I’ve really become quite intrigued with the idea that tight money was a driving force behind the 2008 recession. It’s unfortunate this view isn’t at least being aired outside of among economists. Conservatives like Milton Friedman used to emphasize the critical importance of monetary policy and how the private sector’s role in recessions is limited.
A dilemma for conservatives
Thu, 24 Mar 2011 01:44:28 GMT
Milton Friedman helped revive capitalism when he showed that the Great Depression didn’t show capitalism was unstable, but rather that monetary policy had been unstable.
…I believe that abandoning the Friedman/Schwartz view of the business cycle was a big mistake. It’s not that this view would have magically absolved the private sector from any role in the sub-prime fiasco, I’m somewhere in the middle on this issue, believing both regulators and private actors made huge mistakes. Rather the F/S view would have absolved the financial crash from being the primary cause of the Great Recession. It would be much easier to live with the occasional financial fiasco if it didn’t lead to a Great Recession. Remember 1987?
If RGDP hadn’t fallen sharply in 2009 then the banking crisis would have been resolved much more easily, with far less public money.
…In 1930-33 the policies advocated by Friedman and Schwartz would have been viewed as being highly progressive. Later Friedman moved away from steady monetary growth toward policies that would offset velocity shocks—even more progressive. It’s a pity that so few liberal and conservative economists picked up the torch when Friedman died in 2006. What is “the torch?”
1. Demand shocks drive the business cycle.
2. Monetary policy is the best tool for demand stabilization.
3. Monetary policy is very powerful at the zero bound.
How many economists believed all three in October 2008?