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Recovery Shape: V, U, or L?

John B. Taylor, Ph.D. is the economist for whom the "Taylor Rule" is named. The Taylor Rule is the guideline that central banks, like the Federal Reserve, are encouraged to follow in order to prevent inflation and promote low unemployment. Dr. Taylor spoke yesterday at the Heritage Foundation to promote his latest book, Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. During the presentation, he said that the current financial crisis is government caused, prolonged, and worsened. Kind of like the title to his book. During one point he said that some people are debating if this is a "U" shaped or "V" shaped recession. He suggested that if we don't get the government out of the financial system quickly, the letter shape will be "L".

Please listen to his talk. The first 15-20 minutes cover summarize his ideas. He said the cause was the Federal Reserve keeping interest rates too low during the 2003-2007 period. The government intervention distorted markets and prolonged the crisis: no one knows what the 800 pound gorilla called government is going to do next. The worsening effect is from government ownership of private enterprise.

He doesn't talk about the latest news of Chrysler and GM being taken owned by the government and the labor unions, but you can see a pattern emerge. We may all become "L"osers in this debacle.

Listen here.


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Comments (6)

Charlie, only problem is th... (Below threshold)
GarandFan:

Charlie, only problem is that the people now in charge don't care. "Never waste a good crisis".
It's now about getting the economy moving again. It's about getting and keeping control of a socialist government. I'm waiting for the "mandatory government service" plan to appear. That's one way to address massive unemployment. We'll pay for it the same way we're going to pay for government sponsored health care. The treasury will just print more money.

I long for transcripts. I h... (Below threshold)

I long for transcripts. I hate sound and video on my computer. But the fact I haven't listened won't keep me from commenting:

Government is never good at solving the problems it has created.

RE: "He doesn't talk about ... (Below threshold)
kevino:

RE: "He doesn't talk about the latest news of Chrysler and GM being taken owned by the government and the labor unions, but you can see a pattern emerge."

Yes, indeed. Bondholders owned a majority of the assets in the companies, and by law, the companies must pay them back first. The unions owned a fraction of what the bondholders owned. The State comes in and bypasses the bankruptcy proceedings and awards most of the assets to the unions. In this environment, where the State is owned by the unions and where the State trumps contract law and property rights, who is going to buy corporate bonds any more? If you think that the State is going to take over a company and divide the assets, you're not going to invest in that company unless you're stupid.

The bad news: in a State-controlled economy, capital will move out of the markets.

The really bad news: the State will subsidize losing companies and payoff constituents with lots of taxpayer money.

The terrible news: State influence in the economy will grow, and as the State runs out of money, it will print more.

For this and other reasons: L-shaped - no long term recovery. You wanted change. You got it.

BTW: The Chinese are pulling out of Treasuries and are buying gold.

Excellent analysis kevino.<... (Below threshold)
epador:

Excellent analysis kevino.

Bernanke is no Greenspan.</... (Below threshold)
gary gulrud:

Bernanke is no Greenspan.

An L is the best case. What... (Below threshold)
John S:

An L is the best case. Whatever your financial situation sinks to in this recession is where you'll stay -- if your lucky. There's still the real risk of those $10 or $20 trillion printed dollars exploding into hyperinflation. And for those of us getting older, we can look forward to Obamacare, where involuntary assisted suicide becomes the cure for every serious ailment.




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