Where Are We Now, Three Years After the Onset of the Crisis?

This week marks the third anniversary of the flare up of the financial crisis in August 2007. Howard Green, Headline anchor at the Business News Network in Canada, broadcast the news this way in today’s lead-in to an interview with me to mark the occasion: “It was exactly three years ago this week, August 2007, when the global financial system started experiencing chest pains as credit conditions tightened…It would still be a year and a bit before financial markets would go into cardiac arrest…Where are we now, three years after the onset of the crisis?”

The chart below shows how things looked back then; it’s like a “money market EKG,” called LOIS3 (the spread between three-month LIBOR and OIS, the market’s expectation of the federal funds rate over the same three months). The last reading is on Friday, August 10, 2007 and is what you would have seen if you looked at your computer screen on Sunday August 12 and tried to figure out what would happen next. Yes, there’s obvious evidence of chest pains, perhaps even worse.

But “what’s causing them” was the question everyone was asking. “What’s the diagnosis?” I have argued that the problem was misdiagnosed, and thereby mistreated, by policy makers, and that is why the patient eventually went into “cardiac arrest” a year or so later, though some still say that the treatment was correct and things would have been even worse without the treatment. If you want to see what the “money market EKG” looked like at the time of “cardiac arrest,” take a look at this nice interactive chart on Bloomberg.

Unfortunately the answer to Howard Green’s question above is that we are still in a pretty dire situation. We are now going into the fourth year of “crisis-recession-fizzled recovery” and for several reasons the outlook is bleak unless policy is changed as I had the chance to explain in the TV interview, divided into segments One, Two, and Three.

About John B. Taylor 117 Articles

Affiliation: Stanford University

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

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. 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 the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. 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 Under Secretary 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. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded 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, he was awarded 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.

Visit: John Taylor's Page, Blog

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