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Stanford Report, October 28, 1998

Milton Friedman on the economic crises: 10/98

Friedman‘s take-no-prisoners approach to ‘global’ economic crisis


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