Taylor: The Fed and the Crisis: A Reply to Ben Bernanke

These technical arguments are important, but one should not lose sight of the forest through the trees.  You do not have to rely on the Taylor rule to see that monetary policy was too loose.  The real interest rate during this period was persistently less than zero, thereby subsidizing borrowers.  Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, reported in a speech on Jan. 7 that during the past decade “real interest rates—the nominal interest rate adjusted for inflation—remained at negative levels for approximately 40 percent of the time.  The last time this occurred was during the 1970s, preceding a time of turbulence.”

– John Taylor, “The Fed and the Crisis: A Reply to Ben Bernanke”, The Wall Street Journal, January 11