Our friend Noah Kristula-Green has an interesting quote from Christina Romer on The Daily Beast:
When you asked me for my list of books, I debated about whether to put The General Theory by John Maynard Keynes on the list. The General Theory is an incredibly important book, but it’s basically a theoretical explanation of how aggregate demand could affect output. It was Friedman and Schwartz who provided the empirical evidence that supported the theory. That’s why A Monetary History went to the top of my list.
Christina Romer is of course totally right – Friedman was right about the Great Depression. Because Romer read Friedman she also fully well understand the monetary reasons for the Great Recession.
Noah continues:
It is a testament to Friedman’s scholarship that his work holds up so well.
Now if only conservatives can admit that if Friedman was alive, he would support having the Federal Reserve be much more active in working to speed up the economic recovery.
Marcus Nunes
/ March 2, 2012Could it be that by praising Friedman put you in a good light, but when the time came to practice it, you simply forgot about it? Christy Romer often “slips” on “Fiscal Stimulus”. But Bernanke is much worse:
http://thefaintofheart.wordpress.com/2012/03/02/on-bernanke-paying-lip-service-to-nominal-stability/
cthorm
/ March 2, 2012My only quibble is with Noah’s terminology. There is a fine line between an active and a discretionary Federal Reserve. Gravity actively pulls us toward the center of the Earth – it is an active force technically speaking, but ‘active’ is not a very good term for the way gravity acts, certainly not better than non-discretionary or indiscriminate.
The difference is not trivial; how massively distorted would our world be if gravity was NOT indiscriminate, imagine if gravity pulled harder on objects that were not rotating! We may as well live in a Dr Seuss book. The same is true for the Fed or any Central Bank, only we’re looking from the Dr Seuss book into the rational and consistent world.
This distinction is also the key to successfully explaining market monetarism to conservative critics of the Fed, especially the Ron Paul / Rothbardian variety. If you listen closely what they’re objecting to, it’s what they perceive as discretionary behavior. Even if they don’t accept that money is neutral (in which case market monetarist ideas still distort), the reduction in discretion is enormous. This is especially true on a multi-decade timescale. One of the most powerful images for Fed critics is the value of the 2012 USD vs the 1913 USD – this meme evaporates if you can say a reformed Fed would do much better, preserving most of the purchasing power over the long run. In effect a FIAT currency worthy of the translation, rather than a mockery.
Lars Christensen
/ March 2, 2012cthorm, that is an very important point. I of course have often argued that MMers are strongly against “activist” monetary policy. We want rules – not discretion so I fully agree with your point.