Monday, October 20, 2008

What would Milton Friedman say?

We have had occasion before to mention Peter Robinson, whose fine "Uncommon Knowledge" program is a successor of sorts to William F. Buckley's "Firing Line."

A fellow at Stanford University's Hoover Institution, Robinson recently had a small piece in Forbes, in which he sat down with two of his Hoover Institution colleagues, Thomas MaCurdy [yes, the spelling is correct] and Jay Bhattacharya [can't claim expertise on that spelling.] Both economists are "close students" of Friedman, so Robinson asked them to speculate on what that great economist would say about the current financial crisis, were he around. The whole piece is worth reading, but the answers to Robinson's question about what Friedman would have thought about government intervention were particularly interesting.

He would have approved of such efforts in Britain--but expressed grave reservations about those here in the U.S.

"Milton would have wanted the authorities to find very, very aggressive ways of expanding the money supply," says Tom. The Bank of England did just that, placing large deposits in banks throughout the British financial system. "What they did in England was quick, clean and direct."

Here in the U.S., by contrast, Treasury Secretary Henry Paulson's original bailout plan, under which the Treasury would have spent hundreds of billions of dollars purchasing subprime and other instruments from major banks, went at the problem backwards. "The government should take responsibility for the money supply, but not for setting prices," says Jay. "The problem with subprime assets is that nobody knows what they're worth. Friedman would have told you that bringing the government in wouldn't have helped that."

With his new plan, under which the Treasury has now taken equity stakes worth $125 billion in nine big banks, Paulson has finally begun to make sense. "Direct injections of capital into banks--Milton would have approved of that," Tom says. "But why did it take so long? Why did we have to wait for the Bank of England to set the example?"

Good question -- but watching "Prime Minister's Questions" on C-Span last night (watching that wonderful weekly exercise in parliamentary sparring reminds us of why even lowly British back-benchers have a verbal agility that virtually none of our major politicians do) the viewer was reminded of why it didn't happen. Labour back-benchers were pummeling Labour leadership (the PM was away, so a stand-in had to do the honors,) asking why the money had gone to the banks rather than to the people.

It is a sad day when the British Labour Party leadership has the strength to do what Friedman would have done, while here in America...

And finally, Robinson asks whether Friedman would have seen current events as a setback for capitalism. Their answer?

Only in the short term.

"If this election goes the way it looks as though it's going to go," says Tom, "then the political system is about to get a major overcorrection to the left. And that means the American people are about to get an extreme illustration of just how badly government intervention screws stuff up."

Ah, the advantages of the long, historical view. Grouchy conservatives are of course always correct when they say we are doomed, doomed, doomed. But optimistic conservatives (really the same people, just in different moods -- we are grouchy when we have just read the morning newspaper or made an unavoidable journey to the mall; but optimistic when we choose to marry and have children, when we start a business, or when we write a paragraph in the hopes that someone will read it and care) -- optimistic conservatives understand that after the ecliptic doom, the sun always comes out, even if it won't happen in our lifetimes.

1 comment:

olredtrk said...

I haven't seen many optimistic conservatives lately. Perhaps they haven't been as eloquent as your post, or maybe the media has effectively silenced them through their bias.(insert heavy sigh here)

Churchill, Goldwater, Reagan, Thatcher, ?. I guess I'm still optimistic, I put in the question mark for the next great conservative to fill.