The Kindle edition of John Taylor’s book has been reduced to only USD 2.40 in honor of the third anniversary of the crash of 2008. John Cochrane supports Taylor’s diagnosis of the causes of the 2008 crash – a run on questionable investment banks:
John Taylor took the trouble to respond to Paul Krugman’s latest outrage on the sources of the financial crisis. Taylor’s post — along with the deeper analysis he points to — is well worth reading.
Krugman’s calumnies are so nonsensical I generally do not find it worth responding.
The idea that I now like stimulus is simply preposterous if you bother to read what I write about it. The idea that I or John Taylor don’t think there was a run is even more preposterous. And to top it off, Krugman writes “Anyone else have the impression that something happened in the second half of September 2008?” I mean really, accusing Taylor and myself of thinking that nothing happened in September 2008? Are Krugman’s readers such simpletons that they fall for such unvarnished falsehoods?
Taylor did us a service by taking the time to straighten this one out.
Yes there was a run.
The insight that it was a run is central to my view of how to fix things. If it was a run, echoing, as Krugman says, Friedman and Schwartz’s view of the Great Depression, then some of Friedman and Schwartz’s conclusions are surely warranted! No, this was not some mysterious failure of capitalism and we need to have the Fed run everything under Dodd-Frank. No, this does not require that we save every big institution and protect them from competition and failure forever. This was one run very like the many runs and panics we’ve seen throughout history.
Our run was in the shadow-banking system. I recommend Darrel Duffie’s “Failure mechanics of dealer banks,” the article and the book Once you read these, you naturally see simple ways in which we can fix bankruptcy law and run-prone assets in place of Dodd-Frank. How, exactly? That’s a subject for another post — actually a long series — coming up.
Yes it was a run. And that fact leads directly to some very un-Krugmanlike conclusions.
(If you want to read what I actually have written so far about this issue it’s all here. I’m teaching a class this week on financial crisis — we’re going to spend a lot of time on Duffie and Gary Gorton’s analysis of the run in repo markets.)