Friedman‘s
take-no-prisoners approach to ‘global’ economic
crisis
BY KATHLEEN O'TOOLE
Speculators aren't the
evil beings government leaders make them out to be; the
International Monetary Fund and World Bank make people
poor and destabilize countries; the Japanese central bank
has made the same mistake as the U.S. Federal Reserve did
when it started the Depression slamming the brakes on
printing money too fast.
Sinking back into a brown
leather chair on the stage of Kresge Auditorium, the
irrepressible Milton Friedman introduces another
generation of Stanford students to those and other views
from the dramatic world of economics, and the students
love it.
The outspoken Nobel
laureate, invited to give the only public lecture in a
week-long series of intellectual events hosted by the
Institute for International Studies, drew an overflow
crowd on the afternoon of Oct. 21.
The crowd was weighted
toward the young end of the campus age distribution, even
though it did not include about 75 students turned away
to make room for visiting dignitaries. They came to hear
about the timely subject of the global economic crisis
but were promptly told to forget it. "It's all a
bunch of nonsense. There is no global crisis,"
Friedman announced, with a wave of one arm and a broad
grin.
"The United States is
in very good shape. The European Common Market and
Britain are not standing on the edge of any financial
cliff. With Canada, that's 75 percent of the GNP of the
world."
And so went Friedman's
brand of inoculation against the headlines in the Wall
Street Journal. "Are we facing a recession?
Maybe. We've been having them for 200 years, and we
haven't learned how to solve them. Life goes through ups
and downs. Economists have a terrible record trying to
predict when they will occur."
And then he predicted: If
we have one, "it will be like other postwar
recessions relatively mild."
If there is something new
for an economics student to learn from current events,
the 86-year-old intellectual intimated, it is from the
Euro experiment, about to take place on Jan. 1.
"That's a real new
experiment, no precedent in monetary history. People
compare it to the gold standard, but the gold standard
was a case of each individual country separately
agreeing" to back up their currency with a fixed
value for gold. They could always change their minds, he
said. Now, the 11 European countries who have agreed to
adopt the Euro and stop printing their own currencies
have "thrown away the key. They have no escape
route."
Does he think it will
work? Maybe.
"I've been very
negative about the Euro because I feel the conditions are
not present. In the United States, we have people, all of
whom speak some approximation of the same language"
the audience interrupted with knowing laughter
"free to move about, and lots of real movement, and
we have a large central government," he said. That
means that when an oil crisis hits Texas, Texans can move
to California, or Washington, D.C., politicians can take
action to relieve Texans' pain. Europe, he said, has
large local governments, a small central government and
rigid price regulations. But, he conceded, they may be
"lucky enough to have no shocks that affect one
country" different from the others, in which case
they may be able to loosen up the current regulatory
schemes that inhibit economic growth. "I hope it
does succeed, but it will be fascinating to watch,"
he said.
Friedman repeated much of
what he has written recently in the popular press about
the Asian and Russian financial crises. His major point
is that speculators and markets did not cause them, but
rather government and international agency meddling with
the natural workings of markets. In light of that, he was
asked his opinion of the recent action by the Federal
Reserve to broker an agreement in which major creditors
of the hedge fund, Long Term Capital, agreed to supply it
with new cash when it could not meet its market calls.
Letting Long Term Capital
fail would not have jeopardized world financial markets
as some contended, Friedman said, but he was reluctant to
condemn the Fed's action because no public money was
involved. The Fed traditionally also has tried to save
banks in similar ways when there was suddenly a run by
their depositors that created a liquidity crisis. As a
counter-example from U.S. history, he cited the case of a
Depression-era bank with many outstanding loans to
immigrant entrepreneurs. It was not bailed out because
financiers wanted its owners to fail because they were
Jewish.
Friedman cited the precise
chapter in one of his books where his audience could read
details, and then he moved on to answering the next
question, as pointedly as ever. SR
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