build, build dreams. And when those dream turn out to be nightmares, other people pay for it.” - Andrew Sheng “Contrary to the vulgar belief that men are motivated primarily by materialistic considerations, we now see the capitalist system being discredited and destroyed all over the world, even though the system has given men the greatest material comforts” - Ayn Rand “In fact, there is ultimately a limit to how much regulation can do. In the final analysis, you could write all the rules you want, but there has to be a philosophy of ethical behaviour that comes from human beings operating in a professional way” – William H. Donaldson, CFA “The global crisis was caused by “the over-50s not knowing what the under-30’s were doing” – Johann Rupert, Remgro Chairman “The first casualty of a downturn is truth” - Financial Times Columnist 30 Sept 2008 Introduction- The banking crisis was triggered by largely unregulated trading of complex financial instruments, including......

Words: 12952 - Pages: 52

The 2008 Financial Crisis

... | |The 2008 Financial Crisis | |A Review and Critique | | | |Nicholas Makris | |12/4/2012 | | | Introduction The 2009 economic crisis was significant for two reasons: the rapid rate at which the free market constraints were dropped, and the lack of any stable resolution by the Left (Mellor, 2009). Tenets pertaining to market domination suffered a lethal crack owing to multiple nations realizing the inessential communization, rather than the actual, of economic arrangement (Mellor, 2009). The core of the problem was complicated, but simplification showed it was the nonstandard arrangement of the monetary system that created a complicated scope of financial tools and entities to......

Words: 7080 - Pages: 29

Financial Crisis

...2010 by John Wiley & Sons, Inc W c. All rights rese erved. No part of thi publication ma be reproduced stored in a ret is ay d, trieval system or transmitted r in any form o by any means, electronic, mec or , chanical, photoco opying, recordin scanning ng, or otherwise, except as permi itted under Sections 107 or 108 o the 1976 Unit States of ted Copyright Ac without either the prior writte permission of the Publisher, o authorization t ct, r en f or through payment of th appropriate pe he er-copy fee to th Copyright Cle he earance Center, I Inc., 222 Rosewo Drive, ood Danvers, MA 01923, website www.copyright A e t.com. Requests to the Publisher for permission should be r addressed to t Permissions Department, Joh Wiley & Son Inc., 111 Rive Street, Hobok NJ 07030the hn ns, er ken, 5774, (201)74 48-6011, fax (20 01)748-6008, we ebsite http://www w.wiley.com/go/ /permissions. To order book or for custom service, pleas call 1(800)-CA ks mer se ALL-WILEY (2 225-5945). Printed in the United States of America. e o ISBN 978- 0-470-56516-2 The Financial Crisis: 2007-2009 Objectives Understand the major influences that led to the 2007 2009 Financial Crises Describe the role that agency cost issues played in the financing of mortgages to developing mortgage backed securities and other financially engineered securities based on mortgages Describe the timeline of events that unfolded during the financial......

Words: 17010 - Pages: 69

Financial Crisis

...Journal of Contemporary Eastern Asia ISSN 2383-9449 Fumitaka Furuoka, Beatrice Lim, Catherine Jikunan and Lo May Chiun (2012) Economics Crisis and Response: Case Study of Malaysia’s Responses to Asian Financial Crisis Journal of Contemporary Eastern Asia Vol. 11, No. 1: 43-56 Journal abbreviation: J. Contemp. East. Asia Stable URL: http://eastasia.yu.ac.kr/documents/Fumitaka_11_1.pdf www.JCEA-Online.net Open Access Publication Creative Commons License Deed Attribution-No Derivative Works 3.0 Journal of Contemporary Eastern Asia, Volume 11, No.1: 43-56 http://dx.doi.org/10.17477/jcea.2012.11.1.043 Economics Crisis and Response: Case Study of Malaysia’s Responses to Asian Financial Crisis Fumitaka Furuoka, Beatrice Lim, Catherine Jikunan and Lo May Chiun The paper chooses the “Asian Financial Crisis” as a case study to examine its impact on Malaysian economy and describes how Malaysian government responded to the crisis. It also focuses on the Asian financial crisis’ impact on the employment of banking sector in Malaysia. In the finance, insurance, real estate and business service sector, a number of 6,596 workers were retrenched. Banks were forced into mergers and acquisition as well as downsizing, trim lean, organizational changes and introduction of new technologies. Excess workers were offered a “voluntary separation scheme.” These retrenched workers became the urban poor facing high cost of living and no opportunity for jobs as there is no safety net provided. 1.......

Words: 7422 - Pages: 30

Financial Crisis

...American University School of Business Economics Department Advanced Topics in Economics Midterm Paper Perspective on the Financial Crisis of 2007-2008 Fatima Sobh 200903216 By early 2007, the crisis started in the U.S. with the collapse of the subprime mortgage market and by reaching the end of a major booming housing era. It occurred just after two years of raising the interest rates policy. Not only had it affected mortgages, it reached the banking sector in the U.S. and across the world as well. It had spilled over into the real economy through a dangerous credit clash and collapsing equities’ market which more likely produced a significant recession. The Fed and other central banks have responded in a classical way by flooding the financial markets with liquidity. As for the fiscal authorities, they dealt with the decline in solvency in the banking system by following the template of earlier bailouts like the Reconstruction Finance Corporation in the 1930s, Sweden in 1992 and Japan in the late 1990s. In August 2007, to be specific, the financial system started to crack. Banks realized that they held considerable amounts of mortgage-backed securities that were difficult to rate. Sadly, after experiencing large losses, banks’ balance sheets could not put up with additional lending. (Cecchetti, 2008) As a result, some financial intermediaries began to face difficulties in finding the short-term financing that was necessary for them to carry on their daily......

Words: 4423 - Pages: 18

Danni Rivers, Rion King - My Sisters Hot Friend (NaughtyAmerica) | Lie To Me Streaming | SOLIDWORKS