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.
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
Ah yes: Social Security, Medicare, Welfare, Medicare Part D, Department of Energy, Department of Agriculture, Department of Education, 3.1 trillion dollar budget, etc.
In what word do you think we were ever close to what Friedman wanted post 1930?
Friedman wrote "A Corporation's only job is to make money."The CEO's of today believe "A Corporation's only job is to make money...FOR ME!"they run their company's and the economy into the ground while they walk away with a quarter of a billion dollars in retirement benefits.
Also, Friedman and his disciples were largely responsible for all the misery that took place in the 70's in Latin America. Dictators backed by the U.S. , repression, death squads all in the name of trying to push thru Capitalism, which led to a small group of people getting very wealthy, while the middle class was largely dissolved.
If competition is the great disciplinarian of market excess what stands as the disciplinarian for greed, and unscrupulous and unethical pursuits of wealth? I know the threat of jail time is supposed to act as a deterrent but that seems to be a reactionary approach that kicks in (if ever) after major damage has been done -- see Enron for example. I am a layperson concerning economics so I ask what is probably considered to be a simple question but I ask anyway. How was it ever accepted that no or scant regulation of people dealing with potentially large sums of money was a good idea? Every mom knows that if you do not place the cookie jar out of reach through stated regulation of occasional checks on the contents, coupled with advertised penalties and/or location on a high shelf, the cookie jar will soon be empty. So how does a smart group of people decide not to protect the contents of the national cookie jar? Could it be that some of the very people espousing deregulation were in fact the children or representatives of the children seeking to get their grubby hands on the cookies? I am perplexed.
GrainOSand,
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.
That has been the joy of getting involved. Where I used to feel very isolated in a lot of the things I think about everyday, blogging has allowed me to discover that things are not as bad as my limited perspective was causing me to believe.
Thanks for the encouragement. We are in crucial times and I am trying to do what I can to help us vs. hurt us.
Bingo.
I 47
T 12
H 5
A 79
N 90
K 56
Y7
O44
U32
Love and compassion to make the day brighter and better.
George Bush is a simpleton. He probably actually believes in the invisible hand. But most people who spout Friedman are merely using him as a ruse to hide their own avarice. Soon, no such ruse will be needed. We will simply do as we are told. The new gilded age will be a long one. The new monopolists are global monopolists.
And there is no Teddy Roosevelt in sight!
Here is a central "monetarist" failure of our time: We have record debt. (No secret) We have record low "rents" (interest) for money. Indeed it may be that real rates (adjsted for inflation) are negative. Friedman would argue that monetarist price for goods i.e. interest rates, is the result of the unabridged workings of supply and demand in the market place. However, the government (whether it is trade deficits or fed reserve actions) have flooded the market with money so that the rents are negative. Impossible in a well functioning monetary economy!
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.
The truth is, mainstream economics has been utter ideology for a long time, since physics discovered systems theory fit the natural order as it really is. This article in "Scientific American" makes the case.
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.
But you miss the point. At the margin, an Edgeworth Box may take you through agonizing renditions of differential calculus, but there is no one who cannot understand the notion of Pareto Optimality. What you say, however, is like pointing out that there is no such thing as a "smart bomb"! That's hardly news.
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.
Why did it take 40 years for policy makers to begin to question the course we are on? Since when did the of the well being of the average citizen stop being measure of success of policy? The reality is, as long as the stock market was making double digit yearly gains, all was considered well. Debt, trade deficits and budget deficits be damned. Keep the party going at all costs.
Both parties.
Your point is false. Under the Clinton administration we had great stock market gains, but we also had a real attempt to control the budget and debt. It is under Republican leadership that we have had total indifference to debt and deficits or even worse.
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.
As long as the well being of the wealthy is assured and improves, the well being of the rest of us doesn't matter. It's socialism for the wealthy and capitalism for the poor in America. The loan proceeds from the governments deficit spending is doled out to the CORPORATE WELFARE KINGS and the principal and interest is paid by others, the individual American taxpayers. That's a sweet deal, when you get proceeds from loans and other pay back the principal and interest. This is actually more fascist than socialist because with socialism their is accountability. Fascism doesn't have accountability, according to Mussolini who founded fascism and is why he didn't trust it.
Friedman was mainly arguing against the sort of red tape, strangling bureaucracies as exemplified by places like India in the 70"s, not promoting this cowboy free-for-all, hand the rule making over to K Street crap that was the Bush doctrine. But there are far greater economic forces at work upon American than the wars over market regulations.
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.
For an interested novice those three paragraphs, if true, covered a lot of ground. Excellent, Cactus Tom.
CactusTom: If you care to (or dare to) view history in terms of class struggle, simply substitute "abnormally prosperous working class" for "abnormally large middle class" while remembering that the new deal was already in place at the end of the war.
Your revisionism on Friedman is touching, but totally wrong. Friedman was anti-government and anti-regulation. His position, like his goofy disciple Reagan, was that the government is not the solution, it's the problem. He was, in essence, promoting a cowboy free-for-all.
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.
Great points and absolutely correct. Coincidental with the rest of the world regaining their industrial capacities, with newer equipment and technologies, the USA started defunding education. That's why Ronald Reagoon was elected Governor is Calif. Nixon stated that America was getting to be too well educated for the good of the Republican Party anyway. Just as America was reducing funding for higher education China and some states in India were able to start funding higher education. The U.S.corporations were not using their retained earning for the purpose of retooling and using new technologies. The combination of the USA cutting back on higher education while others were increasing publicly funded higher education and here we are today.More Chinese student take the SAT test in English than Americans do now.
Milton Friedman also believed that "free markets created more democratic societies." Neoliberal imperialism used the International Monetary Fund and the World Bank to lend money in the third world secured by natural resources. Authoritarian dictators signed off on the mortgages on the assets, such as natural resources, and the investment banks "privatized" these "assets" in their debt for equity schemes.
"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."
That's the way I see it, an unbroken line of Friedmanism since Reagan, including Clinton. Capitalism as identical to Democracy has become the well spring of the most absurd canards of the last and hopefully this century. That someone could believe that you could dump the manufacturing sector of the U.S. and have no plan whatsoever as to what will take its place in the economy, meaning buying power of the displaced workers, is absurd. Absurd unless you are willingt to accept the premise that the invisible hand will make it all work out with,say, "knowledge workers". Or, that you could de-regulate financial industries and that they would not turn to crime as quickly as they could even in the experience of history showing that this is exactly what they did before. Honestly, to see this all play out has been as much as I could bear all these years. Now, vindication is still bitter.
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.
Ronald Reagan is dead! His policies may live on, but we are in the process of doing something about that too.
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.
Finally; the anti Rush!
Here Here. Or is it Hear Hear. We need a death penalty for corporations.
It is Hear, Hear, from the tradition of the town crier, and they are well on their way to killing themselves if they do not pay attention to some of the very good minds that have been commenting here today.
This is an incredibly naive view of the present situation. So much money and power has moved to a small number of people who oppose re-regulation that re-regulation is pretty much impossible. Paulson's "reforms" are weak and actually support the Freidman approach in that they further prohibit state regulation. A major reason that the current mortgage crises became disasterous was when in 2003 the Bush-run OCC prohibited state requlation over the wishes of ALL 50 state attornies general.
Ah, you noticed the state regulation pre-emptive move as well. Very, very important for political perspective.
Again, was it Putney Swope?
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!
Socialism for the wealthy CORPORATE WELFARE KINGS and capitalism for the poor.
There are two very important (off the top of my head) elements of the monetarist change to the 70s that you ignore:
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)
There are two fundamental misconceptions about economic theories.
(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).
Elegant thoughts Rog49. On point 1, I would love to see business schools cough up their dominion on economics. Science has much in the way of traditions of proof and reliable results that would settle much of the mysticism of economics. Heck, I'd even be happy if they would hand it over to the engineering school. And on 2, my first point answers the second point.
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.
Other problems beyond the probability of outlier events occurring:
(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
Thanks.
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
Who has the better credentials to create a post Friedman[sp?] regulation of financial enterprises-Barack Hussein Obama, Hillary Rodham Clinton or Al Gore? Are there any other suggestions?
The influence of the corporations and the fact they receive the loan proceeds of the governments debt, the deficit, and that money creation was privatized in 1913 with the creation of the Federal Reserve, by the Democrats, needs to be considered.. The loan proceeds are doled out to the CORPORATE WELFARE KINGS with the principal and interest being paid for by the individual taxpayers. Sweet deal whenever you get the proceeds from loans which are paid by others. The rights of the corporations is preeminent now because they have more rights than people without the responsibility. Then their's privatization which creates substantially more corruption with public funds. The most notable examples of failed privatization and the fact that it's purpose is for more corruption are the State of Florida under Jeb Bush and the US under Bush2. Substantial privatization resulted in higher government spending and a decrease in services except to those corporations who derive the benefit of receiving public funds. Most corruption in this country is private corruption because their is no accountability and corruption is easier to conceal from scrutiny. The higher government cost for reduced services is how the cost of corruption is determined.
Gold and silver would do the job nicely.
None of the Above.
Henry Gonzalez, former Banking Comittee Chair.
And, I don't mean Jr.
James Madison.
Benjamin Franklin.
Thomas Jefferson.
Abraham Lincoln.
ALL deceased.
The Joint Congressional Committee on Currency and Monetary Policy
Honorable Bernard Sanders, (I-VT) Chair
We need Congressional Oversight
Free from Lobbying $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
Brother Dennis from Ohio.
None of the above.
Maybe Ross Perot? "Giant suckin' sound".
I think that I'll bookmark this blog to read the comments above at a leisurly pace. Re-reads of these comments are merited. Often the shorter comments are paced with nuanced meanings which aren't apparent at the 1st reading. OK, I also have senior moments too. Re-reading blogs & comments is my way of dealing with senior moments. Since I'm retired, I have the time. Please excuse the typos.
larry lynch
The followers of Friedman understand his concepts about as well as they do Adam Smith - simplistically. They prefer to take the parts that appeal to them and ignore the parts that conflict with their primary philosophy - greed.
So they read Friedman just as the religious right reads the Bible.
Vice Presidential candidate Joe Biden gave it to Florida...
Sarah Palin had a few memorable moments during her...
Cross-posted at MyDD.com. The fight to expose Fox News continues. A...
RALEIGH, N.C. -- "I was sure I voted...
Today, we are blogging from Durham,...
By Peter J. Burns, Auburn McCanta,...
WASHINGTON — Two white supremacists allegedly plotted to go on a national killing spree, shooting...
On the heels of last week's 'Onehundredandfiftythousanddollarsgate,' we're reminded of the waves Cindy McCain...
UPDATE: Seth Myers sat alone at the SNL Weekend Update anchor desk saying, "I'm Seth Myers. Amy Poehler...
With a week to go in the race, George Stephanopoulos...
I love the concept of the "Smash Shack" the store opened in San Diego, where according to CBS News, victims...
ALBANY, N.Y. — Bankers and brokers looking to escape the financial meltdown...
SAN JUAN, Puerto Rico — Ahh, the Caribbean. Sun, surf. But where's...
Posted March 31, 2008 | 10:31 AM (EST)