What Would Milton Friedman Say About Fed Policy Under Bernanke?

Four years after his death, Milton Friedman's thoughts on monetary policy remain as relevant today as they were 30 years ago. Even Fed Chairman "Helicopter Ben" Bernanke (whose nickname comes from Friedman's famous "helicopter drop" idea for overcoming deflation) has referenced the Chicago don as an inspiration for his actions.

However, Friedman's views may not be well understood even by those who would claim him as their intellectual fountainhead — which could be problematic for policy-making. So what would Milton Friedman say about our current monetary policy?

Friedman criticized the policies of the Fed in the 1930s and the Bank of Japan in the 1990s on this very point. Both central banks claimed to be highly accommodative at these times, pointing to low interest rates as evidence of easy monetary policy. Friedman countered, however, that low interest rates may reflect a weak economy rather than easy monetary policy.

Back in 1997, in fact, he called the idea of identifying low interest rates with easy monetary policy an interest-rate fallacy. The only time low interest rates do indicate loose monetary policy is when they are below the neutral interest-rate level, which is the interest-rate level where monetary policy is neither too simulative nor too contractionary and is pushing the economy toward its full potential.

He is for ending the FED and bringing America back to gold and silver as money. If America did this five years ago the financial crisis wouldn’t have happened.

It's a moot issue now, we are too far gone to revert to "the good ol' days" of finances.

We are in a "hanging on to the extended branch on the cliff" mode now.

Isn't progressive politics fun?

Friedman always contended that expansion or contraction of the money supply was more important than interest rates. Interest rates indirectly influence the money supply in the economy by affecting how many times the dollars which are out there are lent and re-lent. The equation that Friedman discusses in “Free to Choose” and some of his other work is:
% Growth in Money Supply = % Growth in GDP + Inflation Rate

If the money supply grows faster than the GDP is capable of growing, then the extra money available results in inflation. Inflation was the chief problem in the late 1970s, when Friedman was at the peak of his fame. Today, as long as inflation remains low, there needs to be enough growth in the money supply to support economic growth. The real problem, however, which can’t be fixed by monetary policy alone, is that even with very low interest rates, there are not enough people who want to borrow money for business in the environment that Obama/Reid/Pelosi have created. Monetary policy can help fix a recession but it can’t fix the structural impediments that the left is putting on the economy.

I’m not a big believer in the idea that we should scrap the Federal Reserve and return to the gold standard, even though that idea is popular with some conservatives. There’s nothing inherently valuable about hunks of rare metals, other than people have generally wanted shiny things throughout history. In a modern economy, it is perfectly rational that the value of a nation’s currency should be set by the goods and services that people can buy with it. I don’t think the problem with our economy is that people can’t trade their money for a fixed amount of shiny metal. The problem with our economy is that we don’t make enough of the products and services that people want anymore. And the left keep raising more and more barriers for us to be productive again.

CaptainMorgantown, Great comments.

Friedman had a tremendous effect on the U.S. and Chile. He established monetary theory as important, but it has been maligned repeatedly and recently by the Krugmans of the world. Too bad Friedman wasn’t around to see the flawless rescue of the miners by a country that implemented many of his policies and transformed from a third-world communist disaster into a largely economically free country.

It’s people like Friedman that show that history just may be driven by a few great people, or terrible ones like Obama and Rahm Emanuel, giving a new but tarnished meaning to the term “The Chicago School.”

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