Lesson of financial crisis: communications is policy

In line with what Ed says below about the tone of POTUS’ comments to the New York Times, a very excellent and very short book has just come out from the Hoover Institution Press.  Getting off Track by Hoover scholar John Taylor traces the origins of the current global crisis and concludes that ill-considered government actions caused the financial upheaval, worsened it and are now prolonging it.

What were those actions?  A number of usual suspects — especially Federal Reserve Board policy — and some entirely unusual ones.  Taylor presents amazingly comprehensible charts and simple explanations of normally opaque global interest rate data to draw the curtain back on the mysteries of the financial markets.  There, in addition to Fed misaction, he finds fear — mind seizing, knee knocking fear brought on by… government communications, in particular overwrought rhetoric in both the last and the current administrations.  The  global financial markets have sunk into the fetal position, rocking back and forth and whimpering about disasters coming, because leaders of the US government in particular have been screaming about coming disasters.  Taylor makes brilliant use of interest rate differentials to strip out varying sources of risk.  He tightly links movements in rates to officials’ statements before Congress.   Many are wondering why Citibank is trading so low these days.  Perhaps Administration communications about nationalization of banks has something to do with it.  As Taylor demonstrates, communications strongly influences perceptions of risk, and perceptions of risk are at the heart of our current crisis.

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