Paging Scott Sumner
By Arnold Kling
He needs to clear up some confusion. I think that Penn Bullock, is quite confused about Milton Friedman, monetarism, and the current crisis. In fact, Bullock is so confused that I searched in vain for something to excerpt. On the other hand, I may be the one who is confused, in which case Scott is the right one to set me straight.
The main point of the Bullock article is to link Ben Bernanke’s policies to Milton Friedman and Anna Schwartz’s monetarist account of the Great Depression. I don’t see that link.
The Friedman-Schwartz lesson of the Great Depression is, “Don’t let the money supply collapse.” It is not, “Bail out big banks, but don’t bail out small banks, but do bail out an insurance company and some investment banks, but not Lehman Brothers, and make sure to buy mortgage-backed securities…”
A grain of truth in the article is that if driving the Fed Funds rate to zero is not sufficient to keep the money supply from collapsing, the Fed has to buy some other assets, and presumably Friedman and Schwartz would want this to happen. But the Fed could buy short-term Treasuries or long-term inflation-indexed Treasuries. It could (I learned this from Scott) not choose this moment in history to pay interest on reserves–which is a contractionary move (but good for bank profits).
Another grain of truth is that one can divide the world into a camp that wants to abolish the Fed and a camp that doesn’t. An interesting article could be written comparing and contrasting the two camps. In such an article, you might be able to put Bernanke and Friedman in the same camp, namely the one that doesn’t want the Fed abolished. (Even that is arguable, since Friedman sometimes expressed the view that the Fed could be replaced by a computer program.) But that does not make Bernanke an intellectual disciple of Friedman. Unless Scott Sumner tells me I should think otherwise.