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: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. Taylor argues persuasively that the Federal Reserve kept interest rates too low for too long in 2002-05 and that "government programs designed to promote home ownership, a worthwhile goal but overdone in retrospect," together with the credit that was plentiful because of unduly low interest rates created the housing bubble."The rapidly rising housing prices and the resulting low delinquency rates likely threw the underwriting programs off track and misled many people." The ratings agencies also bear some responsibility for creating the toxic assets that clog the banks and other financial institutions. "The ratings agencies underestimated the risk of these [mortgage-backed] securities because of a lack of competition, poor accountability, or, most likely, an inherent difficulty in assessing risk due to complexity." He also mentions, rather fleetingly, the role of Fannie Mae and Freddie Mac in flooding the marketplace with mortgage-backed securities...
Taylor's book is a useful antidote to the mantra, spread by some Democrats including Barack Obama, that the crisis is the proximate result of Reagan- and Bush-style deregulation or the Bush tax cuts and other macroeconomic policies. When you get past this rhetoric, it is very hard to find a plausible chain of causation from either deregulation or the Bush tax cuts to the financial crisis. I think Taylor is clearly right that "government policies caused, prolonged and worsened the crisis"—but the governmental policies he identifies, not deregulation or the Bush tax cuts. As Treasury and the Federal Reserve struggle to come up with ways to solve the financial crisis, it's important for those of us who are bystanders to establish the correct narrative, and Taylor's short book is an invaluable asset in this enterprise.
(Michael Barone, "Ad Hoc Fed, Treasury Acts Caused the Financial Crisis, Not Deregulation, Tax Cuts" in U.S. News & World Report, Thomas Jefferson Street blog)
