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playing a guessing game and making decisions based on outdated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.
