A commentariat has pointed out a very interesting Reason article on Ben Bernanke.
In the words of Ron Paul:
Paul, a libertarian like Schwartz and Friedman, worries that the Federal Reserve is bringing the pair’s monetarist model into reality. In a phone interview, he noted, “In essence, Bernanke is following Friedman’s advice. He’s a Friedmanite when it comes to massively inflating. Bernanke was able to justify [his policies] by using Friedman.”
Asked if Friedman’s enthusiasm for inflation flouts libertarianism, Paul answered: “Absolutely. The monetarists said that you could overcome a natural market correction of a collapsing system by inflation—print money faster! Which contradicts Friedman’s whole thesis. He wanted a steady, managed increase in the supply of money of about 3 percent.” Here Paul is alluding to Money Mischief, Friedman’s 1991 book in which he called on the Federal Reserve to grow the money supply at 3 percent annually, presumably forever. “Yet, at the same time, Friedman said the Depression could’ve been prevented by massively inflating.”
Paul has kind words for Friedman, whom he praises as a staunch defender of economic liberty, but his final summation is damning: “Friedman’s very, very libertarian—except on monetary issues.”
I will be very interested to hear others impressions of this thesis.
I’d be interested to see Paul’s sources on that. Friedman radically changed some his positions over a very long career. As he got older he displayed quite a bit less trust in government machinations in general. He was famously involved in the development of the withholding tax during WW II, and spent the rest of his life trying to get rid of it. How much of this is young Friedman, and how much of it is the older Friedman?
The notion of “planned” or “managed” 3% inflation was around in the 1960’s. The trouble was that it was taken up in the UK by governments who were interfering in everything and anything economic. And look at what happened. It is like giving a drunk a loaded gun and sending him to shoot a rabbit.
Simple: Friedman knew that although recessions usually have a real cause, economic friction can hold the economy below its usual rate of output for longer than desirable, and that suitable monetary expansion can end this.
The question is how much of any macro event is “a natural market correction” and how much of it is a failure of the market to speedily correct? Is monetary policy going to be misused, and would monetary policy misuse cause future economic mis-coordination?
“That you could overcome a natural market correction of a collapsing system by inflation” is probably not true.
Libertarians don’t trust government. Nobody likes unnecesary hardship. What trade-off do you make?
Do bears…oh, never mind.
The reason libertarians don’t trust government is because government brings unnecessary hardship.
I’d buy even into Keynes’ theory, not only Friedman’s. Keynes said you could expand monetary supply during a recession, but then, must reabsorb the excess money during the boom.
(This means actually that the governmnet – ie – the fed and it’s monetary policy cause the boom-bust cycle, which is pretty much what happened in the last 80 years or so).
Governments are good at expanding, never at “reabsorbing”. Which is why it would be better if it stayed out of it altogether, and let us live with whatever natural business cycles occur.
Seems Friedman held contradictory views, and they are also reflected in Anna Schwartz’s answers in the Reason article.
You can either keep monetary supply steady, or you use it as a depression fighting tool and expand as needed. You can’t have both. (You probably can have neither).
It is this that makes Friedman a Monetarist, and not an Austrian economist – which you have to be to be called a libertarian.
This is confused and conflated. I know Ron Paul is the darling of libertarians but he’s out of his element.
Friedman warned against Government spending with printed money, or government spending with tax revenue money. He preached that the government overspending with printed money leads to inflation which is the cruelest tax which everyone pays proportionally. He said that inflation is always and everywhere a monetary phenomenon. He favored replacing the chairman of the Fed with a computer that would allow the money supply to increase at “about” 3% a year, adjusted by the computer program to match productivity increases. He favored the computer running the monetary system over a human because the computer would not be subject to political pressures to deviate from sound monetary policy. Of course, the computer would have to locked up pretty tight to keep the politicians hands off it.
Ron Paul is certainly not everyone’s darling on this site AFAIK, but I’m afraid he’s right on this. I’d give Friedman the benefit of the doubt and call him naive. When a government is allowed to print money there is no way it will not abuse this ability.
He favored replacing the chairman of the Fed with a computer
Yes, except in time of depression…
Human rights need to be respected, except in an emergency….
Read the links in the Reason article.
The problem is that in a fiat money system with fractional reserve banking, it makes little sense to squabble over which monetary policy is more or less libertarian. It would be like arguing over what’s the proper libertarian approach to the Gosplan. (To be precise, it’s not even the combination of fiat money and FRB that makes the system dependent on government intervention to maintain it — each one would suffice by itself.) Of course, one can claim that some particular scheme for government intervention (e.g. the monetarist constant-rate dilution) will have better results than others, but again, it’s like arguing over the details of math in a socialist central plan. It’s certainly preposterous to defend any such policy as more “free market,” “libertarian,” or whatever.
Basically, the only honest libertarian position is to admit that the entire monetary and banking system is an arm of the government, and the supposed boundaries between the government central banks, regulatory bodies, and the private sector are pretty much illusory. It’s all a giant rat’s nest of for-profit Quangos, if you will. (Of course, unsurprisingly for government enterprises, they always turn out to run at a net loss in the long run and regularly produce catastrophic failures.) Note that this conclusion is independent of the recent crisis that prompted another round of mass bailouts and nationalizations, this time more explicit than usual. The situation has been slowly drifting towards this state of affairs for many generations. Honestly, at this point, if the entire banking system were nationalized and its assets and liabilities simply transferred onto the government’s balance sheet, it wouldn’t be any real setback for the free market. In fact, it would be a huge gain in transparency.
Friedman… that famous libertarian who advocated;
Negative income tax (aka tax credits: equalising of income via income tax muddling)
monetarism (aka ‘stable prices’ via GOSPLAN for money)
witholding taxes (aka PAYE – he invented this concept.. thanks)
school vouchers (aka promoting state schooling)
Government interventionism for the ‘neighbourhood effect’
Time and again Friedman has worked hard to NOT remove the state from our lives. He was a statist in libertarian pyjamas.
From the article:
“Friedman and Schwartz, in other words, have helped to spawn the grandest expansion in the Federal Reserve’s history, a program of limitless market interventions and tireless money printing whose unstated aim is all-out inflation. For two libertarian champions of free markets and limited government, this legacy has the ring of a world-historic irony.”
James Tyler:
I have no doubt that Friedman had honest pro-liberty instincts. The real problem with him, and many others, lies elsewhere.
The ideological mainstream has drifted so far to the left in the last few generations that common-sense positions on many issues that were considered self-evident (or at least eminently reasonable) a century or more ago are now considered as lunatic — and it’s impossible to even start voicing them without being instantly denounced by the respectable establishment as a deranged madman or a dangerous extremist, and thus committing career suicide. On some issues, however, it’s still possible to argue against leftist trends and even reverse them in certain situations. The 20th century free market economists like Hayek and Friedman managed to defeat and reverse some leftward trends before they’d become firmly established beyond criticism. Yet, on other issues, they were faced with a situation where an honest common-sense approach would have already been beyond the pale. Thus, what they tried to do was to devise quasi-free-market positions that were supposed to incorporate as many free market principles as possible without going beyond the acceptable ideological limits.
The results were mixed, often leading them to advocacy for lipstick-on-a-pig positions that superimposed some free market principles onto the existing unquestionable leftist ideological consensus. Thus, instead of attacking the existing monetary system as inherently statist, they would come up with quasi-libertarian ideas superimposed onto it, like e.g. monetarism. Instead of denouncing government schooling altogether, they came up with the idea of vouchers. Sometimes the results were even destructive — as much as libertarians hate to admit it, tinkering with government-run operations can produce even worse results, even if the intervention itself can be framed in terms of supposedly libertarian reforms; market incentives can wreak total havoc if unleashed within a system that offers opportunities to engineer government transfers. (In this regard, leftists sometimes actually have some semblance of a point when blame problems on “deregulation.”)
But anyway, now I’m rambling. Basically, my point is that the work of economists like Friedman seems to me like a result of honest libertarian instincts operating in a rigid ideological environment that never allowed them to be pursued consistently, so that Friedman et al. ended up with many bastardized quasi-free-marked positions on a variety of issues.
From my understanding, Friedman began to come around to the more “Austrian” view in his later life that any kind of automatic rule about how to set monetary growth was impossible. In this he was influenced by his fellow classical liberal, FA Hayek. I am not sure if he ever flirted with being a goldbug, though.
What I also think is worth pointing out is that Friedman, while he may have favoured big increases in the money supply to counteract a big contraction in the monetary base – as occured in the early 1930s – he was most emphatically not a supporter of bank bailouts of the current sort. And anyone trying to pray in aid his name for such bailouts is being dishonest.
I recently came across the strident but thoughtful monetarist, Scott Summer. He does a great line on how Australia seemed to dodge the recession: http://blogsandwikis.bentley.edu/themoneyillusion/?p=2139
I think the message is that monetarists developed a pretty idiot proof way for central bankers avoid a recession, but that they still manage to anyway. But if I remember, correctly, even De Soto has suggested massive inflation of the monetary supply before applying whatever other reforms during this recession. I don’t think it so much increasing the money supply which is libertarian heresy, so much as deficit spending and public spending specifically.
Flash Gordon has it. (Love the movies, by the way. The old ones. Although Ornella Muti certainly added to the recent one.)
Friedman believed in — essentially invented — the quantity theory of money, which basically sees money and GDP as being balanced, as on a balance scale. One piece of money is “worth” essentially as much as the piece of GDP it balances.
Increasing productivity makes GDP grow; if the number of pieces of money stays the same, then the money is “worth” a bigger piece of GDP, which we call “deflation.”
If the number of pieces of money grows and GDP stays the same, then each piece of money is “worth” less; this is inflation.
Deflation is undesirable, because it inhibits investment and economic activity: if money is deflating, why invest or buy if you can avoid it? Deflation is a Bad Thing.
Inflation is also undesirable, for all the usual reasons. But in a free economy, productivity tends to increase, and this is desirable. (Consider: you can go from New York to Los Angeles in five hours by plane compared to five days by train in 1935, and in constant dollars for 1935, it costs about $6 instead of $200.)
If the money supply is constant, which is effectively what a gold standard does, you get natural deflation. Deflation, remember, is a Bad Thing. (If you get a big influx of gold into the economy, as happened in Spain in the 15th C, you get inflation, even if you’re using hard money.)
If you push too much money into the system, as happened in Weimar, you get big inflation. High inflation leads people not to invest and do business but instead to buy hard goods and hoard them, and so this is a Bad Thing.
When people stop investing, this is also a Bad Thing.
What’s desirable is for money supply to exactly grow with increasing productivity, but since both of them are hard to measure, and deflation is a Bad Thing, then erring a little bit on the side of inflation is the safest thing.
The point of having a Federal Reserve was to insulate the money supply from politicians. Friedman’s idea was to say “here’s the predictable rate at which money supply will increase and there’s nothing you can do about it, ha HA ha ha ha.” But it’s hard to make governments cooperate.
Ah, but Charlie, how do you define “money”? (This is essentially the point Ian B hit me with recently in another thread, and I didn’t [and still don’t] have a good answer.) It’s not simply one of the “M”s the Fed measures, because of the fractional reserve nature of our banking system. If the banks get conservative in their lending, and instead of lending 10x the deposit base shrink that to 6x, isn’t that some species of “deflation”? After all, there’s only 60% as much purchasing power in the system. But the government can’t control that (at least, not very precisely). I’m looking for an answer here and hope you can provide it!
Laird:
It is the fractional reserve banking that gives rise to the different “Ms” in the first place. Without it, there would be only M0. The fact that there is no clear answer which “M” should be considered as the actual money supply reflects the essentially corrupt nature of the whole system.
The most succinct way to explain this mess would be as follows. Banks inflate M1 (and up) by practicing FRB. But what exactly have they created? Ultimately, they’ve given the actual cash to long-term borrowers through various financial instruments, and they’ve incurred on-demand liabilities towards their customers that they can’t possibly fulfill, basing their solvency on the assumption that the customers won’t withdraw any significant sums for the time being. (Mind you, the issue is not their liquidity, but their actual solvency, since if they start massively selling their long-term instruments to retain liquidity in an all-out bank run, that will depress their prices dramatically and leave them deep in the red.) Obviously, such a system is wildly unstable, and will collapse like a house of cards in an apocalyptic bank run at the slightest hint of trouble. Or rather it would — if it wasn’t for the deposit guarantees by the government, which can simply print enough money to bail out the banks, so its guarantee stabilizes the system for the most of the time.
So basically, what gets inflated into M1 are implicit claims against the government’s printing press. Since the press can crank out infinite amounts of cash at near-zero cost, it’s as good as the physical M0. (The real trouble ensues when FRB-like manipulations are done en masse by entities that don’t enjoy the backing of the printing press, or that enjoy it through the informal “too big to fail” guarantees but get overconfident — a.k.a. “shadow banking.” Mechanisms of this sort are responsible for the catastrophic extent of the present crisis.)
In reality, banks generally don’t hold any more reserves than they have to, so something like this doesn’t happen in practice. After all, even with a 6x multiplier, you’re insolvent without the backing of the printing press, so you might as well go for the 10x and increase the profits. But yes, if the government significantly increased the reserve requirements, there would be deflation. (Things get more complicated when the central bank starts further manipulating things by paying interest on excess reserves, as the U.S. Fed has done recently.)
Overall, the key insight is that M1 (and significant parts of the higher Ms) ultimately boils down to claims against the printing press, so shrinking it would be equivalent to the hypothetical disappearance of a large part of the physical M0 in a system without FRB.
“Friedman believed in — essentially invented — the quantity theory of money…”
Hah! If that’s right then Friedman was barely out of his mother’s womb before he had Von Mises refuting him at length in the first edition of “Theory of Money & Credit”. Come on man, easy on the throttle there…! 🙂
Charlie, you were being ironic, right?:-)
It’s a shame that most libertarians don’t really grasp economics. Even if it’s also true that most economists like to exclude from theory any practical consideration of how money actually works, which arguably makes them doubly irrelevant to libertarian theory. Friedman is always good value though… if you have a taste for period literature.
As you do not explain in what way ‘libertarians’ do not understand economics (and of course libertarianism is not directly about economics but rather liberty), your comment has little value. So please elaborate.
Sorry, Ivan, but I don’t think you’ve adequately anwered the question I posed for Charlie. “After all, even with a 6x multiplier, you’re insolvent without the backing of the printing press, so you might as well go for the 10x and increase the profits.” The problem is that this isn’t happening; banks are pulling in their horns and declining to make many of the loans they would have made a year or two ago. The multiplier is being effectively decreased without (direct) governmental intervention. So why is this not “deflation”?
Laird:
You are right — my answer wasn’t precise, and I was a bit lazy parsing your comment. I was talking about the ordinary “good times,” in which holding excess reserves incurs large opportunity costs for banks so it generally doesn’t happen. When the financial markets are in shambles like they are now, you are totally correct that the reduction in lending and the corresponding fall in multipliers would cause shrinking of higher Ms and thus dramatic deflation. It’s a matter of simple supply and demand. And the dramatic increase in reserves has indeed happened. (This was partly fueled by Fed’s decision to start paying interest on excess reserves last fall. I never managed to understand what piece of macroeconomic cargo-cult science stands behind this particular decision. The excess reserves started going up even before that, though.)
However, in such a situation, the central bank will act to prevent deflation. It will be done the only possible way — basically, by issuing money like crazy, which e.g. the Fed is doing right now. This normally isn’t done by actually printing it, but in virtual form through issuing various Fed liabilities backed by its press. Just look at these graphs, and notice how everything gets smoother and nicer as you go from M0 to M2: M0, M1, MZM, M2.
The problem, of course, is what happens later when the banks (as they hope) fire up the all-out FRB again. Will this mass of new money cause dramatic inflation then? The central bank has many ways to manipulate the money supply and will presumably try to prevent this from happening, but I wouldn’t be at all surprised if the situation spins out of control. We’re in an extremely complicated situation that’s managed by people who are essentially career charlatans and whose supposed grand expertise is very much a naked-emperor situation. At best, they’re capable of pulling a few stunts that can stabilize the situation in the short run, but for anything beyond that, may God help us all.
(I’m talking specifically about the U.S. situation here, since I’m most familiar with it and its statistics are the easiest to find. But the same principles apply to any modern central bank/fiat money/FRB system.)
Thank you, Ivan, that was much more helpful. Issuing securities “in virtual form through issuing various Fed liabilities backed by its press” is a pretty blunt tool, isn’t it? I share your worry. (Although I don’t share your apparent concern over the Fed paying interest on bank reserves. The rate is 10 bp below the Fed Funds rate on regular reserves and less than that on excess reserves. With the Fed Funds “target rate” at less than 25 bp, I just don’t see that’s enough yield to get the banks excited.)
There are a few other denizens of this site who are economically knowledgable. I’d be interested in hearing their thoughts on this, too.
I’m a little thick, but I don’t see why deflation is A Bad Thing. You need deflation to correct bubbles. Deflation in stock prices, housing prices, everything. How can you have a correction without deflation ? You need to be able to deflate wages too, along with commodities.
I don’t see why fighting deflation is imperative.
I think it’s best to let business cycles run their course. It’s the attempts to dampen them that ruins everything – i.e. makes the highs and the lows much higher and much lower.
Deflation of the short-term variety, is not A Bad Thing. Long-term deflation is. Basically, when holding cash earns you positive real interest, you have a reduced incentive to invest in actual capital which can increase actual production, and thus you tend to screw up the economy in the long run.
And while I’m no Friedman scholar, my understanding was that he advocated a slow, constant increase in the effective money supply to balance out productivity increases and leave a little bit left over to err on the side of inflation. In normal times, this involves printing 3%(or so) of the money supply per year. In odd times, like say 1929, when the effective money supply shrank dramatically due to bank actions, more money needs to be added to the system to counteract that shrinkage. Conversely, when bank actions dramatically increase the money supply, government should ease off to keep the total growth down to 3%(or so). This is the sort of massive inflation in question – increase the supply of government money to counteract the decrease in the supply of bank money. Total money growth would (ideally) stay flat, while governmental money growth would move as needed to achieve that goal.
Not necessarily the most practical system, but it makes sense on paper.
Jacob: because it hurts:-)
That’s the thing though: when the government doesn’t tinker with money supply, the bubbles don’t get too big for the correction to take too long and hence to be too painful.
“Long-term deflation is.”
Why ?
If prices go down you can buy more with your money – why is that bad?
You say it would discourage investment. Why ? Let’s say you earn 2% on hoarded cash trhough deflation. You would still be interested to invest in a business that makes 10 %.
Deflation – in this respect is equivalent to an increase in interest rates – any such increase makes it harder for businesses to make a profit. But deflation isn’t something inherently Very Bad.
There seems not to be aby special need to “fight” deflation. There is a need for government to fight inflation, but only because it created it in the first place.
Alisa – why does deflation hurt? Whom does it hurt ?
I thought lower prices were a Good Thing. I like them.
“…why does deflation hurt? Whom does it hurt?”
I’m guessing that’s a genuine request for knowledge…
Deflation is going to hurt debtors and benefit creditors – just consider for a moment the function of borrowing for capital accumulation in economies that have now been on an inflationist monetary policy for a long time (thus rendering the idea of savings as a basis for captial accumulation laughable). It is enormous. What do you think would happen if these economies suddenly switched to deflationist monetary policies?
Consider also the effect of a strengthening currency on exporters – in a country like Taiwan, for example, the contribution that exports (semi-conductors etc) make to GDP is huge. These industries would wince at the prospect of a deflationary policy since they would be forced to sell their goods at lower prices.
“I think it’s best to let business cycles run their course.”
Amen. That means either a return to a gold or some other commodity standard, or…. something more radical.
“Deflation is going to hurt debtors and benefit creditors ”
And ? Why not ?
Inflation hurts creditors and benefits debtors. Is this a Good thing, but the other way around a Bad thing ? Why? (I think creditors are better people than debtors).
Deflation is the mirror image of inflation in EVERY respect. They are both as good or as bad…
Deflation amounts to an increase in interest rates, while inflation is a decrease in same, both in a hidden way.
As to Taiwan’s exports, I’m not too worried about that, they’ll have to deflate wages too, then they’ll be competitive again.
Why is deflation demonized?
“Inflation hurts creditors and benefits debtors. Is this a Good thing, but the other way around a Bad thing? Why? (I think creditors are better people than debtors).”
Of course it’s not a good thing.
Both inflation and deflation – on a large enough scale and in relatively short periods of time (or year or several) – can be disastrous for an entire economy but in different ways. The “ideal” is to prevent the possibility of either occurring on such large scales.
Since you think creditors are better people than debtors, I am curious to know whether you have had the experience of either starting a business yourself or funding somebody else’s start-up.
“As to Taiwan’s exports, I’m not too worried about that, they’ll have to deflate wages too, then they’ll be competitive again.”
You assume an awful lot there!
“Why is deflation demonized?”
Depends who’s doing the demonizing. In the case of the left the answer is that it is because large scale deflation makes the fiscal policies of constitutional governments more difficult to fund – the alternatives are spending cuts (hurrah) or unpopular tax increases (boo – and hence the importance to the left of tarnishing the notion of selfishness). Government is usually by far the largest debtor in any particular economy. That bearded commie Joseph Stiglitz, for example, is always screaming about deflation lest his commie welfare programs get cut.
Jacob:
The only reasonable explanation I’ve ever seen is based on the money illusion. The argument goes, people tend to think about money in absolute terms without properly adjusting for changes in prices, especially when it comes to wages. Thus, in times of deflation, a boss can’t say, “look, people, everything is cheaper now, we’ll have to cut your paychecks or otherwise we’d be giving you all too much of a raise if we kept it the same” without compromising employee morale and loyalty. Wages higher than the market clearing rate, of course, mean unemployment. By the same argument, inflation is good in times of recession, because it surreptitiously cuts wages and allows the labor market to clear more rapidly.
How much truth there is in arguments of this sort, I don’t know. The effects surely exist to some extent, but there’s no way to tell reliably whether they are really significant enough to influence major macroeconomic trends. There are also endless bookshelves of Keynesian and other macroeconomic theories that elaborate on the supposedly harmful effects of deflation by theorizing about numerous more complex mechanisms. Yet, I’ve never managed to make any sense out of it all, and I’m inclined to dismiss it all as ideologically driven pseudoscience.
Of course employers can cut wages – if the unions are not backed by government regulations. People would rather earn less then get fired, it happens all the time. Both options hurt, though, and so gov…sorry, the “independent” central bank comes to the rescue. Jacob, I still don’t see what your real question is.
Alisa:
That depends on the context. In a financial system such as the presently existing one, based on fiat money and fractional-reserve banking, a credible flat-out refusal of the government to tinker with the money supply ever again would cause an apocalyptic meltdown of the whole economy. We’d be lucky if the military managed to maintain discipline, introduce martial law, and prevent the complete breakdown of civilization. I’m not being at all hyperbolic here.
The reason is that the whole system critically depends on the backing of the printing press. All these “multipliers” and nebulous “higher Ms” are nothing but implicit claims against the printing press that multiply like rabbits under the fiat/FRB regime. If a mysterious force from outer space appeared tomorrow and announced that all the government printing presses would now be forever magically blocked from operating by its power, first there would be a cataclysmic all-out bank run in which literally all financial assets except the physical money would lose all value, and then a deflation of several orders of magnitude, since the money supply would be reduced to the physically existing currency. In the U.S., for example, that would mean a few hundred billion dollars left to cover all the countless trillions of outstanding liabilities, both private and public! Assuming an optimistic scenario like martial law in which some semblance of ordered civilization would survive this cataclysm, this would mean that you could buy a mansion for $1,000 as long as you had the physical bills with you — but you’d more likely be busy trying to scrape the nickel or so you’d need to feed your family today.
Alsadius:
I’ve heard this argument many times, but it seems to me like a pure fallacy. It’s probably the easiest to see the following way. If hoarding cash is bad, then a fortiori, hoarding it for a longer time is even worse. Yet, if you hold your cash forever, it’s as if you’ve destroyed it. If it stays forever under your mattress, you might as well have thrown it in the sea or burned it. Yet, how exactly can anyone get hurt if you destroy your own money? On the contrary, when you destroy a certain quantity of money, you make everyone else’s money slightly more valuable by simple supply and demand.
It is not your money itself that does productive work — it is the labor and capital bought with it by the entrepreneur in whose business you invest. If you destroy your money, it merely makes the money of others capable of purchasing more — including the money of those who do choose to invest in productive efforts. If there is an ongoing deflation, this merely means that their profits will be augmented by the increased purchasing power of their money. And if they’re investing in productive industries, the profits will certainly provide additional incentive over what the hoarders reap from deflation.
Thus, I really don’t see how this entire argument is anything but failure to consider the proverbial “that which is unseen.”
When I read stuff like this, it truly sounds to me like an astrologer giving elaborate advice about how I should organize my life and activities according to the pattern of motions of Moon and Saturn. Yes, sure, he can point at a whole bookshelf of literature written by other eminent astrologers that support his methodology — but just like our eminent macroeconomists, he can neither (1) point at any empirical evidence for any success of his theories in the past that would go beyond blind chance and data-torture, nor (2) give any coherent reasons, grounded in more fundamental and agreed-upon scientific insights, for why exactly the mechanisms he elaborates on should even exist in the first place.
As others have said….
Milton Friedman was both the man who said we “can not spend out way out of recessions” and the man who said that if need be the Fed should “throw money from helecopters”.
He held various positions at various times – and the modern Chicago School is split.
I have no doub that some of them (I hope a minority) think Ben Bernanke is fine.
As a “dogmatic Austrian” the words that come to my mind when I here the name Ben Bernanke would get me smited
Of course trying to increase the money supply “in order to keep the price level stable” is what both Ben Strong in the 1920’s (a hero of Milton Friedman’s by the way) and Alan Greenspan tried to do.
Increasing the money supply with this objective of “price stablity” in mind is so wrong (or so many levels) that it is difficult for me to know where to start.
Of course there is an obvious difference between Ben Bernanke and Milton Friedman.
Milton Friedman would never have worked for Barack Obama, and (regardless of what lies he tells himself) that is what Ben Bernanke is doing.
Ivan,
I think you are right, and economics is mostly quackery, especially given the consensus among economist that says: inflate and print, print and inflate, forever. There is no way this can work in the long run, we’ve seen these theories implemented in country after country, always with the same result, see for example Argentina. Still they repeat the mantra and carry it out time and again.
I don’t think, though, that your apocalyptic scenario about the end of civilization is correct. We’ve seen several instances of total break down of the currency (for example – Argentina again, Israel in 1984, etc…) and life went on. All people lost 50% or 80% of their assets and became poorer, but civilization didn’t break down. After a total shock like this, life picks up it’s pieces and goes on. In Argentina, for example, all people who hoarded money outside (anyone who had money), brought it back after the shock, and started buying up assets, dirt cheap. They reckoned there wouldn’t be another confiscation within a couple of years and they could make some money in the meantime.
I think, in the current crisis, government should have stayed out, and let the economy sort out things and clear the bubble. There is a welfare safety net in place, which would have prevented large scale social unrest. People would not have gone hungry. Government could have printed money, but only to finance the welfare safety net, i.e. it could have helped people in distress, on a personal basis, there was no need to rescue banks and car-makers or to “stimulate” the economy.
To the editors:
I propose to open a new thread to discuss: is the crisis over ?
“A slow and still-fragile recovery is taking hold across the country” – says the FED.
I think their self-congratulatory study isn’t very credible.
Paul Marks:
Well, let the man speak for himself instead:
http://www.youtube.com/watch?v=HQ79Pt2GNJo
On second thought, I think I was insulting astrologers when I compared these people with them. If our civilization survives for a few more centuries, I’m sure that some day 20th/21st century macroeconomics will feature prominently in the historical catalog of mass delusions and frauds that wielded vast academic authority and intellectual respectability in their time. Honestly, I think von Däniken’s theories will be remembered as more intellectually sound.
Jacob:
Well, just look at that video linked above to see a representative sample of Bernanke’s prognostics in retrospect. These people have basically reached the same level of credibility as the official economic statistics of the Soviet Union.
Oh, and you might find this entertaining if you ever felt bad for mixing up all these abstruse “M” numbers. A few weeks ago, Bernanke got grilled by Ron Paul in Congress, and at one point, he claimed that — in his words — “the measures of money in circulation like M1 and M2 are not growing quickly.” Now just take a look at the graph of M1 I linked to above!
Jacob:
The hypothetical scenario I was describing would be much worse than that. (And that’s not even taking into account that an Argentine-style collapse of the U.S. would have far more severe consequences for the whole world, for obvious reasons.)
Thing is, the whole fiat/FRB financial system is critically dependent on manipulations with the printing press. In good times, it works because of implicit expectations of such manipulations. In bad times, the extent of the crisis depends on how well (or badly) these manipulations are executed. It’s completely illusory to expect that the market will just sort itself out. It won’t, because there is no free market in the first place. In reality, each single transaction anyone does in our economy that involves money is shrouded — directly or indirectly, knowingly or unknowingly — in implicit expectations from the government.
Naively applying free market principles in this mess would be like advocating that the U.S. Army auction off its nuclear weapons on the free market. The analogy is not perfect, but it is true that the existing financial system is one giant pile of weapons of mass destruction that require government maintenance lest they blow up. In times of crisis, this maintenance requires various bailouts and monetary policy stunts that, done badly, can deepen and prolong recessions and depressions. But the complete lack of such maintenance would indeed vaporize the entire system, and with it the whole economy, to the extent that makes Argentina look like a joke.
This is not an indictment of the free market by any means, because free market certainly didn’t get us here. However, it simply must be recognized that long-lasting massive pathological government interference in the economy can result in bastardized pseudo-capitalist systems in which sudden and partial application of free market principles will lead to an even greater disaster. When it comes to money and finance, there is simply no free market in existence that could be logically separated from the government.
Any realistic move towards a free market in finance would have to first recognize the true extent of government control and liabilities and start from there. Trouble is, this won’t happen exactly because we like to fool ourselves that the modern financial institutions are perhaps overregulated, but still capitalist — rather than the chartered for-profit quangos that they truly are. You can’t make free market out of Gosplan by trying to rewrite some of its parts. Chances are you’ll just make a worse disaster out of it. I remember reading somewhere that moving from what we have to an actual free market financial system would be a project comparable in magnitude to the Eastern European transition from socialism to capitalism, and I definitely agree with it.
…moving from what we have to an actual free market financial system would be a project comparable in magnitude to the Eastern European transition from socialism to capitalism…
Well, even that happened and it was not the end of the world or mass unrest and turmoil. Like the ex communist countries shed communism, the US (and UK) could shed the current statist financial system and start a new one. There would be enormous losses, but no break-down of civilization. The current crisis was a good point to start, along the lines I outlined (no bailout of banks). The financial system would have collapsed totally, but that is what it is going to do anyway, sometime later, there is no escaping that.
There would have been a new start. It will happen some way or other, sooner or later, it is inevitable. We cannot predict when it will happen anymore than we could predict the collapse of communism.
I think we could start a thread on “what would have happened without the bailout of banks?”. Related see Dale Amon’s post “Reset”.
Jacob:
I think you slightly misunderstand my point. In the post-communist transition from socialism to capitalism, people had a fairly accurate understanding of how a socialist planned economy is organized and what it takes to transform it into something resembling the Western capitalist economies. Of course, the actual job was done with varying degrees of practical success in different places, depending on all sorts of political, cultural, and other factors, but at least it was pretty clear what had to be done and what the final result was supposed to be.
In case of the present financial system, however, we first have to understand its nature, about which people are massively fooling themselves. Your typical free-marketer believes that finance, on the whole, functions as a part of the market economy — overregulated and corrupted by interventionism, to be sure, but still fundamentally capitalist and capable of adjusting if the umbilical cord is simply cut off. My main point is that this view is fatally wrong. The first step must be to realistically recognize what the actual de facto assets and liabilities of the government are, and treat them as such. This necessarily means that any realistic move towards fixing the situation will have to appear at first as a massive government intervention, not as deregulation, because many institutions that people delude themselves into treating as private and capitalist are in fact just surreptitious government operations.
Look at it this way. If you want to turn a socialist economy into a market one, you first have to accurately consolidate everything onto the government’s balance sheet, and only then start selling things off, adjusting the government assets and liabilities in the process, and enforcing the property, contract, and other rights for the newborn private sector without further government meddling into it. If instead you start tinkering with the Gosplan and partly reworking it from the inside under a deluded belief that you already have a market economy that just needs some deregulation and reform here and there, you may well end up with a botched Gosplan that will produce a cataclysmic disaster instead of just the regular socialist misery it’s been producing so far. Trying to simply cut off the existing financial system’s umbilical cord to the printing press and implicit promises of bailouts would be an approximate equivalent of this.
I think you are wrong on the transition from communism to capitalism. It was NOT a planned and orderly procedure. It was total chaos, the first system collapsed overnight and dissapeared, a new system emerged out of it’s ashes, gradually.
The same would happen (will happen) to the finacial sector in the West.
cataclysmic disaster instead of just the regular socialist misery it’s been producing so far.
I can’t see the big difference between “socialist misery” and “cataclysmic disaster”.
As I said before, suppose the gov just keeps the welfare net running, presumably by using the printing press for it. The financial sector closes down completely, and starts anew, without gov “guidance”.
It could work, not without causing severe losses and dislocations, but it would work.
Of course, you need first to reach the consensus that government needs to stay out. Else – it’s just an “improved” Gosplan.
Here’s a bit of raw meat for the discussion. The Audit the Fed Bill has a majority of co-sponsors in the House and a fairly large number in the Senate. I just received this news:
“Thanks to the thousands of Campaign for Liberty members who have tirelessly dedicated themselves to spreading the word, gathering petitions, and putting continuous pressure on Congress by calling, writing, and faxing, Congressman Ron Paul informed C4L today that House Financial Services Committee Chairman Barney Frank has officially agreed to hold hearings on HR 1207! The hearings are tentatively scheduled for Friday, September 25 at
9:00 am.”
So, what do you think the impact of very publicly shining a really good strong flashlight at what the Fed has being doing with the money supply will be?
Ivan you are a naughty man.
My asthma is partly stress related – which means when I fly into a rage I can be a danger to myself (via an attack) as well as to other people.
Showing me B.B. speaking was almost bound to make me fly into a rage.
On economics – read real economics (say Henry Hazlitt’s “Economics in One Lesson”) before you dismiss it.
Of course I would have you reading Human Action if I could.
Dale is correct – the Audit the Fed movement is attracting all sort of people. In the Senate it attracts people as diverse as Senator De Mint and Senator Bernie B. (socialist from Vermont).
How many of the people in Congress who say they want to shine a light on the Fed (and the corporations it lends money on easy terms to – by buying up their debt) really mean it – I do not know.
But let us hope for the best – now downstairs to watch some more of Glenn Beck’s special broadcast.