Friday, March 28, 2008

Milton Friedman turns in his grave: our Berlin Wall

David Seaton's News Links
Here is how Wikipedia describes Milton Friedman:
According to The Economist, Friedman "was the most influential economist of the second half of the 20th century…possibly of all of it". Alan Greenspan stated "There are very few people over the generations who have ideas that are sufficiently original to materially alter the direction of civilization. Milton is one of those very few people."In his 1962 book Capitalism and Freedom, Friedman advocated minimizing the role of government in a free market as a means of creating political and social freedom. In his 1980 television series Free to Choose, Friedman explained his view of how free markets work, emphasizing his conviction that free markets have been shown to solve social and political problems that other systems have failed to address adequately. His books and columns for Newsweek were widely read, and even circulated underground behind the Iron Curtain. (...) His views of monetary policy, taxation, privatization and deregulation informed the policy of governments around the globe, especially the administrations of Ronald Reagan in the U.S., Brian Mulroney in Canada, and Margaret Thatcher in Britain.
And this is how ├╝ber-bear Nouriel Roubini describes the crisis we are entering:
I would argue this is the worst financial crisis the U.S. has had since the Great Depression. We haven't seen this type of real financial turmoil for the last 70 years. Of course, it's not going to be as bad as the Great Depression. But this isn't your typical run-of-the-mill recession that in the last two episodes lasted only eight months with a minor contraction in output. This is going to last at least 12 months and more likely 18 months, which is something we haven't seen in decades
The Wall Street Journal's David Wessel Chimes in:
On the Richter scale of government activism, the government's recent actions don't (yet) register at FDR levels. They are shrouded in technicalities and buried in a pile of new acronyms. But something big just happened. It happened without an explicit vote by Congress. And, though the Treasury hasn't cut any checks for housing or Wall Street rescues, billions of dollars of taxpayer money were put at risk. A Republican administration, not eager to be viewed as the second coming of the Hoover administration, showed it no longer believes the market can sort out the mess."The Government of Last Resort is working with the Lender of Last Resort to shore up the housing and credit markets to avoid Great Depression II," economist Ed Yardeni wrote to clients.
And for the maraschino cherry on the whipped cream topping here is this from Martin Wolf, chief economist of the Financial Times:
Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Josef Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits.(...) If the US itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the US and other high-income countries are not a dire warning. If the US, with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?(...) we must start in the right place, by recognising that even the recent past is a foreign country. (emphasis mine)
Nouriel Roubini says,"
Of course, it's not going to be as bad as the Great Depression."
Now, it is really difficult to be more pessimistic than Professor Roubini and it would be impertinent for me to try... I would only say that it is going to be "different" from the Great Depression.

I think that I probably factor in a lot more intangibles than a scientific economist like Roubini would think proper to. I see this discrediting of America's philosophy of finance as just another element in the general discrediting of the United States as a brand. As Martin Wolf says,
"Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer."
In the same way that "shock and awe" is "no longer. Or that Guantanamo and Abu Ghraib and the value of the dollar "no longer" represent anything "free and robust". There is more than one way to go bankrupt.

All these different elements affect each other in so many negative, mutually magnifying ways, that, in their turn, have so many variables themselves, that to predict with precision the outcome of all this would be like predicting next year's weather. Forgive me if I incur in the sin of quoting myself from a few days back:
What do you call it when many problems, all with many intersecting vectors, each with its own conflicting internal contradictions, all of them in mutual contradiction with each other, all of which then line up like planets in a malignant horoscope? A series of thesis and antithesis with a dialectical result that can only produce a sinister synthesis? The US military calls this construction a "clusterfuck"; sometimes known by the NATO, phonetic-alphabet acronym, "Charlie-Foxtrot". The United States finds itself at this moment immersed in full-spectrum, multilayered, universal, clusterfuck of historic proportions.
The way I look at things, this is our Berlin Wall.

Since the 1980s we have been living in the world of Milton Friedman. His theories are not surviving this crisis. For some people on the right this will disrupt and shred their intellectual certainties to the same degree that the fall of the Berlin Wall did to the certainties of many on the left.

This is certainly not the end of the world. Look at Russia. They will probably never be as powerful as the USSR was and like us they still can't make a decent car, but after a few perfectly horrible years, they are dong ok.


Like them, we'll still have the atomic bomb and people will still be afraid of us and with good reason, but nobody will think we are cool anymore.

I think I'll kind of miss that. DS

14 comments:

Anonymous said...

As usual, you are on to something BIG. But the unwinding of the Washington Consensus and the return of Friedman's disaster capitalism to its country of origin, may be a Beginning rather than and End.

Anonymous said...

"For some people on the right this will disrupt and shred their intellectual certainties to the same degree that the fall of the Berlin Wall did to the certainties of many on the left."

Doubt it. Milton who? Denial and obfuscation. Move along, nothing more to see here...

Anonymous said...

Mr. Seaton,

Since when is having the government mandate that entities only invest staggering sums of money in securities rated as AAA by rating agencies the government has designated (which we've found now to have had horrible judgment) part of the "the free market at work"?

One could just as much insist that people ought have the freedom to invest in securities of their choice rated by agencies of their choice and not those designated by the government.

I can't recall where (WSJ?) but there were innuendos that the rating agencies had become, shall we say responsive, to accomodating clients rating trash securities as AAA grade. Could you kindly tell me why you consider this to be the free market at work?

David Seaton's Newslinks said...

I think you underestimate Friedman's influence and the intellectual cover he gave to the policies that have brought to us to where we are today.

David Seaton's Newslinks said...

"tell me why you consider this to be the free market at work?"
Heavens! Do I give that impression? Sorry.

Anonymous said...

What bothers me about the economists is their one or two handfuls of variables that interest them exclusively about market fluctuation. What about the social factors and social costs?

My mother got through the depression OK as a kid. But she was on a farm. The sort of one square mile family farm that Jim Hightower has called optimal. Mixed rotated crops and livestock. Sell some, eat some. Butcher your own sheep. Consume your own milk and cream. Even then the family head had a second job with the government much of the time.

So, where are the family farms now? How many are run like factories and how many still consume their own production? Where are the small towns? Rural people have gotten used to driving 50 miles to WalMart. And Cities? Everybody has sprawled out to the suburbs and will be burning $4/gallon gas to do EVERYTHING. Where is the middle class urban concentration of the past served by local businesses? Where are the streetcar lines? Where are the railroads that were _so_ much more efficient moving loads across the country? Where is the manufacturing that created those loads? Where are the jobs programs to shore up our decaying infrastructure? With the trillions in debt Bush has pushed us into, what safety net is possible? What work programs are possible to keep things running?

Perhaps what scares me most is, without urban concentration and neighborhood affiliations, where is true 1930s style activism. We're just talking here on the internet.

Different, yes. Different _can_ be worse.

Anonymous said...

To me these are not the ineluctable fruits of "free capital market", but rather of the crony capitalism that has been the mark of George W Bush from his days as a businessman with many startups in Texas through his years in Austin culminating with his years in Washington.

Every democracy gets the leadership it deserves; my hope is that Americans learn from this and put more thought into choosing their leaders.

Anonymous said...

In defense (sort of) of Milton Friedman

David:

Milton Friedman's insight was that growth in the money supply had a direct effect on inflation. His policy prescription was that the fed should target money supply growth. His disciple, Paul Volcker, did just that, and wrung inflation out of the economy, albeit at a tremendous cost. This was not orthodoxy before he said it; prior to that it was believed that expansion of the money supply could be relatively costless. In my mind, Friedman overstated the role of money - he thought the depression was solely due to bad monetary policy.

Greenspan and Bernanke are not Friedmanites. The Fed recently stopped reporting M3 (the broadest definition of money). According to Shadowstats (a website I recommend) their estimate of M3 is that is is currently growing at double digit rates.

I don't think Friedman would have advocated taking government insured depositors money in banks and loaning it to highly leveraged hedged funds; nor would he have approved of FNMA guaranteeing jumbo mortgages.

In other words, don't blame Friedman for the misuse of his theories. What we have had is government support and encouragement of highly risky practices with the ultimate bagholder being the US government. We didn't have free market capitalism. Those who claimed it was were intellectually dishonest to begin with.

I certainly hope that the current financial events spur a reappraisal of the need for regulation and break the ties between the US government and Wall Street.

Forensic Economist

David Seaton's Newslinks said...

"We didn't have free market capitalism. Those who claimed it was were intellectually dishonest to begin with."
I think that is the heart of the question.

David Seaton's Newslinks said...

"my hope is that Americans learn from this and put more thought into choosing their leaders."
Looking at the present crop they don't seem to be, do they?

David Seaton's Newslinks said...

http://seaton-newslinks.blogspot.com/2008/03/milton-friedman-turns-in-his-grave-our.html#6052209969327975071
That is a a great comment!

"Perhaps what scares me most is, without urban concentration and neighborhood affiliations, where is true 1930s style activism. We're just talking here on the internet.

Different, yes. Different _can_ be worse."

Wonderful!

RLaing said...

Adam Smith, the man who originally came up with this 'Free Market' concept, also saw the practical obstacle that prevents a real-world free market from existing: anytime people of the same trade get together, they enter into a conspiracy against the public.

I evaluate free market ideology the same way I evaluate any other religion, in terms of the benefits that accrue from believing in it. I don't expect it to be an objective description of reality itself.

The free market chant is meant to ward off the evil of government intervention which might benefit the public. Public subsidies to corporations, of which the US has a super-abundance, on the other hand...

Anonymous said...

We've fallen into facism. That's the only way to describe it. The government is now working for the relatively few, while any speaking of this is quickly crushed by playing off the same stupid prejudices; socialism, communism...

Rome is burning, and the rich are still frollicking, while the ignorant shit-kickers continue to convince themselves they haven't been deduced to shit-kickers. It's going to take 15 years of termoil and my generation to fix it...

Anonymous said...

Where Friedman was right and where he was wrong.

It may be useful to look at Friedman's successes and errors, since it seems to me to be all too typical of American intellectuals who can't look past the US border.

Milton Friedman and Anna Schwarz wrote an excellent book entitled the Monetary History of the United States, gathering statistics on the growth (and occasionally decline) of the various types of money. Dry, but recommended.

He also wrote a book on the monetary causes of the depression. The federal reserve actually allowed the money supply to shrink in 1930 - 32. It was Friedman's view that this turned a cyclical downturn into the depression. Further bad policy came in 1938, when bank reserve requirements were raised, precipitating the recession within the depression.

This is all accurate, and useful to today's policy makers. However, what Friedman and many current economists missed is that the depression was a worldwide phenomenon. The first bank failure was not in the US, it was Creditanstalt of Austria. There was a worldwide credit boom before the crash. The seeds of the boom and bust are not found in America but in the debts run up in World War I which were unpayable; the reparations exacted from Germany; and the credit extended during the 20s which kept the fiction alive that the debts and reparations were payable. In other words, there would have been a severe contraction no matter what the Fed did in America. The Fed should not get all the blame for the depression; nor would good management have saved America from the depression.

Again, today we have had a world wide credit boom followed by a worldwide banking crisis.

Thanks for the posts, David, I appreciate your thoughts.

Forensic Economist