In this paper I have provided empirical evidence that government actions and interventions caused, prolonged, and worsened the financial crisis. They caused it by deviating from historical precedents and principles for setting interest rates, which had worked well for 20 years. They prolonged it by misdiagnosing the problems in the bank credit markets and thereby responding inappropriately by focusing on liquidity rather than risk. They made it worse by providing support for certain financial institutions and their creditors but not others in an ad hoc way without a clear and understandable framework. While other factors were certainly at play, these government actions should be first on the list of answers to the question of what went wrong.I love seeing Taylor unleashed like this--no U.S. Treasury position holding him back now. (Note to critics: in the last sentence above he acknowledges other "factors were at play", he never denied this point) Taylor continues his assault on poorly designed and executed U.S. macroeconomic policy in an interview with Tom Keene of Bloomberg. Listen to the interview here.
Update: John Taylor continues his critique of Fed policy at the AEA meeetings while Josh Hendrickson provides a nice overview of Taylor's paper.