John Taylor on the Financial Crisis
Jul 20 2009

John Taylor of Stanford University talks with EconTalk host Russ Roberts about the fundamental causes of the financial crisis of 2008. Taylor argues that the housing bubble of the early 2000s was caused by excessively loose monetary policy, in particular, a sustained period of excessively low interest rates pursued by the Federal Reserve. Other topics covered include rules vs. discretion in monetary policy and the risks of inflation in the coming months. The conversation concludes with a discussion of the impact of the current crisis on future monetary policy and the field of macroeconomics.

John Taylor on Inflation, the Fed, and the Taylor Rule
What's so bad about rising inflation? Why should we aim for a rate of 2 percent? Why is it a problem if interest rates are too low--and what do we mean by inflation, anyway? Stanford University's John Taylor talks with...
Robert Shiller on Housing and Bubbles
Robert Shiller of Yale University talks with EconTalk host Russ Roberts about the current housing mess and related financial market problems. Shiller argues that the decade-long run up in housing prices was a bubble where speculative fervor outweighed any economic...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Per Kurowski
Jul 20 2009 at 10:15am

Another expert that completely ignores the immense effect of the changes in the financial regulations coming out of Basel which allowed anything able to hustle up a triple-A ratings to be subsidised by generating extremely low capital requirements for the banks. 1.6 percent and lower! … An authorized marginal bank leverage of 62.5 to 1 and higher!

Jul 20 2009 at 1:34pm

The Fed’s balance sheet is actually over $2 trillion, not $1 trillion:

Scott M. Anderson
Jul 20 2009 at 5:57pm

I have been witing for this podcast for several months. Thank you! John Taylor’s editorial in the WSJ resonated with me very well and have been hoping that he would return to Econtalk.

Back in the 2003-2004 timeframe I was vehemently (perhaps to the point of being a boor) arguing that the interest rate subsidies of a loose monetary policy dangerous. I am no expert but felt that maybe the Fed was just changing the price of money ($) rather than the value so was creating distortions that favored one set of market participants over another. I was aware of the Taylor rule and Milton Friedman’s thoughts on monetary policy, thinking that this is a classic deviation from the Taylor rule.

I also, as did many others, anticipate some of the consequences. It seems like when a bubble is created, that many if not most recognize the bubble but many still act in a way to reinforce the bubble. There must be another aspect of this puzzle that causes market particpants (homeowners, investors, institutions) to continue to behave in a way that increases their likelyhood of loss.

What I am trying to say is that housing became less expensive (to finance) but the risk of loss on the housing increased so one might expect the market to reduce demand at some point of equilibrium short of the disaster. The same argument for other market actions including fixed income investments and the very low risk premium.

I found an article that I have not yet read thoroughly, so can not say whether I fully understand or agree but its premise is that another form of government intervention is at least partly to blame – tax policy. The white paper is called – “Tax Arbitrage Feedback Theory” by Sam Eddins. Tax policy affects investor behavior and results in market distortions that can become unstable. Once again, I am not ready and able to vet the thesis but it stands to reason that there may well have been other policy induced distortions that destabilized the economy.

Certainly, monetary policy changes market particpant behavior. Thank you again for this fine guest and podcast.

Stephen Smith
Jul 20 2009 at 6:24pm

In the podcast you mentioned a paper that evaluated different countries’ central banks’ adherence to the Taylor rule and their economic situation during the most recent financial crisis, and found that those who followed the Taylor rule did okay, whereas those that didn’t had their economies collapse. Do you have a link to that paper, or at least a citation?

Jul 20 2009 at 6:44pm

Having read Taylor’s book, I find it very hard to argue with his reasons for the crisis because the data he presents is so stark. His chart showing the (very large) deviation from the Taylor rule is all alone pretty dispositive. Could it be all this talk about the crisis of macroeconomics is overdone? The causes of this crisis were pretty much the same as the causes of past crises: expansionary monetary policy leads to asset inflation and excessive risk taking ending in a rude awakening. Add a few idiosyncratic ingredients taken from the contemporary environment, such as securitization, derivatives, and perverse government incentives encouraging mortgage lending and borrowing, and your crisis is up-to-date.

One thing left unsaid during the discussion is that the Fed “undoing” its balance-sheet build-up of necessity requires a rise in interest rates, possibly a very substantial one. No?

Jul 20 2009 at 9:06pm

I would like to better understand the critique of the taylor that has been leveled by Paul MacCulley of PIMCO
The use of a rate set by the market instead of the Fed Funds rate is the only example I am aware of where a Keynesian has prefered markets to politics so I find it fascinating but wonder what I must be missing.

Jul 20 2009 at 10:06pm

I am not an economist but I really enjoy the arguments and different points of view in the podcasts. I recently read some interesting ideas on shifts in different classes of asset investments triggered by government policies by John Rutledge. I was wondering if it would be possible to organise a podcast with him at some point. Thank you very much for bringing economic thoughts to the general public in such a clear and easily understood manner.

Joe Cushing
Jul 20 2009 at 10:16pm

Excellent podcast today. I’m glad to know the great moderation wasn’t just a fluke and that we do know stuff about monetary policy. This means the great moderation can be repeated. I like the idea of rules to bind the fed but I don’t know who should write them.

When I was younger, I once decided to test my car’s handling on a loose gravel road. I started moving the wheel back and forth to see how well it would hang on to the road. Then I went a bit too far and the back wheels broke free just a bit. To compensate, I steered the other way a bit harder. The wheels broke the other way, a bit harder. This continued a few times until I was sideways with my rear wheels in the ditch. I’m afraid Greenspan started us skidding into one ditch and Bernanke is steering us into the ditch on the other side of the road.

Tony G
Jul 21 2009 at 12:24am

Two questions/observations on the Taylor interview.

1) One of the primary themes of this podcast was that the Fed Funds rate was “too low, too long.” To what extent, if any, did technological innovation and the subsequent productivity gains play a role in the Fed’s thinking about keeping rates low? My thought here is that advances in computer technology and the institutional innovations (e.g., on-time inventory) of the 1990s and early 2000s led to increases in productivity that helped to keep inflation low. Throughout the 1990s and first decade of 2000 I kept hearing about how surprisingly low inflation was and how the Fed felt it could keep interest rates low. Any connection here?

2) At about 34 minutes into the podcast, Taylor said he was opposed to fine tuning of the economy. However, his Taylor Rule and econometric work seems to give the impression that monetary policy can be fine tuned. In many ways, this may be more of an indictment of formal and econometric modeling than of Taylor, per se. Our use of “high-powered” statistical models seems to give an air of greater knowledge about causation in the economy than we may really have. (Russ had an earlier podcast dealing with econometric models and truth.) Let me put this another way: Taylor argued here that his statistical work showed the two stimulus packages (Bush and Obama) had little impact. But the mere ability to make such a statistical claim gives rise to the “hubris” that we can fine tune the economy if we just get the model correct. Comments?

P.S. I’m a new listener to EconTalk, having just discovered it about 2 months ago. Love the Munger segments. Leeson was great as well. I actually decided to use Leeson’s book for my pol econ class based on the podcast. Also, I feel vindicated because so much of what I have been doing in class for the past 15 years is being discussed here on EconTalk (e.g., popcorn prices, tragedy of the commons, fair trade coffee, the economics of sweatshop protests). I would love to hear podcasts with Terry Anderson (of PERC) and John Lott on crime/guns. More Larry Iannaccone too!

Bob Anderson
Jul 21 2009 at 5:36am

An interesting discussion, as always, but with one concern: in your efforts to avoid the “political” ramifications of the discussion, you ignore the 800 pound gorilla in the room. Cheap money was a politically expedient strategy for an administration promising that we could wage two wars without financial resources. We were blessed with a relatively independent Fed for two decades. That came to a halt in the latter years of the Greenspan era as he manipulated the money supply to avoid the impact of the government’s fiscal policy. In my mind this has to be acknowledged in order to understand what happened.

Jul 21 2009 at 11:37am

Readers might find this paper interesting on the crisis which references Mr Taylor.
As an Austrian I am always encouraged to see people reaching similar conclusions but from a different direction.

Justin P
Jul 21 2009 at 5:44pm

Since when did John Taylor become an Austrian? I need to read the book, but judging from the Podcast, it seems that Taylor reiterating what the Austrians have been saying for years.

Now the question is, what do we do with the Fed? What is going to happen once the Fed unloads it’s balance sheet? What is it at ~2 trillion?

Jul 22 2009 at 4:09am

Justin P, I didn’t word my post clearly, I was referring to myself as an Austrian not John Taylor. And as for Bernanke unloading his balance sheet, look at the bottom of the article on page 1 of the FT today where he says he will sell the toxic stuff (but with an agreement to buy it back at a future date). Would you consider your house sold if you had a contract with the purchaser to buy it back at a future date?

Jul 22 2009 at 2:47pm

Tried to download on itunes and gives me an error (trouble connecting with server or something of the sort)…

[Note from the Econlib Editor: Sometimes the servers are busy, in which case trying again later will work. Also, we have noticed some difficulties with some of our iTunesU feeds, which we are working to resolve. Try subscribing directly to our main iTunes feed at instead of the iTunesU feeds. Email me at if you still have trouble.–Lauren]

Jul 22 2009 at 3:37pm

“Rapid increases in housing seen in the United States, and also in Ireland, Spain; maybe South Africa. Why did those happen? Looking at the Organization of Economic Cooperation and Development (OECD) countries, at countries whose interest rates were below the Taylor Rule for those countries, and found high correlation with housing price boom in other countries–Ireland, Spain.”

This quote puzzles me: Ireland and Spain are euro zone countries that do not set there own interest rates. This is set by centrally by the ECB (European Central Bank).

Justin P
Jul 22 2009 at 6:16pm

Jonathan – No I meant John Taylor advocating Austrian Business Cycle Theory. You’d almost think you where listening to Russ interview Tom Woods, author of Meltdown. Which…Russ if your reading…would be a good podcast too!

Aug 11 2009 at 3:34pm

This interview leaves two big questions hanging:

1- What is Professor Taylor’s opinion of the Fed’s policy today, and what does he foresee its impact being tomorrow. Surely, by any stretch of the Taylor Rule, today’s rates are too low. Shouldn’t that, according to Taylor’s analysis of the previous bubble/bust, lead to a bigger future bust?

2- Why was Professor Taylor not making this point in 2001-7?

Comments are closed.


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Podcast Episode Highlights
0:36Intro. [Recording date: July 13, 2009.] Argue in book that much of current financial crisis is due to excessively loose monetary policy. What is the evidence? Interest rates were much lower, especially in 2003-2005 than would have been expected based on the kind of monetary policy that was used during much of the 1980s-'90s, when we had these long expansions and very short recessions. Measure through the Taylor Rule--pretty good description of the way interest rates were set during most of this period of long boom or Great Moderation; natural starting place. Previous podcast. Taylor Rule shows that good monetary policy is one in which the interest rate set by the central bank adjusts by a sufficient amount when inflation or GDP rises or falls. Quantitative amounts, so you can measure it. To review: When saying the Federal Reserve sets an interest rate, talking about the Federal Funds rate, the rate that banks charge each other for overnight lending. The Fed doesn't literally set it--it injects or extracts reserves to change the rate in that market process. The word "set" is sometimes used--Federal Open Market Committee (FOMC), group assigned to determine monetary policy, frequently votes about that rate--effectively set a target and the trading desks adjust the reserves to bring the actual interest rate in line with their goal. In the 2003 and 2005 period--isn't it before that? Can focus on 2002-2005, doesn't get back to normal till after 2005. Another way of saying that the Fed at that time injected too much money into the banking system. One way to think about this: in the early part of 2004, the Federal Funds rate was still at 1%, almost three years after the recession had ended in 2001, so a long period of time where the economy and inflation are moving up but the interest rate is still held at a very low level--whether you use a rule or just look at the past in some informal way. Lowest level in the previous 40 years.
5:06Why did they do that? Standard argument is that after the 9-11 (September 11, 2001) attacks and the 2001 ("dot com") recession, the Fed was worried about deflation, so they lowered interest rates; but they kept them there. Well-intentioned efforts to prevent something worse, like a deflation or Japanese experience. Based on the objective evidence they knew they were lower than normal. Were they worried about the kind of effects that might lead to, like housing? There were discussions at the time; but one effect of easy money is that you don't know where it's going to go or what it's going to do. Milton Friedman talked about this long ago, ups and downs of too much money or too little money. Housing is a typical one--monetary policy did induce a boom in housing in the 1960s-1970s, slumps in housing. Logical place but hard to predict.
7:14Focus on Federal Funds rate, why is measured monetary expansion not as dramatic as we would have predicted? Standard measures of money, say M2 growth over the period we are talking about was large, but not dramatic. Interest rates were dramatically lower, but why isn't the traditional measure of the amount of money the right thing we want to look at? Because of all the technological and regulatory changes, the ability of people to make payments without the traditional forms of money, traditional measures of money became less relevant. It wasn't that money didn't matter--there was a measure of money that was important--but measuring what that is has been difficult for a long time. That's one of the reasons that central banks have focused on interest rates; and one of the reasons that rules like the Taylor Rule were designed, to stand in for money in a situation where money growth is hard to measure. Good indicators of monetary excess in the rise in the inflation rate, which was picking up over this whole period. Surprising that it didn't pick up dramatically. Yes, the Federal Funds rate was really low, but why should that have such a big impact? Was it the money or the price that over-stimulated the housing market. Fed Funds rate was the transmission mechanism: one, low Fed Funds interest rate would make the interest rate on adjustable rate mortgages (ARMs) much lower. About 30 percent of the mortgages over this time were ARMs--in fact, the fraction increasing rapidly over this time. Reduced cost of buying a house, increased demand--moving up along the demand curve. Second, term structure of interest rates: longer term mortgages, 30-year mortgages, depend on longer term interest rates; have to think about the transmission mechanism, short rates feed through to the long-term rates. Circuitous channel with a lot of uncertainty; were puzzles, Greenspan calls this a conundrum as long rates didn't seem to be moving up as they might have in the past, but that may have been because rates were excessively low. Period when Fed started to raise rates--why didn't the long rate respond? Data: long-term rate and short-term rate both falling in first part of the 2002-2005-ish period; but the difference between them starts to grow, short-term rate starts to fall faster than the long-term rate, making the short term rate particularly attractive. Part of the problem for adjustable rate mortgages. Puzzle as to why long run rates were falling even as short run rates started to climb up at the end of this period--that's the conundrum. Main reason people were somewhat unsure about what the Fed was going to do: when were they going to raise rates? Were they moving away from the policies of the 1980s and 1990s? Longer term rate adjustment a surprise for that reason. Others have claimed that the long-run decline was not the fault of the Fed, but happened for other reasons. Alan Greenspan, Fed Chairman at the time, indicted by first claim, has defended himself: these long-term interest rates had nothing to do with the Fed, but had to do with a worldwide glut--expansion--of savings. That argument has some factual problems--overall global savings rate was lower in that period. Hard to see an excess. Greenspan aware of that--would say it's not the measured rates but the intended savings greater than the intended investment. Problem with that is it's not possible to measure it, so more of an argument that is hard to substantiate. To summarize: overexpansion of housing securities, investment in housing, housing construction in the early part of the 21st century that led to this crisis, particularly in the sub-prime market, was due to over-expanded monetary policy and deviations from either the Taylor Rule or the past behavior of the Fed.
14:13There are other things that fed into that. The low rates themselves encouraged some excess risk-taking. For example, prices of housing started to rise even more than in the past--encouraged people to make their payments, less incentive to default; misled underwriters into thinking these assets were less risky. When housing prices started to level off and fall, that went down. Also encouraged the purchases of risky assets through Fannie Mae and Freddie Mac, big part of the expansion of the subprime. Played a substantial role; people including Greenspan were clear that these created a lot of risk; evidence clear that the expansion related to this. Ideological positions. One reason not to dwell on this as much as the low interest rates is we don't have as much evidence. Fannie and Freddie not involved directly in subprime lending. They did get entangled in it, through securitization. A lot of the mortgages originally issued were put together in the form of mortgage-backed securities, which were then divided into tranches at different risk levels, which were mixed with other tranches from other mortgage-backed securities; within those there were subprime mortgages. Not well known--or some people think it's not true but it is--though they were not bundling subprime mortgages initially into their own securities, at the beginning of the explosion of the subprime market they were a nontrivial portion of the demand for those securities, using them to satisfy the demand for affordable housing requirements that HUD imposed on them starting in 1992. Estimates in the hundreds of billions of dollars, but shocking how difficult it is to get reliable estimates of how involved they were. Systematic analysis would be desirable. Two other areas. One: attractive thing about your explanation and unattractive about explanations that rely solely on Fannie and Freddie or other favorite causes is that the housing bubble was not just an American phenomenon. Rapid increases in housing seen in the United States, and also in Ireland, Spain; maybe South Africa. Why did those happen? Looking at the Organization of Economic Cooperation and Development (OECD) countries, at countries whose interest rates were below the Taylor Rule for those countries, and found high correlation with housing price boom in other countries--Ireland, Spain. Only one study; early. Global transmission mechanism for money. Tempting but wrong to think that each country has independent monetary policy set by its own central bank. But interest rates have increasingly global character. Role of the United States alone as elephant or gorilla must have effects beyond the United States; big effects. Multi-country model. Expansion of money supply in Europe would have big effects. Early research: if each central bank did what was right for its country, keeping inflation low, would prevent instability more broadly. More complicated as it becomes globalized. Tendency for central banks to follow each other. U.S. and Sweden. Worried about their exchange rates. Might want to think about global inflation goal. Doesn't mean you have to have coordination of monetary policy.
23:23Role of intervention generally; government's role in prolonging or shortening of the crisis. Go back to fall 2008, back to March, beginning of unprecedented intervention on the part of the Fed and the Treasury. Bear Sterns takeover in March, then crisis in the fall: Fannie and Freddie bankruptcy collapse takeover and failure to take over Lehman Brothers. Money poured into AIG. Claim was that without these interventions we would have had a frozen credit market. A lot of people skeptical; but on the other side, people say to look at Lehman Bros.--when that failed, that's when things got bad; should have bailed them out, too. Lehman Brothers: If you look closely at the timing of the panic in 2008--S&P 500 goes down 28% in three weeks, huge increase in interest rate spreads in money markets--10 days or two weeks after the Lehman Brothers bankruptcy; and at a time when the U.S. government was saying we need to intervene with the Troubled Asset Relief Program (TARP), selling it to Congress and the American people by scaring which did scare. Globally a drop in imports by many countries. Around the time of Lehman Brothers, but after; maybe people slept on it for 10 days and then decided it was scary. Surprises disrupt financial markets: surprise not to bail out Russia in the 1990s, caused a disruption. For Argentina, not so much of a surprise. Problem with Lehman Brothers was that it was a surprise. After the Bear Sterns bailout, expectation that Lehman Brothers would be bailed out. Right after Bear Sterns a good explanation of what the policy was could have been put forth; would have reduced the impact. That's the kind of research that is needed. The more government can be clear and predictable about its policy, the fewer the surprises. Did the Fed and the Treasury at that period have an alternative policy? Given how linked together those firms were, if they'd gone down together would it be catastrophic? When you are inside it looks different; difficult to second guess. Suppose Bear Sterns was a surprise--at that point articulating a strategy even if it were general would give people a sense of what might happen. Monday morning quarterbacking; don't know what people knew. For policy-makers, it's very hard to say no. Don't get much reward if you say no and things work fine. Get huge penalty if you say no and things do fall apart. Strong incentive to say yes. Short run damage; long term can cause a lot of difficulties. Now, a bailout mentality--automobile and insurance companies. Not healthy; hard to reverse. Analogy with emerging markets: a lot of interventions and bailouts in the 1990s; that was the mentality until IMF didn't bail out so much. Ad hoc is really appealing. General rules limit your flexibility; "flexible" sounds nicer than "ad hoc." Rules for monetary policy; that's why you have constitutions. Have to have experience, knowledge, confidence to act in the public interest.
32:23Given inevitable political nature of these institutions--Treasury, Fed, all of them--what are the implications for what we might do? What has been proposed--we don't talk about legislation on this show--is in general an expansion of power to the Fed. If Fed is part of the problem, talking about pure monetary policy, what might we think about in terms of the Fed to reduce the chances of this kind of disaster happening again, where interest rates are too low, too long? Learn from this experience. Think about the low rates as an effort to do too much fine tuning. Tried it, but it didn't work. Go back to basic fundamentals of what did work. Not so much a political question as a technical question. Don't try to fine-tune. There are advantages to rules; politics can get in the way, and will get in the way more with some of the current proposals. Political pressures will be there no matter what. Worried about deflation, will say they don't want deflation and depression on my watch. Twenty years of policy with long expansions and short recessions. Not a lot of complaining when Fed raised rates; usual amount. Can be done; sometimes requires people like a Paul Volker to get started; Alan Greenspan during most of that period. Hard to get back to that. Good economic performance in most countries in the late 1980s, early 1990s. Interim period, one we are in right now: Federal Reserve has accumulated an enormous number of assets, balance sheet close to a trillion, up from small numbers of billions a year or so ago, now in hundreds of billions, about half of which is mortgage-backed securities. When they accumulate assets, they are injecting reserves into the banking system; enormous amount of excess reserves which would suggest--per Alan Meltzer podcast--that when that starts to be lent out we will have inflation. Is there an alternative? Alternative is that Fed will remove those reserves in time. Worried about it politically. Talk like they've got a big mop; reserves sloshing around. Easier said than done--mortgage-backed securities are hard to unmop. Have to sell them; would raise mortgage rates. Suppose the Fed had already gotten rid of them. Fed's independence. Buying medium term Treasuries trying to keep Treasury rates low. Arcane to talk about the balance sheet of the Fed, eyes glaze over. What is the impact of those purchases? Think of macroeconomics as ex post story-telling; things are not so good but could be a lot worse. Some say: Monetary policy important; Fed has introduced liquidity into the market and that's what kept the economy from falling off a cliff last fall. Others say that had nothing to do with it; they are pushing on a string; all we have left is fiscal policy; administration's stimulus package; even though it hasn't done enough, at least it changed expectations. Fiscal policy: starting with stimulus package, Bush stimulus package, Stimulus Act of 2008--did nothing. Very little impact for current package. Initial monetary side, scare and panic; things stabilized long before the packages were put forth. Fed improved the balance sheets of the banking system. Purchases of mortgage-backed securities drives up the price and drives down the yield, interest rate; makes mortgages more attractive; mortgage rates did fall; could be tempted to say that mortgage rates fell because of the rates. But data show due to perceptions of risk. Purchases by the Fed doesn't do much at all. Interbank spreads in the money market--can't see impact of Fed. Can still argue things could have been worse. Wife bought Taylor golf clubs for his birthday two years ago, special materials to improve his game. Didn't do anything for his game, but still thank wife--game could have been worse without these clubs. Post hoc ergo propter hoc, even when nothing happens--after this therefore because of this--confusion of correlation with causation.
42:57Transmission mechanism confusion: Fed has as its main tool the Federal Funds rate, but when that goes close to zero people say the Fed's impotent and can't do anything. Idea: quantitative easing, by accumulating other assets--other than pushing down the Federal Funds rate and injecting reserves into the system--the Fed can buy anything. As long as it can buy assets such as mortgage-backed securities it can take them off the banks' balance sheets, inject reserves into the system, and stimulate the economy. Not through the interest rate on mortgages--that's the Japanese story. Basically printing money. U.S. version is more direct. U.S. Fed started expanding its balance sheet the week of Sept. 17; interest rate driven to zero by this expansion. FOMC didn't even vote to reduce the rates before this expansion occurred. Low rates caused by other things. Keeping Fannie and Freddie afloat.
45:38State of macroeconomics: where do we stand? Is it too early to draw some lessons from this crisis for macroeconomic theory? When the Great Moderation was in its heyday, people said, "We solved that." In the last 18 months, some soul-searching. Great Moderation was due to good monetary policy; once we got off that policy things went to hell in a hand basket. Understanding of the importance of expectations was basically right. Like in the 1970s, we got off of that; 1980s and 1990s, basically good. Deviation from those policies is what happened; lots of evidence and data. What will happen to the field? A lot of interest in financial markets in macro policy; might be too simplistic in our modeling. Pessimism would be that it's harder than it looks. You'd think we would learn from the 1970s and from this episode; not obvious, not clear. Confident that if John Taylor were next chairman of the Fed, good economic times; but don't want to have to depend on the right person getting the position. Prone to this kind of catastrophic mistake. Greatest mistake used to be the Great Depression; tempting to say that we just didn't understand monetary policy back then; but we're smarter now. But we did it again; not quite as bad. Might not mean getting better. Period before the Great Depression was not nirvana. 1894 was a bad one. Evidence from the United States; and emerging markets improving, despite being so heavily hit by this last crisis has been that Brazil, Turkey more than in the past. Political system, requires good individuals; good leadership important. Never completely on automatic pilot; but the more institutions can build some of this philosophy into them, maybe better. Lessons learned here can be useful. Skepticism in Congress now about monetary policy. Eyes used to glaze over but now people are looking at Fed's balance sheets. Never been a time in our lifetimes when there has been so much skepticism about the role of the Fed. Has always been a view of its being an international conspiracy manipulating things--that view more widely held than ever--but also mainstream folks saying something has to be done. But not obvious what that would be; hard to structure rules; Milton Friedman argued for fixed money growth rule, automatic. Some say think about a gold standard; price rules. Some kind of interest rate rule; guidelines do help. Hard to legislate, maybe more than a pure inflation target. In shorter run, productive way is to not give Fed more responsibility, more roles. If right, cultural effects--norms, stigma, pressure--could play a role. From 2002-2005, presumably you told Fed they were doing the wrong thing; Taylor Rule; would have been pressure on the Fed if more economists spoke up. Learning more from hindsight. Better to know in advance but nothing wrong with that. Rule of thumb, not iron-clad rule; deviations punished with shame and embarrassment.