Ron Paul, like Schwartz and Friedman, is a libertarian, but he embraces the “Austrian” school of economic theory that rejects the very concept of the Federal Reserve. He is critical of what he sees as the Fed’s ongoing monetarism. “In essence,” Paul says in a phone interview, “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.”
Does Friedman’s enthusiasm for inflating the monetary supply in crises flout libertarianism? “Absolutely,” Paul answers. “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 Fed to grow the money supply at 3 percent annually, presumably forever. “Yet at the same time, Friedman said the Depression could have 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.”
With Bernanke at the helm, the Federal Reserve has unleashed monetary expansion, the very definition of inflation—and Friedman’s blueprint for averting economic depression. According to Bernanke, Obama, and scores of economists, it’s working. “Prospects for a return to growth in the near term appear good,” Bernanke predicted in August.
But with lenders foreclosing on 358,000 homes that month, the commercial real estate market only beginning to collapse, a 20 percent annual fall in railroad freight, and unemployment projected to crack double digits any minute now, the much-vaunted recovery is no given. And if it isn’t working, we might still relapse into recession, or worse.
The total cost of the Fed’s monetarist-inspired program is mysterious. Paul, whose bill to audit the Fed is now co-sponsored by more than half of the House of Representatives, declares: “We don’t know for sure how much the Fed has spent—I’ve heard it could be $6 trillion. But we have no knowledge of what the Fed’s doing. All these dealings are very secret.” A Reuters estimate in late September pegged the Fed’s balance sheet around $2.1 trillion, with $111 billion doled out to banks every day through the Fed’s overnight discount window. Bloomberg News has sued the Federal Reserve for full disclosure, and we may soon find out the exact number. Manhattan Chief U.S. District Judge Loretta Preska has ordered the Federal Reserve to open its books, though the bank has filed an appeal.
Friedman and Schwartz, those champions of low inflation, have helped inspire the greatest monetary expansion in Federal Reserve history, a program of limitless market interventions and tireless money printing whose end game is likely to be a return to the bad old days of inflation that they fought for so long. For two libertarian champions of free markets and limited government, this unintended legacy has the ring of a world-historic irony.
Penn Bullock (penneth@gmail.com) is a freelance writer for Village Voice Media. He lives in Florida.
Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.
anon|11.17.09 @ 7:56AM|#
Friedman was one of the better mainstream economists from a free market perspective, but he was still wrong on the Depression. Too bad Bernanke didn't take his inspiration from Hayek and Mises, or we may not have even gotten into this mess.
HAC|11.17.09 @ 8:24AM|#
yep.. problem with monetarists.. their capital theory is as bad as keynesians'... (see link)
Xeones|11.17.09 @ 8:29AM|#
PROUD FATHER OF GLOBAL MISERY
ron|11.17.09 @ 8:29AM|#
It's easy to confuse Chicago with Keynes.. 80% of their methodology is shared.
The key is fractional reserve banking and it's central banking enablers at the Fed.
Friedman was a good guy (well, except for the witholding tax peccadillo) but as long as he was inconsistent..."price controls are bad.. but not for the price of money"... he helped the central planners more than freedom..
robc|11.17.09 @ 9:34AM|#
ron,
He was young and stupid at the time of the withholding tax error. He admitted this later on. Dont see why people hold that against him instead of his real problems (which you also mentioned).
Pingback| 11.17.09 @ 10:08AM
Loans For Bad Credit - Student who fell from roof had gone to smoke - Milwaukee Journ links to this page. Here’s an excerpt:
|11.17.09 @ 10:15AM|#
Young, stupid and helping expand the government is no way to go through life.
|11.17.09 @ 10:24AM|#
So funny to listen to the fed now. "The output gap is high so inflation is not a threat." I hope they keep interest rates at zero for another year as CRB doubles, then triples....and keep repeating the crap about the output gap. Smart people don't want to hold dollars when they know the fed has to try and inflate away trillions in bad debt and pension obligations.
What is more politically feasible,
1)Obama gives a big speach tomorrow telling all the government workers that there is really no way that there pension defined benefits will be honored or
2)the Fed will inflate the shit out of the dollar while all the illiterate state workers get the wool pulled over their eyes by the great wizard. The smarter 5% makes lots of money speculating in commodities and the dumber 95% is still as dumb and poor as ever. This is evolution at work.
ray|11.17.09 @ 11:02AM|#
all the "output gap" talk is meaningless... more money + fewer goods = higher prices (ceteris paribus)... all that cash has to go somewhere... and it will.
ray|11.17.09 @ 11:04AM|#
..but don't ask me where. If I knew for sure I'd be getting a mortgage to buy rice/oil/gold/ammo/chinese stock...
since I don't know, I'm just buying gold, but only with money I can spare (no leverage..)
|11.17.09 @ 2:09PM|#
Why not borrow?
Pingback| 11.17.09 @ 10:40AM
Twitter Trackbacks for Bernanke’s Philosopher - Reason Magazine [reason.com] on Tops links to this page. Here’s an excerpt:
|11.17.09 @ 11:15AM|#
While it is tempting to use leverage, the bad guys hold the strings to that and they are not afraid to shake all the leveraged folks out when it would most help their side....or that is just how it seems. Use a balanced and reason approach witha healthy fear of leverage and fraud...pretty sure those ETF's will end up fucking people over in the end.
|11.17.09 @ 11:19AM|#
"all the "output gap" talk is meaningless... " it also is implying that goods and production is homogeneous...but in reality it is not...it takes time to switch over our capital base from producing condominiums to producing....uh...well it is easy to produce nothing(see present)...but it is kinda hard for unemployed mortgage brokers to make super conductors that haven't been invented yet.
andy|11.18.09 @ 5:59AM|#
exactly... capital goods are heterogenous..
Kroneborge|11.17.09 @ 11:48AM|#
Infaltion isn't much of a concern as long as the velocity of money is still decreasing. Moreover, the velocity probably won't return to what it did for quite a while due to less financial innovation etc.
As far as the crises goes, there is still a lot of pain to go through, the question is whether it's better all at once, or spread out a bit.
I think the main concern is that if they picked all at once, it would have gotten out of control.
For example, at the hight of the crises, international trade was having a hard time getting letters of credit. If that had shut down, we could have had a melt down that would have made the great depression look like a walk in the park.
roy|11.18.09 @ 6:02AM|#
V is just an imaginary variable to balance the equation...
MV = PT
you can actually try to measure empirically M, P and T. V? They just make it up. It's 100% theory.
|11.17.09 @ 1:46PM|#
"I think the main concern is that if they picked all at once, it would have gotten out of control. "
Kroneborge, I think it is more complicated than that. The "spread it out" option entails increasing interventionism...increasing power of a centralised power over the individual. This always leads to a crappier situation in the long run. Yes Keynes and Greenspan may be dead in the long run, but we are gonna have to live with it. I'm just trying to be on the right side of the Fed's whipsaw attacks when they next decide to jerk us around.
|11.17.09 @ 1:51PM|#
If they leave rates at zero for a long time as they are promising then inflation will pick up. Your predictions on money velocity are worthless in the face of extended expansionary monetary policies. Smart people(cnetral banks, GS traders, hedge funds etc) will be getting their hands on the cheap money and betting on commodities regardless of how quickly joe-sixpack spends his paycheck each week.
|11.17.09 @ 3:30PM|#
If you read anything of Bernanke's papers on credit view models, one would argue that the stated goal is, at least in the short term, to have higher-than-normal inflation, ultimately resulting in low (if not negative) real interest rates for lending and using that amount of new loan capital to resuscitate the goods market with minimal long-term harm.
That being said, I'd break with Bernanke's model in so much as that, while the financial panic ultimately resulted in a supply shock to credit markets, the inevitable government regulation over banks that will follow in its wake is likely to cause much of that shock to become permanent, establishing a new lower equilibrium in economic output. If that is the case, the policy goal may be to keep inflation in check so as to not depress the labor market as well...
|11.17.09 @ 4:14PM|#
In his book "Inflation Targeting", Bernanke says that a targeted inflation of 5% or 7% may be ok!! He doesn’t want to "pass judgment" on this until more econometric studies have been done.
|11.17.09 @ 4:16PM|#
here about all the 400 oz gold bars that are filled with Tungsten?
http://beforeitsnews.com/story/0000000000000499
I'd donate to $50 to Reason if they do a interview with this Ron Kirby guy on the fake gold bars he is claiming are sitting in a lot of ETFs. You don't even have to make it a friendly interview, just investigate it.
Pingback| 11.17.09 @ 4:38PM
Bernanke's Philosopher - Reason Magazine PV online links to this page. Here’s an excerpt:
economist|11.17.09 @ 10:37PM|#
My own views on economics are a somewhat odd mix of monetarism and Austrian theory. The Austrians are correct, namely, about the effects of artificially expanding credit (through fractional reserve banking and expanding the money base) in sewing the seeds of the business cycle. However, Friedman was correct that a slow, consistent expansion of the money supply is necessary to avoid constraining economic growth (as excessive deflation tends to disincentivize investment). I think his ideas have failed in practice because he more or less ignored the Austrians' insights on the effects of credit expansion by the central bank (although it should be noted that Friedman saw central bank policy as a "second-best" solution for expanding the money supply.
Pingback| 11.18.09 @ 6:27AM
Recomendaciones « intelib links to this page. Here’s an excerpt:
|11.18.09 @ 11:23AM|#
economist,
Your views are well thought out, but I think there is one presumption you make that is very important.
"as excessive deflation tends to disincentivize investment"
When you say this you are making the presumption that "more investment" is always the "right" thing. I find this odd. While it is true that you need investment in order to have productivity gains later on, you must accept the idea that not all "investments" are equal right?
(investments in "security" say ammunition and gasoline for tanks to invade desert countries) != (new advanced bread factories)
Just as a thought experiment, lets assume there is a world where a sceret cabal of satanist worshipping death cultist have gained control of all the central banks, many leading media outlets and many infleuntial policy think tanks(just a thought experiment) they intend to slowly trick the masses into accepting a central governing power with greater authority so that they can basically create a prison planet where most of the population are brave new world type servants. They plan to get to this new world by making fabian socialist promises(free health care, free education k-college, gauranteed retirement plans for all, right to housing, right to food etc.) However as each new power over the individual is given to the govenment the economy gets weaker and weaker...smart capitalist who understand what created their past prosperity decide it is best not to invest in things the governrment can confiscate, but instead hoard durable assets and hide their wealth or buy political infleunce to protect their small domains...economist see the data flows, investment in real productive assets is falling! the decline in prosperity "must be due to less investment!", they claim. "the free-market has failed", they think "we need to incentivize greater investment"...all the mainstream economist agree and so new programs are created...
Do you think that narrowly focusing on increasing investment will fix things in this scenario?
Ben not Bernanke|11.20.09 @ 9:49AM|#
No one except for the last statement talk about the real problem with all of this. Government largess is the main problem. I believe that we could debate either Friedman or the Austrian school if the govs around the world were not sending the markets the wrong signals. We need to control government first to see which theory will create the most growth. Till then it is going to be a rough road. Gabe is exactly right and all of the minds here should spend their time figuring out how to stop the madness.
|11.24.09 @ 12:41PM|#
as excessive deflation tends to disincentivize investment
You have it backward. Investment will be optimized if the interest rates reflect the true cost of risk/capital. Fiat currency is not needed for this process. Price deflation and inflation can occur naturally but they aren't in themselves bad things and they are self correcting. The evils of deflation are largely mythical.. or rather deflation is indeed evil to people who earn their wealth via first use of currency.
The industrial revolution happened during a period (and was arguably causal to) a period of prolonged mild deflation. Goods prices however dropped faster than wages.. so it was not a bad time at all for labor.
As efficiency goes up more is produced with the same raw material and labor.
This isn't a bad thing and need not be compensated for with more currency.
Pingback| 12.29.09 @ 10:40PM
California Conservatives Destroy Tea Party - Page 2 - INGunOwners links to this page. Here’s an excerpt:
Pingback| 1.25.10 @ 9:57PM
“I drank a fifth of vodka, you dare me to drive?” -Benjamin Shalom Bernanke « Shadow links to this page. Here’s an excerpt:
|3.13.10 @ 7:02PM|#
I love all you guys attacking Bernanke and monetary expansion.
I have one question. During the Great Depression the central bank allowed currency to deflate and, though they eventually cut interest rates, periodically raised interest rates in order to stem the flight of gold from the country. Hmmm, allow deflation and try ad make money more sound by holding onto gold reserves.
Which view of monetary policy does this sound like? Not the monetarist view obviously.
How did that all work out?
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I have one question. During the Great Depression the central bank allowed currency to deflate and, though they eventually cut interest rates, periodically raised interest rates in order to stem the flight of gold from the country. Hmmm, allow deflation and try ad make money more sound by holding onto gold reserves. -John from Stand Mixer
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