The Corner

Bernanke and Friedman Revisited

A few weeks ago, I was asked by a young journalist what I had to say about Federal Reserve Chairman Ben S. Bernanke’s monetary policy, which follows the great free-market economist Milton Friedman’s prescription to fix this crisis. My answer: Nonsense. Bernanke’s policy is Keynesian in essence. Think about it: a massive injection of cash into the economy, a dramatic expansion of government, and many interventions in the market. That’s Keynes, not Friedman.

I suspect many people share my view. In fact, on April 13, Rich Miller of Bloomberg News wrote:

Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation “will get higher than it was in the 1970s,” says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over-year rate of 13.3 percent.

Friedman’s work proved that when government increases the money supply, the result is inflation. When the government dramatically increases the money supply, the result is dramatic inflation. Hence, I assumed, he would have disapproved of the Fed’s policy.

Now enters Penn Bullock — the young journalist who asked me the original question. According to Bullock, it is wrong to call Bernanke a Keynesian. In fact, the Fed Chairman is the ultimate Friedman scholar. Over at his blog Industrial Waste, he writes:

In “Monetary History,” Friedman spelled out a government plan for averting future depressions. Here it is: drop interest rates, buy corporate bonds, lend to the banks, and print money to keep inflation going.

Like a perfect disciple, Bernanke has implemented each of these prescriptions to the tee – and to the tune of over $12 trillion. Interest rates are at zero and the Federal Reserve is now the chief buyer of corporate bonds. The banks are being shoveled up to $100 billion a week and the printing press is running at full steam.

Ask Bernanke and he will tell you where his ideas come from:

Testifying before Congress this year, Bernanke told Ron Paul that Friedman is the guiding light for the Federal Reserve. The matter was sealed at a dinner in Orlando this week (which I attended), where former Federal Reserve Governor Randy Kroszner informed an audience of libertarians that the recovery plan ‘is entirely consistent’ with Friedman’s wishes. . . .

As dictator of the Federal Reserve, Ben Bernanke has faithfully transcribed Milton Friedman’s depression-prevention model into reality. Trillions of dollars are allocated in line with his academic theses.

So stop calling Bernanke a Keynesian. He’s a Friedmanite.

Check out this must-read blog post here. The question now I guess is: Would Friedman still be a Friedmanite today?

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