- Sep 29, 2005
- Reaction score
- Surfing the Oceans of Liquidity
Fed Bashers: Take A Lesson from Milton FriedmanFrom the 1960s through his death in 2006, the dominant intellectual figure in Republican economic policy was University of Chicago economist Milton Friedman. He thought that the gold standard was nuts and that the Feds greatest failure was that it didnt provide enough money to the economy during the Great Depression. While we dont know what Friedman would be saying today, there is reason to believe that his views would be the opposite of Paul, Perry and many other Republicans.
We know this because Friedman commented often on Japans stagnation in the 1990s, that was very similar to the U.S. situation now. In a December 17, 1997, article in the Wall Street Journal, he gave this prescription for Japans problem:
The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money . Defenders of the Bank of Japan will say, How? The Bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money? The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money.
With the Federal Reserves discount rate at zero, monetary conditions in the U.S. are parallel to those in Japan. Unfortunately, the low level of interest rates has blinded many economists to the necessity of further Fed action. As Friedman explained in his article, it is misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight high interest rates, that money has been easy, he wrote.
I believe that if Friedman were still alive, he would be among the sharpest critics of Republicans attacks on the Fed. Perhaps his great stature would have been enough to keep them from going off in the wrong direction.