Domestic Policy

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  Govt Biggest Monetary Risk?May 12, 2009 21:54 A top former Treasury official under the Bush administration laid the blame for the financial crisis at the foot of the government Tuesday, and said the government is itself the biggest risk to the economy in the months and years ahead.

Those tough words came from John Taylor, an economics professor at Stanford University, who once served as a Treasury undersecretary under George W. Bush from 2001 to 2005. He said it was the government - by way of actions such as an overly accommodative monetary policy, inconsistent responses to financial troubles and a fragmented regulatory environment - that created most of the current financial troubles.

"In each of these cases there was a tendency for government action to convert non-systemic risks into systemic risks," Taylor said in remarks prepared for delivery before attendees at a conference held by the Federal Reserve Bank of Atlanta, at Jekyll Island, Ga.

"I think there is an even strong case that the Federal government is the bigger systemic risk going forward," he said. Taylor listed the rapid expansion of federal budget deficits and the size and scope of the Fed's balance sheets as his chief sources of worry.

Taylor also said the government's numerous interventions into business are a big problem that distort the normal function of companies, subverting the rule of law at the same time. "We risk losing the most important ingredient to the success of our economy's since America's founding - the rule of law," Taylor said.

He's also worried the Fed won't be able to unwind its balance sheet in a way that will keep inflationary forces in check.