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September 25, 2008

Quote of the Day

The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 ... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.

—Milton Friedman, Two Lucky People, 233

It sounds to me like Milton Friedman was saying that the government could have mitigated the Great Depression through a proper intervention.

"Offset the depression" I take to mean "use the massive backstop power of the federal government to push back against prevailing (irrational, vicious-cycle) market forces until a more rational equilibrium was reached."

Like I said in an earlier comment, I think some people are taking the general precepts of Friedman and reading out of him any, um, nuance on this subject whatsoever. Friedman's rules are being parroted; his caveats and exceptions are being ignored, to the extent they are known at all.

The word "Keynesian" gets tossed out a fair amount. I'm not sure what a "true Keynesian" is, but I think it is fairly standard economic thinking -- even among very conservative economists -- that the basic notion of Keynesian economics -- that the government should act in a countercyclical fashion to offset the the sometimes-irrational excesses of the market and economy -- is true, to one degree or another.

For those who think a recession is overdue -- I wouldn't sweat it. We're going to have a recession.

For those who worry that credit has been too loose (I agree!) -- I wouldn't sweat it. We're going to have a great tightening of credit.

The question I think at this point is whether we're going to have a credit crunch, higher unemployment, and a fairly deep recession, or if we're going to have a credit meltdown, unemployment up to 10% or 12% or higher, and a severe, long-lasting recession that has a good possibility of being worse than the awful one of 1981-82 and even has an outside chance of being downright catastrophic.

So those who want the market to punish us for our excesses: Do not fear, punishment is on the way. It's a question between punishment and cruel and unusual punishment.

Thanks to Jack Straw.

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posted by Ace at 05:31 PM

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