The American Spectator

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Misunderstanding Monetarism

By Philip Klein on 12.1.08 @ 4:33PM

Ezra Klein has suggested that Ben Bernanke's "extremely aggressive" moves during the financial crisis have undermined the case for Milton Friedman's monetarism, but Ezra is working off of an inaccurate understanding of monetarism. Friedman's argument wasn't that we need more aggressive monetary policy, but actually, quite the opposite. He believed that no matter how brilliant its board members may be, the Fed will always be playing a guessing game and making decisions based on outdated information, or choosing among competing policy goals. Friedman famously compared the Fed attempting manage monetary policy to a "fool in the shower" who keeps turning the temperature from one extreme to another because there is a lag time between turning the faucet, and having the water adjust from hot to cold, or vice versa. It's true that he criticized the Fed for allowing our money supply to contract dramatically in the early stages of the Great Depression, but he used that example not to make the case that the Fed needs to be more aggressive, but to demonstrate why it was dangerous to give so much power to the Fed in the first place. What he advocated was to set a constant rate of growth for the money supply that wouldn't be subject to the whims of Fed members, and that would be predictable to businesses and investors. As Friedman's imagined it, such a system could be run by computers. If anything, the erratic, constantly-shifting strategies being employed by Paulson and Bernanke prove Friedman's criticisms to be quite astute.