David Beckworth Plays "What Would Milton Friedman Say?" Whack-A-Mole
David Beckworth:
Macro and Other Market Musings: The "What Would Milton Friedman Say?" Whack-A-Mole Game: [O]bservers claim that both the ad-hoc nature and scale of monetary policy intervention [we currently have] would never be sanctioned by Milton Friedman. I and others have responded many times that except for the former point, this critique is wrong. Just look at Milton Friedman's own words to see why.
Nevertheless, this "What would Milton Friedman Say?" critique against Bernanke's Fed keeps reappearing in prominent media outlets like a never-ending whack-a-mole game.
The most recent contribution comes from Amity Shlaes… who is operating without a license here…. Her claim that Friedman would not endorse QE2 or Operation Twist overlooks… [that] Milton Friedman advocated large scale asset purchases for Japan [in 2000]…. Milton Friedman's call… for purchasing long-term government bonds as a way to push the Japanese economy out of its quasi-recession is similar to the Fed's justification for QE2 and Operation Twist. The only meaningful difference is that Friedman was advocating a continual, sustained purchase of securities until a robust recovery began. The Fed, on the other hand, has been applying a piecemeal approach (i.e. QE2, Operation Twist, long-term interest rate forecasts) that in some ways creates more uncertainty…. Second, not only did Friedman call for large-scale asset purchases (LSAPs) but he also provided theoretical reasons for doing so… portfolio effects that in turn affected aggregate nominal spending. Edward Nelson… has an excellent article that summarizes Friedman's view on LSAPs and its implications for the portfolio channel. Anyone who wants to make claims about Friedman's monetary views should read this article first.
Third, Milton Friedman was very clear that one should never look to the level of short-term interest rates as a guide to monetary policy….
The one point where I do agree with Shlaes is that Friedman would have preferred that monetary stimulus be done in a more systematic manner…
