The Root Causes of the Current Financial Crisis

Last October I summarized a trenchant analysis by Anna Schwartz, co-author with Milton Friedman of the seminal A Monetary History of the United States.  She pointed out that Bernanke was solving the wrong problem - in a misguided attempt to replay history and prevent the last Great Depression, he was treating the banking crisis as a liquidity problem when instead it was a solvency problem.   Today in the WSJ the Stanford economist John B. Taylor explains how we got into this mess in How Government Created the Financial Crisis.  For those who do not get the online version of the Journal, let me summarize: