The Federal Reserve couldn't wait until October 29th to cut rates. Instead, it slashed its Fed Funds rate 0.5% to 1.5% in a move that was coordinated with other central banks. Interestingly, Milton Friedman's acolyte, Anna Schwartz, recently observed that Fed Chair Ben Bernanke, who is reportedly a student of the Great Depression, is taking the wrong approach to this crisis.
Milton Friedman is widely regarded as the economist who figured out that a lack of liquidity is the reason that the economy took such a tailspin after the crash of 1929. Schwartz, 92, co-authored A Monetary History of the United States 1867-1960, with Friedman. And her assessment of Bernanke is brutal. She thinks he should be fired. The reason? She believes that he and Paulson made a huge mistake in bailing out failed companies. In her view, they underestimated the free market's ability to recover from such failures.
Scwhartz also faults them for issuing dire warnings about how capitalism would fail unless Congress passed their bailout bill. I guess Friedman and Schwartz have influenced my thinking as reflected in this post about letting free markets work and this one questioning the fear tactics used to sell their program. This morning's emergency rate cut suggests that for all the fear mongering used to sell their program, its effect has not helped the markets, which have lost $2.8 trillion since the day investors thought the bill would pass.
Milton would have let the failed institutions fail. But it's too late to know whether his ideas would have worked.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
10-08-2008 @ 10:14AM
Kyle Butt said...
For a different view on why the 1929 crash was so deep, read Rothbard's "America's Great Depression." It wasn't lack of liquidity that was the problem, It was government interference. Hoover Propped up prices, and the fed tried to re-flate the economy, but banks held on to the extra reserves.
America's Great Depression is available as a pdf for free on mises.org
Kyle
10-08-2008 @ 10:17AM
Bill Kiele said...
What seems to be going on is that, now that the gov't HAS acted, the private players won't commit to any action. Had the gov't been less invasive, the private players would have HAD to fix it themselves. Would lots of worry have followed? Sure. Would the total amount of "chaos" been higher? Don't think so.
However, it was probably for the best that the GSE's be formally nationalized, putting an end to that lie. We have to live with it either way.
Question: When the congress also okayed the offloading of risk by lenders, and the GSE's took on those packages, did that action demand a government "undo" now anyway?
10-08-2008 @ 10:25AM
amuzed said...
It is amazing that anyone takes Milton Friedman seriously any more. He has been completely discredited in The Shock Doctrine by Naomi Klein.
10-08-2008 @ 11:22AM
CareerDiva.net said...
FYI, Klein recently came out slamming the bailout.
Great post Peter!
10-08-2008 @ 12:13PM
Gene said...
Adjusting the price of money downward will not sell more money unless there is a real market for that money. Much activity is simply churning actions in the market. High speed computers executing buy and sell orders; advantaging a few.
Orthodox capitalism requires winners and loosers. Unfortunately everyone can't win.
The actions taken to save Insurance Companies are lethal to the free market.
If we abandon the free market. What will atke it's place?
10-08-2008 @ 1:34PM
william lindblad said...
Hmm! Newsweek recently had an article that talked about the great depression of 1840. Great, but wrong county and they should look up the Chartist movement in the U.K.
There is not a correct book on the cause of 1929 as the real cause is obscure and the same one as today. Oversight/guidance/control - call it what you want.
Another name is Laissez faire
The reason behind 1929 is the Spanish Flu
pandemic that is still in the minds of the CDC today. While it killed 1/3 of the worlds population you really have to look at the age bracket that it did in. It killed all of those that might have used restraint and the "roaring twenties" was a period dominated by the young.
Thereafter, the government put controls and oversight in place, but they only work is enforced.
A good analogy would be to guess the effect of removing all police from the interstate system for a few years. You would wind up with something akin to our current financial mess.