Acting too quickly and aggressively may pose its own risks. Stanford University economist John Taylor argues in a January working paper that three government actions — the 2007 term auction facility, the 2008 tax rebate, and the lowering of the federal funds rate between 2007 and 2008 from 5.25 percent to 2 percent — actually prolonged the financial crisis, "either because they did not address the problem [which Taylor identifies as counterparty risk, not liquidity] or because they had unintended consequences."
Why did the financial crisis intensify in the fall of 2008? Conventional wisdom says the bankruptcy of Lehman Brothers is the answer. But Taylor's own "event study" suggests that what truly spooked the credit markets was uncertainty over the initial undetailed (recall that it ran a mere two-and-a-half pages), $700 billion TARP, drawn up over a weekend and presented by Henry Paulsen to the Senate Banking Committee on September 23. Haste, it seems, still makes waste. — E.T.
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