Is Fed chairman Ben Bernanke a follower of John Maynard Keynes or Milton Friedman?
[Penn Bullock is a freelance writer for Village Voice Media.]
Ben Bernanke just had a fine month. For allegedly saving the world from a second Great Depression, President Barack Obama awarded the Federal Reserve chairman a second four-year term. "As an expert on the causes of the Great Depression, I'm sure Ben never imagined that he would be part of a team responsible for preventing another," the president said. "But because of his background, his temperament, his courage and his creativity—that's exactly what he has helped to achieve."
"Mission Accomplished," the banner might have read.
Missing from Obama's speech was any mention of Bernanke's economic ideology. The New York Times and Bloomberg News have called him a strict Keynesian—a liberal fan of fiscal stimulus—and that label has stuck.
In reality, Bernanke is following the monetarist depression-prevention model hatched by Nobel laureate and libertarian patron saint Milton Friedman. Bernanke has repeatedly invoked the late libertarian economist in support of lowering interest rates to zero, bailing out banks, and pumping untold trillions of dollars into the financial system. The implicit goal of these policies is to ignite artificial inflation.
The story begins in 1963, when Friedman and co-author Anna Schwartz published The Monetary History of the United States. Their chapter on the Great Depression was spun off into a standalone book, The Great Contraction: 1929-1933, an epic revisionist history that changed America's understanding of the causes of the Depression. Friedman and Schwartz contended that the Federal Reserve—not capitalism or Wall Street—was to blame for the dismal '30s. "The fact of the matter is that it was the decision to tighten credit policy in 1928 that produced the Great Contraction," the 93-year-old Schwartz said by phone from her office at the National Bureau of Economic Research in New York City. Interest rate hikes had been undertaken in 1928 to curb what the Fed saw as rampant speculation on Wall Street—a conflagration of leveraging, margin buying, and outright Ponzi scheming fueled by cheap credit that was supplied in the first instance by the Federal Reserve. (Goldman Sachs' pyramid schemes of the era, when they collapsed, would generate losses of $475 billion in today's dollars.)
Friedman and Schwartz, however, denied that speculation had ever posed a problem, or that there had even been a credit bubble in the 1920s. In their narrative, a paranoiac Federal Reserve had needlessly constricted the money supply and thereby crashed an otherwise prosperous economy.
After the Great Crash of 1929, the Federal Reserve drastically cut interest rates; but, on occasion, the Fed was forced to abruptly raise them again in complicated maneuvers to stem outflows of gold into Europe. Friedman and Schwartz blamed these sporadic interest rate hikes for smothering several incipient recoveries, opening a vortex of deflation, and turning a recession into the Great Depression.
Friedman and Schwartz's overarching thesis was that the Depression would have never happened if the Federal Reserve had inflated the American economy. As Schwartz told me, "What the Fed had to do was increase the money supply. By taking that action, it would've revived the economy. That's the lesson of the Great Depression." In The Great Contraction, she and Friedman argued that the Fed had an infinite capacity to inflate. "The monetary authorities," they wrote, "could have prevented the decline in the stock of money—indeed, could have produced almost any desired increase in the money stock."
Which brings us back to the question of Ben Bernanke's economic ideology. When it comes to the Great Depression, Bernanke is a disciple of Friedman and Schwartz. In 2002, at Friedman's 90th birthday party at the University of Chicago, Bernanke was effusive. "Among economic scholars," he began, "Friedman has no peers." He developed the "leading and most persuasive" explanation of the Depression, whose impact on economics and the popular mind "cannot be overstated."...
Read entire article at Reason Online
Ben Bernanke just had a fine month. For allegedly saving the world from a second Great Depression, President Barack Obama awarded the Federal Reserve chairman a second four-year term. "As an expert on the causes of the Great Depression, I'm sure Ben never imagined that he would be part of a team responsible for preventing another," the president said. "But because of his background, his temperament, his courage and his creativity—that's exactly what he has helped to achieve."
"Mission Accomplished," the banner might have read.
Missing from Obama's speech was any mention of Bernanke's economic ideology. The New York Times and Bloomberg News have called him a strict Keynesian—a liberal fan of fiscal stimulus—and that label has stuck.
In reality, Bernanke is following the monetarist depression-prevention model hatched by Nobel laureate and libertarian patron saint Milton Friedman. Bernanke has repeatedly invoked the late libertarian economist in support of lowering interest rates to zero, bailing out banks, and pumping untold trillions of dollars into the financial system. The implicit goal of these policies is to ignite artificial inflation.
The story begins in 1963, when Friedman and co-author Anna Schwartz published The Monetary History of the United States. Their chapter on the Great Depression was spun off into a standalone book, The Great Contraction: 1929-1933, an epic revisionist history that changed America's understanding of the causes of the Depression. Friedman and Schwartz contended that the Federal Reserve—not capitalism or Wall Street—was to blame for the dismal '30s. "The fact of the matter is that it was the decision to tighten credit policy in 1928 that produced the Great Contraction," the 93-year-old Schwartz said by phone from her office at the National Bureau of Economic Research in New York City. Interest rate hikes had been undertaken in 1928 to curb what the Fed saw as rampant speculation on Wall Street—a conflagration of leveraging, margin buying, and outright Ponzi scheming fueled by cheap credit that was supplied in the first instance by the Federal Reserve. (Goldman Sachs' pyramid schemes of the era, when they collapsed, would generate losses of $475 billion in today's dollars.)
Friedman and Schwartz, however, denied that speculation had ever posed a problem, or that there had even been a credit bubble in the 1920s. In their narrative, a paranoiac Federal Reserve had needlessly constricted the money supply and thereby crashed an otherwise prosperous economy.
After the Great Crash of 1929, the Federal Reserve drastically cut interest rates; but, on occasion, the Fed was forced to abruptly raise them again in complicated maneuvers to stem outflows of gold into Europe. Friedman and Schwartz blamed these sporadic interest rate hikes for smothering several incipient recoveries, opening a vortex of deflation, and turning a recession into the Great Depression.
Friedman and Schwartz's overarching thesis was that the Depression would have never happened if the Federal Reserve had inflated the American economy. As Schwartz told me, "What the Fed had to do was increase the money supply. By taking that action, it would've revived the economy. That's the lesson of the Great Depression." In The Great Contraction, she and Friedman argued that the Fed had an infinite capacity to inflate. "The monetary authorities," they wrote, "could have prevented the decline in the stock of money—indeed, could have produced almost any desired increase in the money stock."
Which brings us back to the question of Ben Bernanke's economic ideology. When it comes to the Great Depression, Bernanke is a disciple of Friedman and Schwartz. In 2002, at Friedman's 90th birthday party at the University of Chicago, Bernanke was effusive. "Among economic scholars," he began, "Friedman has no peers." He developed the "leading and most persuasive" explanation of the Depression, whose impact on economics and the popular mind "cannot be overstated."...