Diuretic
Permanently confused
I thought as much. It's about ideology.
This is in the TIME article from 1969
THE NEW ATTACK ON KEYNESIAN ECONOMICS - TIME
It looks very much as if Friedman's ideas began to take hold in the late 1960s and possibly early 1970s. Somehow his ideology was taken seriously and so the movement to denounce Keynesianism began. Once Keynesianism was out of the way then the Chicago mob, sorry "school", could take over. There you are - and this is the result of it.
Robert Skidelsky comments on this in some book reviews on his website. Here's an extract
Robert Skidelsky - Book Review: On the threshold - of what?
Out with Orthodoxy. Friedman's critics hold that his theory is too simplistic to guide complex economies. They believe that by calling for an inflexible system of monetary growth, he would deprive policymakers of their discretionary powers to adjust money to meet changing conditions. But even such an opponent as M.I.T.'s Paul Samuelson pays Friedman a barbed compliment. "Strong ideology drives out the weak," he says, paraphrasing Gresham's law, "and Friedman has the strongest ideology around."
This is in the TIME article from 1969
THE NEW ATTACK ON KEYNESIAN ECONOMICS - TIME
It looks very much as if Friedman's ideas began to take hold in the late 1960s and possibly early 1970s. Somehow his ideology was taken seriously and so the movement to denounce Keynesianism began. Once Keynesianism was out of the way then the Chicago mob, sorry "school", could take over. There you are - and this is the result of it.
Robert Skidelsky comments on this in some book reviews on his website. Here's an extract
.Morris, an American lawyer and investment banker, seems to have anticipated the present credit crunch for some years. His book, The Trillion Dollar Meltdown, is the best account I have read of its genesis, written before the crunch had become global. In part, it is the story of financial innovation carried to self–destructive excess. At the same time, Morris unwittingly exposes the flaw in the financial system: it was too complicated for anyone but a professional investor to understand. This is also a problem with his book. Though it is excellently written, and full of arresting thoughts and phrases ("Intellectuals are reliable lagging indicators, near–infallible guides to what used to be true"), the world of financial legerdemain which it reveals is simply too opaque for the averagely well–educated reader to understand.
The credit crunch, originating in the American subprime mortgage crisis of 2007 and then spreading out to the global banking system, had its origins in a gigantic credit bubble. How did this arise? Morris identifies three enabling conditions. The first was the coming to power of the Chicago School of economists, with its deregulating philosophy. A key deregulating move was the repeal in 1999 of the Glass–Steagall Act of 1933, which aimed to separate retail from investment banking. "While Keynesians prayed to the idol of the quasi–omniscient technocrat, the Friedmanite religion enshrined the untrammelled workings of free market capitalism". The second condition was what he calls the "Greenspan put". Denouncing a "new paradigm of active credit management", Alan Greenspan, Chairman of the Federal Reserve from 1987 to 2006, held the Federal funds rate down to 1 per cent from 2003 to 2005 as the economy went into overdrive. His message to the market was: no matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles. The third condition was what Morris calls a "tsunami of dollars" – the result of America’s huge trade deficits, financed largely by East Asia. It was Chinese savings invested in US Treasuries which enabled Greenspan to keep the interest rate at 1 per cent for thirty months. "America’s housing and debt binge was made in China.”
It was in this regime of deregulated markets, cheap money and Asian–financed consumption demand that leveraged (debt–dependent) finance took off. The stages in the rake’s progress were the junk bond explosion of the 1980s, the development of mortgage–backed securities or "pass throughs", the creation of portfolio insurance to "manage" the extra risk, and the sprouting of hedge funds to buy up the riskiest debt and sell it to wealthy speculators. Credit agencies fed the bubble by giving bonds containing "toxic waste" triple–A ratings. Morris does not decry the value of all this financial engineering. But the new investment instruments, while hugely enlarging credit facilities by spreading risk, suffered from dangerous flaws only revealed in moments of stress. A small number of institutions – global banks, investment banks, hedge funds – built an unstable tower of debt on a tiny base of real assets. So long as a cheap–money regime forestalled defaults, the tower might wobble but stay erect. A rise in interest rates from 2005 onwards brought it crashing down. Morris comments tartly: "Very big, very complex, very opaque structures built on extremely rickety foundations are a recipe for collapse". His forecast of a "true shock–and–awe surge of asset write downs through most of 2008" proved to be all too accurate.
What needs to be done? The key requirement is to restore effective oversight of the financial services industry. Morris makes the excellent point that banks make high profits by taking large risks, but their losses are partly socialized. Banks cannot be both public utilities and risk–taking institutions. If the taxpayer is to be liable for losses, through deposit insurance or bail–outs, then risk–taking by banks must be severely limited. This points towards restoring some version of the old Glass–Steagall Act
Robert Skidelsky - Book Review: On the threshold - of what?