David Stockman: Economic Anarchist

I wonder how much of the comtempt of the federal Reserve from Republican economic policymakers is rooted in the writings of Milton Friedman. Case in point is David Stockman.

A recurring theme of Stockman’s work is that it is precisely these efforts that have sown the seeds for all that ails the economy. He writes in the Times: “As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests.”

Friedman was highly critical of the Federal Reserve allow the dollar to deflate and not acting fast enough to stop the crash of 1929.

The first bank runs started in 1930. Banks did not have enough revenue to cover businesses and customers withdrawing money. Friedman is correct about the Federal Reserve acting too slow.

Friedman made it popular for conservatives to hate the Federal Reserve. However, Stockman argues that Friedman is wrong. Friedman rightly stated that the Federal Reserves not giving the banks a cash injection in 1929 was wrong. Stockman argues against the selling of Treasury bonds.

“During the four decades since the gold window was closed – the rules of the game have been profoundly altered. Specifically, under Professor Friedman’s contraption of floating paper money, foreigners may accumulate dollar claims or exchange them for other paper monies. But there can never be a drain on US monetary reserves because dollar claims are not convertible. This infernal regime of fiat dollars, therefore, has had numerous lamentable consequences but among the worst is that it has facilitated open-ended monetization of US government debt.” ibid.

Does Stockman actually want to go back to the gold standard? The man has lost his mind.

Hank Paulson, Tim Geithner and Ben Bernanke allowed Lehman Brothers to fall. The three even urged Lehman Brothers to file for bankruptcy. The result was an international economic crisis. International financial institutions froze credit after Lehman Brothers fell. Paulson went to Congress to get TARP passed and bailout AIG and the too big to fail banks. Stockman would have let AIG and the banks fail. The result would have been an economic crisis worse than the Great Depression. I am no fan of the way Paulson, Bernanke and Geithner handled the 2008 financial crisis. However, what Stockman is advocating is anarchy.