Friday, April 18, 2008

Friedman Bashing

I missed this Peter Goodman article in the NYT the other day that attempts to blame free market economics (and Milton Friedman by association) for the current problems in the economy. Nothing could be futher from the truth, but he tries his best:

Joblessness is growing. Millions of homes are sliding into foreclosure. The financial system continues to choke on the toxic leftovers of the mortgage crisis. The downward spiral of the economy is challenging a notion that has underpinned American economic policy for a quarter-century — the idea that prosperity springs from markets left free of government interference.

Goodman and most of the public don't seem to understand that the current difficulties in the housing market were not caused by the free market. In fact they were caused by the Federal Reserve, which held real interest rates negative in a successful attempt to avoid deflation. The Federal Reserve's price fixing is about as far from free market as you can get.

In the United States, the reconsideration of the Friedman doctrine came via the global financial crisis that has resulted from the collapse of American real estate. Many economists blame regulators for ignoring warning signs that banks and investors were growing reckless. One Friedman acolyte has taken the brunt of such criticisms — Alan Greenspan, the former chairman of the Federal Reserve.

But as America reaches for regulation to tame the markets, the keepers of the Friedman flame remain resolute that government is no solution.

“Friedman taught some fundamental long-run truths and he was adept and skilled and almost brilliant at getting them into the public domain,” said Allan H. Meltzer, an economist at Carnegie Mellon. “Now we’ve come into a crisis that has dampened enthusiasm for those policies, and we’re headed back into a period of more regulations that will do the same bad things as in the past.”

Banks and investors grew reckless because the Federal Reserve gave them cheap money with which to get reckless. Regulators are only needed because of a failure of central planning, not because of a failure of the free market. At least Goodman quotes Meltzer at the end who gets it right. We will get more regulation out of this while ignoring the root of the problem.

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