Is the FED Friedmanian? | Forex Factory

Options

Permalinks
Print Thread

Is the FED Friedmanian?

  • #1
  • First Post: Feb 8, 2007 3:25pm Feb 8, 2007 3:25pm
I got this commentary off a very bearish USD blog...

Quote
Alan Greenspan -- and to a considerable extent his replacement Bernard Bernecke -- are "Milton Friedman School" boys. That's not just about being "Free Marketeers." Friedmanism includes policies to deal with economic crises just like every other economic school of models. But that also means that Friedman's remedies are still along free market theory lines. The good Doctor may have championed FDR's "modified" Keynesianism (deficit-spending 'bottom-up' economic growth) during FDR's Administration but the blood had stopped going to Milton's head by the early 1960s. [When Greenspan went to Friedman's School in Chicago.] Friedman wound up teaching that past economic crises in America laid at the feet of the -- get this -- the failure of America's central banks (after 1915 this meant the Fed) to keep supplying cheap dollars.

Basically, what this means is that during economic panics banks stop converting depositor's accounts into dollars. This seems paradoxical but in the long run banks hang on to their money and thus we know at least where the money is. REALLY! I'm not kidding. Friedman laid much of the blame for the reaction to the Market crash of 1929 to banks converting their assets into dollars -- then failing -- causing people to hoard money because they no longer trusted the banks. The result was a net contraction of the money supply and what money was still left to loan out was done so at high interest rates.
Bears dine on beef
  • #2
  • Feb 8, 2007 5:14pm Feb 8, 2007 5:14pm
Milton Friedman was the most Intelligent/Sane/Respected* Economist of the last 50 years.

*At least by anyone who knows anything about Economics.
  • #3
  • Feb 8, 2007 6:40pm Feb 8, 2007 6:40pm
The short answer is no.

The core of Freidman’s work was that economic policy could be managed through the use of strict money supply controls. Leading up to the early 1980's economists from around the world were beating the money supply drum as a solution to the US inflation problem and as the panacea of future economic stability. While the Friedman solution did in fact kill off inflation, it failed miserably as a policy management tool.

The crux of the issue was that, all things being equal, the reduction in the size of the money supply simply causes the velocity of exchange to increase. This velocity of exchange did nothing to limit the growth of the money supply because there was no reduction in the demand for money. Because the actual money supply could not be controlled, Freidman’s system dictated that money would have to be removed until there was none left. We can thank our shining stars that Paul Volker had the sense to abandon Freidman when he did or we would have suffered the same fate as Great Britton did later in that decade.

The truth was that only the explosion in interest rates (which perpetual reductions in the money supply engendered) contracted the demand for capital enough to bring inflation under control. Today the fed utilizes optimal interest rate theory (which is an offshoot of Keynesian principles) to manage the demand for capital and the resultant inflation it produces.

Sadly, Milton Freidman was a failure. He had his day at the Fed between 1979 and 1983 and he blew it. Since Great Britton abandoned his policies (following the devastating recession they caused) there is no government on earth that has or will implement the flawed ideas he expressed.

I'm not sure what the blog you site is actually arguing. It is plainly evident to anyone who understands Freidman that even though Dr Greenspan attended Friedman’s school, he does not share Freidman’s ideas about monetary policy. Deficit spending and bottom up economic growth are fiscal strategies, not monetary policies so it doesn't really matter what the chairman’s opinions are on the matter. And finally, it WAS the fault of the central bank that the 1929 recession lasted as long as it did. Had they lowered interest rates enough to stimulate demand, it would have been much shorter in duration and less deep.
  • #4
  • Feb 8, 2007 8:30pm Feb 8, 2007 8:30pm
"Sadly, Milton Freidman was a failure".

I would love to be a failure like him. Nobel Laureate, Author, Columnist, Advisor to numerous Presidents and the leader of a whole new thinking in Economics.

He might not be your guy, but he was the furthest thing away from failure. Anyway that should be left to the people who write the history books.
  • #5
  • Feb 8, 2007 9:14pm Feb 8, 2007 9:14pm
Quoting SunTrader
"Sadly, Milton Freidman was a failure".

I would love to be a failure like him. Nobel Laureate, Author, Columnist, Advisor to numerous Presidents and the leader of a whole new thinking in Economics.

He might not be your guy, but he was the furthest thing away from failure. Anyway that should be left to the people who write the history books.
Fair enough. I would mearly point out that his nobel prize, books and column, and the advice provided to the presidents were all the byproduct of a theory that turned out to be a failure in practice. I suppose that might not make HIM a failure, but his theory certainly was.
  • #6
  • Feb 8, 2007 10:26pm Feb 8, 2007 10:26pm
You forgot to put IMO humbly or otherwise.

I'd suggest you do a little more reading than just the people who criticize Friedman. A good starting point might be Wikipedia. But I can see your opinion is already made and so is mine. But that is what it is - an opinion.
  • #7
  • Edited Feb 9, 2007 12:14am Feb 8, 2007 10:58pm | Edited Feb 9, 2007 12:14am
Quoting SunTrader
You forgot to put IMO humbly or otherwise.

I'd suggest you do a little more reading than just the people who criticize Friedman. A good starting point might be Wikipedia. But I can see your opinion is already made and so is mine. But that is what it is - an opinion.
Well, I've read Keynes "General Theory of Employment, Interest, and Money" as well as Friedman’s "Capitalism and Freedom". The events as I described them came from the minutes at the FOMC during the time when Friedman’s policies were in effect. But your right, defining Freidman or his policies as a failure can't be done outside the context of opinion.
  • #8
  • Feb 8, 2007 11:44pm Feb 8, 2007 11:44pm
SunT, I do not know you.
DS I only know you from reading numerous posts you have provided.

Just a word of caution {nea} tact guys, looks like Flames are around the bend.

It sounds like you are Both adhering to your beliefs and if you require to arrive at a resolve, perhaps it could happen in another thread.

ST. No slight intended but I do beleive DS knows his stuff.

DS. No slight intended but I do beleive Definative posting can be missread as arrogance
  • #9
  • Feb 9, 2007 6:27am Feb 9, 2007 6:27am
Quoting Darkstar
Well, I've read Keynes "General Theory of Employment, Interest, and Money" as well as Friedman’s "Capitalism and Freedom". The events as I described them came from the minutes at the FOMC during the time when Friedman’s policies were in effect. But your right, defining Freidman or his policies as a failure can't be done outside the context of opinion.
Are you suggesting that Friedman is a fraud? He's only been called a 'public intellectual' about one thousand times.

Quote
We can thank our shining stars that Paul Volker had the sense to abandon Friedman when he did or we would have suffered the same fate as Great Britain did later in that decade.
Bernanke is known as 'Helicopter Ben'. Is it just a coincidence?
Bears dine on beef
  • #10
  • Last Post: Feb 9, 2007 8:35am Feb 9, 2007 8:35am
Quoting Sysonby
Are you suggesting that Friedman is a fraud? He's only been called a 'public intellectual' about one thousand times.

Bernanke is known as 'Helicopter Ben'. Is it just a coincidence?
He certainly isn't a fraud in any sense. Until the day he died he had a deep conviction regarding his economic theories. I was pointing out that there was a time when the Monetarist principles were highly regarded at the Fed, but it has passed.

The "Helicopter Ben" title is severely overdone. The title comes from a speech he wrote about potential solutions to a Japanese style deflationary event (liquidity trap) in the US. As you may have noticed the BOJ has been trying for MANY years now to stimulate the Japanese economy enough to drag it out of the deflationary spiral that resulted from the Asian financial collapse. Even with interest rates at 0% (free money to anyone who can qualify) the stimulation has been tepid at best.

The liquidity trap is a legitimate economic policy issue. It is rare that it occurs, but when it does the normal monetary policy mechanisms simply fail to induce the desired result. Aside from just suffering with the negative consequences as long as they may exist, there really is no other solution to the problem. In short, the only cure for deflation is inflation and if 0% interest rates can't stimulate inflation, what can?

Making the leap from deflationary solution provider to inflation lover is a bit misguided (IMO ). Friedman may have been the first to use the helicopter example, but that doesn't make anyone that happens to cite it a Friedmanian. Do some research on the problem he was discussing (liquidity trap) and see if you can come up with an alternative. You might be able to win a Nobel Prize yourself.
0 traders viewing now