Friday, October 30, 2009

Printing money will save us all, apparently

Money from helicopters is Ben Bernanke's modern encapsulation of Milton Friedman's bold revelation

The Fed has expanded what economists call base money. But the so-called money multiplier, which is a function of bank lending, remains constrained. Today's bold monetary policies are Friedman's invention. That the Fed can always create fresh liquid funds – and should do so liberally in an emergency – was his revelation. Money from helicopters is Bernanke's modern encapsulation. The forces of depression and deflation can be combated by policymakers, and the world has learned from the 1930s. A second Depression should be avoided.

Posted by drewster @ 12:59 AM (1324 views)
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7 thoughts on “Printing money will save us all, apparently

  • Yeees.

    “A second depression should be avoided”.

    That modal sounds much more like a recommendation than a prediction to me.

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  • mark wadsworth says:

    Weird.

    I had always understood Milton Friedman to say that dropping money from helicopters is absolutely pointless, e.g. here. It leads to nominal price increases but nothing else.

    What we are looking at now is the bursting of a credit bubble, i.e. complete loss of previous over-confidence. Is it not better to burst the bubble, do debt-for-equity swaps (to recapitalise banks and get houses back on the market) and start again with a clean sheet?

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  • Friedman and the Chicago boys were all fakes, there was no ‘Economic miracle’ in Chillie, the only miracle was they got away with expanding the money supply at a huge cost to the average and low paid (through devalutaion of their wages in real terms).

    The end result of this policy will be a worthless Dollar – dropped as the world currency by the Arabs and chinese.

    Antoher aspect often overlooked in Monetary policy is how the newly printed money is distributed. It’s often not handed to you, me and the man on the street, but in fact ends up in the cash holdings of banks or in bankers wages / bonuses (as they are the conduits for the expansion). This merely leads to some specific areas benefitting (Ferrari showrooms, top end properties etc.) which does not create the broad stimulation required for growth.

    The attempt at solving the current crisis with quantitive easing will thankfully be the death of Friedman’s theories and the end of Monetarism.

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  • mountain goat says:

    Banks lend you an umbrella when the sun shines and then take it away when it rains. People take risks when confident, but save and hoard when fearful. That is human emotion led economics and the path things followed before this grand intervention/manipulation by central bankers started. You can see how Friedman’s “stimulate when in recession” method would have worked initially when the debt level wasn’t too high. Just reducing the incentive to hoard cash would kick-start an economy which was in recession. But now after repeating this over and over for decades, not waiting for debts from the previous period of exuberance to be paid off, the level of debt is too high. It’s very close to being a dead parrot economy. Pumping it full of QE blood allows it to march around like a zombie only as long as the transfusions last. When everyone (not just we on hpc) realize that the parrot is dead watch out below….

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  • MW
    – The author is correct in asserting that Friedman thought up the idea, that he thought the Fed made the situation ( depression / 30-33 ) worse by constricting the money supply, and that he thought the Fed should have provided liquidity to the banks to avoid failures.

    Friedman opposed the federal reserve system itself, but in the case where it exists he supported targeting a steady increase in the quantity of money.

    I don’t know if he would have actually supported “bursting the bubble” over a slowly diminishing support, since he may have feared letting the financial institutions go bust and causing more problems. He would have acknowledged the likelihood that supplying liquidity would lead to inflation, but may have cited it as a lesser evil.

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  • mountain goat says:

    I recommend this big picture look at Andrew Smithers book “Wall Street Revalued: Imperfect Markets and Inept Central Bankers” by the FT.

    The big points of the book are four: first, asset markets are only “imperfectly efficient”; second, it is possible to value markets; third, huge positive deviations from fair value — bubbles — are economically devastating, particularly if associated with credit surges and underpricing of liquidity; and, finally, central banks should try to pri ck such bubbles. “We must be prepared to consider the possibility that periodic mild recessions are a necessary price for avoiding major ones.” I have been unwilling to accept this view. That is no longer true.
    FT

    hpc wouldn’t allow me to use the pri_ck such bubbles lol

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  • mountain goat says:

    More from this book review on the subject of pricing.

    “The right time to buy is not when markets have done well, but when they have done badly. “Markets rotate around fair value.” There is, Mr Smithers also shows, reason to believe this is true of other markets in real assets – including housing.

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