John Taylor, Professor of Economics, Stanford University offered a keynote address at the Federal Reserve Bank of Atlanta's 'Financial Innovation and Crises' conference, addressing the role of the government in reducing systemic risk in the financial markets.
Taylor, the former undersecretary of the Treasury for international affairs in the Bush administration, cautioned that the Fed may need to raise interest rates soon.
My calculation implies that we may not have as much time before the Fed has to remove excess reserves and raise the rate, he said at the Jekyll Island Club, just down the hall from where the Federal Reserve system was born a century ago.
Taylor insisted that the federal government is the biggest source of systemic risk in the financial markets, warning the formulating policy proposals and drafting legislation without considering these government risks is a mistake.
He pointed to the growing debt of the federal government as an example of systemic risk.
The deficit in 2019 is expected to be $1.2 trillion about the same as the most recent Administration budget for 2010...What is the purpose of running trillion dollar deficits as far as the eye can see? he asked.
There is certainly no stimulus effect from such deficits, and they put a heavy burden on the not so distant future. This is a systemic risk because it will effect the entire financial system and the real economy.
Reigning in government-induced systemic risk should be the highest priority above the creation of a new systemic risk regulator, Taylor added.
He warned that the creation of a risk regulator might serve as an excuse for existing regulatory agencies to pass off responsibilities for past and future regulatory failures.
The experience during the panic last fall is not reassuring that such an agency could resolve private institutions without causing more systemic risk than it was trying to reduce.
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