Sunday, February 7, 2010

In defense of Milton Friedman

I have been seeing growing attacks by conservatives on Milton Friedman. Some even have gone so far as to call him a Keynesian. This is the ultimate insult. Since Friedman is not here to defend him self I will do it for him. Friedman is being attacked because in his Monetary History of the United States, he chided the Fed for allowing the money supply to collapse by one-third. Friedman contended that if the Fed had supplied liquidity to the banking system, we would have still had a recession in 1933 but not a depression. Supplying liquidity would have prevented most of the banks from failing during that period as well. Fed chairman Ben Bernanke is a student of the depression and has supplied massive amounts of liquidity into the economy. Some writers take this as learning from Friedman. However, Bernanke is no student of Friedman. Recall that one of his sternest critics has been Friedman's co-author, Anna Schwartz who has said that Bernanke is not up to the task. The difference is the Friedman would have provided liquidity to the banks that were having liquidity drains. He would not have endorsed this Fed's commercial paper facility, TALF facility, bail outs of AIG and the investment bankers. Lastly only a fool would write that Friedman is a Keynesian. A Keynesian believes that you can spend your way out of a recession by having the government spend more and more. Friedman said that if you don't expand the money supply then all the government spending will not affect positively GDP. Friedman is no Keynesian.

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