There’s some discussion about Milton Friedman’s influence on the economics profession over on Scott Sumner’s blog, the Money illusion, where Sumner quotes a Brad Delong reference to Friedman and Schwartz 1969 that lays at least part of the blame for the confused monetary response to the 2008 financial crisis on Friedman’s idea that the deflation of the Great Depression was caused by money being destroyed as the banks went down. Hence, the reaction of monetary policymakers to the banks and not the monetary fiasco of plummeting NGDP that preceded it and that intensified throughout the crisis.
In my office where I work, we joke some times when talking about who to blame for some mishap under discussion that we need to point at the guy who couldn’t make the meeting. And since Freidman is no longer with us, having died in 2006, I suppose it’s just easier to point at the dead guy.
To get the non-economic portion of the post out the way, blaming the dead guy for things that happened well after he died as if nobody in the room responsible for making monetary policy during the 2008 mishap aren’t also responsible for knowing what they’re doing and for making intelligent and reasoned choices is a little on the side of cowardly, passing out the “save your reputation for free” cards. There is no one more responsible for the crisis in 2008 than the people who were making the choices before, during and immediately after the crisis.
The other problem I have with the DeLong proposition is that by the time NGDP took its final plunge in late 2008, it had been allowed to start its decent from trend starting in 2007; and recalling Bear Sterns and e-Trade, the final eruption of financial crisis that included the collapse of Lehman was not the first of the crisis that had been going on for most of the year. I wonder sometimes what those responsible for policy were doing between Bear and Lehman, and more importantly what they were doing before either of those.
But DeLong isn’t entirely inaccurate, he just pulls out the wrong information to support his claim. I used to think very highly of Friedman. In many ways I still do, but facts I recently uncovered about his career made him seem far more human than I gave him credit for. In short, for a period of his life, he seemed as obsessed about squeezing every last bit of inflation out of an economy as possible as Bernanke and Mishkin were pre-2008.
Friedman’s rule, aside from the k% rule, dubbed simply the “Friedman Rule” is case in point. I wrote about it here; and it’s easy to see how many people could look at that while ignoring the exceptions to this rule, such as economies that have price rigidities and are subject to supply shocks, and think it’s a grand idea to have nominal rates at zero to reduce the effects of inflation on cash balances – making cash hoards much more appealing.
The effects of this rule on an economy with price rigidities and supply shocks are predictable and downright appalling. But that apparently didn’t matter to the inflation-obsessed Herbert Hoovers of the economics profession because we got the policy they wanted – zero nominal rates and microscopic levels of inflation as far as the eye can see – nonetheless. It doesn’t take a ton of bricks to fall on me to understand that Bernanke was far more oriented with Friedman than his defenders can admit, taking what he wanted from Friedman’s scholarship, rather incoherently, and leaving the rest. The financial crisis was merely the culmination of policies that began in 2006 and hung us out the microscopic inflation limb come hell and high water where we’ve been left to dangle.
I am not saying that Friedman is to blame. No, quite far from it. The people making the choices in 2008 are to blame. But there are some things in the body Friedman’s scholarship that I certainly wouldn’t credit with preventing the crisis either.