The Bush administration has thrown in the towel on the long battle begun in the 1970s to minimize government oversight of the economy. In light of the credit crisis, it now wants to regulate Wall Street. Treasury Secretary Paulson has put to together broad set of reforms, not truly effectual, but a serious start.
This marks, at last, the end of the Age of Friedman. And not too soon.
There is a direct line from Milton Friedman's ascendancy in the 1970s to the debacle on Wall Street today. Friedman had been working his brand of economic ideology roughly since the late 1940s and early 1950s, but he did not strike gold with mainstream economists and the public until the hyper-inflation of the 1970s.
He had a double-barreled approach. He was a respected scholar who ingeniously sought to prove his views with empirical and statistical research. These views were largely anti-Keynesian. John Maynard Keynes preached that government spending could ward off recession or at least ameliorate their impact. Friedman argued there was little to do but maintain a regularly growing money supply.
But Friedman's monetarism was discarded long ago -- officially by the Federal Reserve in 1984. They worry about interest rates now, not money, which was always a Keynesian principle, if initially of lesser concern. And, in fact, traditional Keynesian stimulus has made a big comeback. The conservative Bush clambered to get aboard a Keynesian fiscal stimulus package initiated by the House Democrats in December.
The second barrel was Friedman's articulate popular policy writings. What did remain of Friedman's philosophy (aside from one academic contribution, the overstated natural rate of unemployment philosophy) was his deeply held, well-articulated and simplistic view that government regulation was almost always bad for us.
Competition was the great disciplinarian of market excess, wrote Friedman, obeying such predecessors as Friedrich van Hayek, author of The Road to Serfdom. By 1999, even Bill Clinton and many a Congressional Democrat fully supported the elimination of key financial regulations established in the New Deal.
As night follows day, what happened was a return of the excesses of the 1920s. Competition is not enough to ward off excesses. Free floating prices do not automatically stabilize economies. Financial markets in particular encourage excess naturally, a point made by the more profound economist, Hyman Minsky.
Friedman's followers will seldom admit that much of his public policy was not supported by genuine empirical research, unlike his monetarism. At least, because Friedman did the homework, one could debate with him on the groundwork of his views in these areas. In my view, the empirics never supported the stronger propositions he made.
But in the area of public policy, it was largely ideology. It was mostly an exaggerated application of Adam Smith's invisible hand: we would all be better off if we just maximize our profits.
Why did Friedman's views become popular? As he himself conceded, crisis in the 1970s demanded a new set of ideas.
Crisis in the 2000s is now demanding a return to greater realism. Will the nation overshoot, as it did with Friedman's ideological deregulation? Not likely. The powerful vested interests are around to keep government regulators in check. The Bush administration proposals reflect that; they are weak. And though the Democrats are on the case, it is most likely the nation will not do enough.
But if the demise of simplistic Friedmanite ideology is now upon us, at least this crisis has had one silver lining. And perhaps we can begin to discuss more openly, and better deal with, why this economy has served most Americans so poorly since the 1970s.
In what word do you think we were ever close to what Friedman wanted post 1930?
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Love and compassion to make the day brighter and better.
You are fast becoming a favorite poster of mine. We share a common perspective on many issues and I admire your ability to express your thoughts.
Thanks for the encouragement. We are in crucial times and I am trying to do what I can to help us vs. hurt us.
It is the capitalist free market conundrum of our time: Record debt and Record low interest rates. The two cannot exist in the so-called "free market". So, since Milton is deceased, I will remind you that what you are observing is greed speculation and market abuse by the government that permits maxing out the credit card supported by nonmarket negative real interest rates that unfairly reflect the values of homes and other assets (stocks). Globalism has given us a lot of stuff that the old theories did not properly comprehend on the a priori.
http://www.sciam.com/article.cfm?id=the-economist-has-no-clothes . Mainstream economics does not hold up to scientific inquiry. It's nonsense. Ecological economics makes sense, and fits the world as it really is, but no other economics comes close.
Economics is the study, the changing study of "allocating a limited amount of goods and services to an infinity of wants". That's it. Politicians know that a promise of "nickle beer" will get them elected. Now what is so complicated about that? Economics is not science. And of course Supply Side Economics is ideology (it is really propaganda) used by politicians who are selling nickle beer.
Both parties.
The Clinton administration also tried hard to improve the trade deficit picture, but with varied success. Both parties have a responsibility for our sad trade picture, but it is not equivalent. The Reagan/Republican/Corporate Media view prevailed in the foolish electorate and the Democrats too meekly went along to keep from losing more elections.
Coming out of WWII America’s enemies were in ashes and its friends were mainly bankrupt. So for some 25 years America ruled the world economy nearly free from competition. As we became the one stop seller of everything our standard of living exploded, creating an abnormally large middle class. But by 1970 the rest of the world was well along the road to recovery, and so it was about then that our manufacturing industries peaked. Then by 2000 our technological advantage had evaporated. And so with the rest of the world rolling along producing just about anything we could at a fraction of the price, American wages and the bloated middleclass had nowhere to go but down.
But when folks are used to living the high life they do not easily give it up. So in order to keep on living as if we still owned the world, both government and the private sector have been borrowing like mad. Now we have just about come to the end of the line.
The rest of your post also misses a tie to Friedman's folly. The Free Trade myth was also pushed by Friedman and his disciples. That myth gained traction with the Republicans and Corporate Media and thus with voters. People were convinced getting cheaper goods from abroad was great--without paying attention to the flip side. The flip side being things would be manufactured elsewhere, not here. Voters, for their short term gain, sold their future to Republican hucksters like Friedman and Reagan and Bush.
"Debt for equity" is what it is called. The neocolonial policies have been rejected by many countries in Latin and South America. Middle Eastern oil-rich countries have had to nationalize their resources repeatedly, and now have to fight for their lives.
The fact that Bill Clinton promoted these same policies will be seen in history as the final crossing of the Rubicon. Bush crossed it, but Bill Clinton paved the way by being "economically conservative." There is a difference between balancing a budget and being against regulations designed to prevent colonialism and financial securitization and other off-the-books derivative schemes that are collapse in our economic system.
"Free trade" is another one of these ideas. If outsourcing jobs and using military force for exploiting countries for their resources and cheap labor is "patriotic," I'd hate to see a real traitor. The damage to America's economy that we are seeing with bail outs of investment bankers is the logical result of Milton Friedman's ideas, which were all second-hand. Milton just wanted to prove that he was "right."
On your last paragraph, patriotism is not demonstrated by undermining the economic stability of your nation. In fact, that is a key strategic objective of waging a war on a nation. So, not only unpatriotic but treasonous.
Had this economic anarchy, that has been foisted on us by these self serving conservatives under the guise fo free markets, actually been imposed by a foreign power, it would be tatamount to an act of war.
We must stop considering corporations to be persons. They have no conscience. They exist only to make maximum profit. They are amoral and as such requre regulation to keep them in their proper place in society. Self regulation, voluntary regulation, these things are absurd. It requires an entity with the power to levy meaningful sanctions and impose meaningful consequences on corporations, and those who run them. The only entity that fills that bill is government.
Peepeedicking!
Whose f-ing money is it anyway?
Why are we trying to regulate the banks abuse of the money power?
Put them out of the business.
Before the scandalous British tax on trade with the Colonies, the Colonies got on for years by distribution of what we would call today, a well regulated money supply.
It was done in a spirit of mutual respect and co-operation among the Colonies.
What worked for them before the Brits forced us into a Revolution over its monetary policy will work for us today.
It is now time to start to think outside the Whartonite box of finance, and restore the Jeffersonian doctrine of economic democracy.
"Only the Congress..."
Which group of bankers would we trust to regulate which group of bankers until the two groups trade places?
The problem with the various crises that we have before us is that they each and collectively mask the true problem of the day.
All of the nation's money supply is created by issuing dollar-denominated debts ultimately payable by the American taxpayer.
To whom?
The "HOLDERS".
The Holding Companies.
Taxation without representation is still TYRANNY!
1) Exchange rates, fx exchange rates, "float" (the monetarist argument), they are not "set" by the respective governments. This is a tremendous awakening of the free in "free" market. The value of your currency is market determined reflecting its market value.
2) Interest rates paid by banks are the domain of banks, they are not limited by the federal government. (remember when 7.25% was the max a bank could pay on a 48 month cd?). This too is a liberated part of monetarism that will remain with us.
Monetarism does not exclude Keynesian principles. Trust me, the tenets of Friedman are as relevant as the princples of Keynes. Your analysis seems like a new basketball coach for the Tarheels arguing that zone defense was the failure of the Heels and that now only man to man, the way of the future.... until, wouldn't you guess back comes the prominence of the zone. (Business is a game, the rules are set by league and the government acts as the referee and the supreme court decides the wedges upon which the game grows)
(1) The first is a failure to understand that economics is not a hard science.
(2) The second is treating economic theory as divine revelation and economists as prophets..
Regarding the first point, generally to solve the system of simultaneous equations representing an economic system, the economist must "plug" one of the variables by holding prices, employment, interest rates constant.
The reality is of course that there are only certain circumstances where such variables do not change in response to changes in others..
So a theory may work tolerably well in certain situations and not in others.
Another problem is assuming that equilibria are stable. Relax this assumption and results differ dramatically.
Regarding the second point, it's the misguided belief that a particular theory solves all problems.
Economists become secular prophets. One finds their works reverentially quoted as being of timeless universal validity.
Valid insights are often extended beyond logical bounds to absurdity. The observation that regulation "sometimes interferes" with the market becomes "always interferes". A reaction to one excess (too much regulation) leads to a new excess (the avoidance of substantially all regulation).
But I particularly like your observation that economic models assume equilibrium. Indeed they seem to argue that equilibrium is unavoidable, giving a false sense of the range within which economic circumstances can swing. Hedge funds are built on statistical limits beyond which variables are unlikely to trespass, but do. All of which leaves us utterly exposed to the perfect storm that can't happen, except when say, something like the global climate changes ever so slightly.
As to putting econ in engineering schools, my firmly held belief is that economics is more art than science and so really wouldn't belong in engineering.
You've put your finger on a key problem in the modern financial world - a failure to think through what happens at tail end of the downside distribution
(1) mischaracterizing the shape of the distribution – e.g., overlooking leptokurtosis
(If you’re "mathy", Google “Omega + Keating and Shadwick. Interesting discussion of the risk impact of different “moments” on a distribution as well as their solution to comutational difficulties)
(2) breakdown / significant changes in correlations among asset classes and instruments
(3) “spreadsheet seduction” – one is so enthralled with the intellectual elegance/complexity of one’s model that one abandons common sense and reality.
(3) failure to consider the impact of market disruptions on price discovery and liquidity. When the herd heads for the exit, usually not all get through the door at once. When one is dealing with instruments that have a thin market even at the best of times – e.g., debt securities other than US Govs -- the door may be closed and locked.
(4) failure to understand the interlinkages across markets, instruments, etc.
Many bankers thought they had disintermediated subrprime risk to others. But discovered they had not. Like the assumed “netting” of credit default swaps (a disaster waiting to happen and much larger than subprime
(5) the blinding force of greed - the most potent force with intelligence failures second
Maybe Ross Perot? "Giant suckin' sound".
larry lynch