What would Friedman say on QE2?

After hypothesising views of Fisher, Keynes on crisis and policies, the next question is what would Friedman say on the crisis and QE2 in particular?

David Wessel of WSJ has a superb article reviewing asking Friedman disciples and economists on what would the great econ say?

Enough about John Maynard Keynes. We can be sure the 20th century British economic giant would advise more government spending to spur U.S. economic growth with consumers and businesses so hesitant and short-term interest rates at zero. What would Milton Friedman, the University of Chicago champion of monetary discipline, do now? What would he say—reversing the charges when he returned a reporter’s call, as he always did—if asked about Federal Reserve Chairman Ben Bernanke’s imminent move to print hundreds of billions of dollars to buy more U.S. Treasury bonds to put more money into the economy?

We can’t ask him. He died in 2006. “Friedman,” says one of his eminent students, Robert Lucas of the University of Chicago, “was such an original thinker that one could never guess how he would react to a new question.” Nevertheless, this seems a ripe moment to contemplate Friedman’s views and those of his disciples—though they don’t agree among themselves.

The disciples have their own take:

  • Robert Lucas is uncertain on QE2: If we had something like the Japanese deflation I’m sure Milton would say: Pour more money into the system. But we’re not in that situation.
  • John Taylor is against QE2: He says Friedman would  not approve this massive bond buying
  • David Beckworth of Texas State University is for Q2: He says Friedman would  look at income which have declined
  • Then there are two more points for QE2 – velocity of money is low and inflation is falling

Overall:

Milton Friedman held unswervingly to his principles, but was more pragmatic than some of his modern-day followers. He was supremely self-confident, but, as Mr. Lucas puts it: “One of the many lessons I learned in Friedman’s class was to work out my own views on questions, using economic logic as well as I can, and not to trust authority—even his.”

The Friedman logic, though, makes the case for QE2.

Interesting take on Friedman. Just wish he was alive…

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One Response to “What would Friedman say on QE2?”

  1. The QE2 – What would Keynes, Friedman, Mises do? « Study of Economics Says:

    […] Mostly Economics (blog of some economist from India), I read that Keynes would agree with the policy of the Fed and […]

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