Monday, July 11, 2011

Great Recession cooks Friedman and Keynes: Two great theories, neither up to today’s task

Some of the biggest names in economics gathered at the University of Chicago in November 2002 for a 90th birthday celebration of the brightest star of them all. Milton Friedman, a Nobel laureate and seminal thinker, was returning to the university where he had made his name.

One of the speakers was a Federal Reserve governor, Ben S. Bernanke. In a scholarly address, he endorsed Friedman’s view that the Fed was instrumental in causing the Great Depression with a tight monetary policy that turned a contraction into something much, much worse.

In concluding, he addressed Friedman and Anna Schwartz, co-authors of the magisterial “A Monetary History of the United States,” in which that thesis originally appeared. “I would like to say to Milton and Anna…regarding the Great Depression: You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again,” Bernanke said.

He kept his word. When the financial crisis and recession descended six years later, Bernanke, now the Fed chairman, followed Friedman’s monetarist playbook to a “T”: He flooded the system with liquidity and stuffed banks full of reserves in a series of desperate efforts to stanch the new Great Contraction.

“Bernanke is following a monetarist depression-prevention model laid out by Nobel laureate and libertarian patron saint Milton Friedman,” the libertarian magazine Reason wrote in 2009. “Trillions of dollars have been staked on the insights of ‘monetarism’… A series of Fed policies many libertarians find repugnant are being championed by a man claiming to take his chief inspiration from the most influential libertarian economist of the 20th century." (read more)