Fed chair Ben Bernanke and Treasury Secretary Hank Paulson have been called “The Committee To Save The World.” But what if they are actually making the situation far, far worse? Anna Schwartz, who co-wrote Monetary History of the United States 1867-1960 with Milton Friedman, says we should abandon everything we’ve tried so far.
In the standard telling of the story, the CTSTW is trying to avoid the mistakes of the Great Depression by taking extraordinary measures to avoid a financial meltdown. Ben Bernanke has specifically praised Schwartz and Friedman’s work arguing that the Federal Reserve made the Great Depression far worse.
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve,” Bernanke said. “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
Bernanke’s work on the Great Depression and praise of “Milton and Anna” have lead many to believe that the plans of the CTSTW are straight out of the monetarist, Chicago School text book. Here’s how historian Niall Ferguson explains it to New York Magazine editor Hugo Lindgren:
“The Federal Reserve system was very powerful in 1929, but as Milton Friedman and Anna Schwartz pointed out in their monetary history of the United States, they did all the wrong things. They systematically tightened monetary policy when there was already a credit crunch. And one of the key points that Friedman made was that if the Fed had been much more openhanded, then the Depression might have been less severe. Well, we’re putting that to the test at the moment. You could say that Ben Bernanke is running a real-time experiment with Friedman’s hypothesis.”
Friedman’s been dead since 2004 so he can’t speak for himself. But Schwartz isn’t keeping quiet. At 94 years old, she’s still working out of her Manhattan office overlooking Fifth Avenue, around the corner from the Empire State Building. And her assessment of Bernanke and Paulson’s actions is absolutely brutal.
For starters she thinks Bernanke should be fired. “I don’t see that there’s anything that the Fed has done that’s helped the economy, helped the market, and proved that its insights into the problems are insights that others would share,” she said in a recent interview with William Cohan.
Here are some excerpts from her interview with Cohan.
- Let failing firms fail. “Rescuing firms that are on the verge of bankruptcy is contrary to the way capitalism is supposed to operate,” she says.
- Government Fear Monger Should Stop. “And their fear tactic of the downside warning that a recession will be on the way unless they take action, warning that the market won’t be able to respond to the elimination of firms that aren’t able to meet the market tests, I think these are all doctrines that have no basis either in the behaviour of other central banks or that are supported by the Fed’s own history.”
- Arrogance Is Not A Good Policy. “These are people who think they know more than they do and that’s why they’re supremely confident that the actions that they take, which are quite extraordinary, are defensible. I don’t think they are. They came in with the notion that they should be aggressive. They should pre-empt. Well, that assumes that they know a lot more than they actually do. They have very incomplete knowledge of the current state of the economy, and certainly of what the future will be.”
- We Need Milton Friedman. “I think it’s just terrible that Milton’s not around because I’m sure that if Milton were alive, he would be writing about the shortcomings of this Fed, and it would have a tremendous impact on the market and might even persuade the present leadership to abandon the kinds of policies that they’ve instituted.”
She goes on to explain in great details exactly where we’re going wrong.
“The Fed’s approach is there will be a crisis if you don’t rescue a failing firm,” she said “And that’s not true. The market knows when a firm isn’t sound. And if the Fed didn’t behave as if every failing firm is too big to fail, then it would permit the exit of firms that weren’t really viable and the market would recognise this as a just decision. It’s not the job of the Fed to be intervening to help such firms. People are knowledgeable. They knew that there were troubles with Lehman.
“They knew there were troubles with Bear Stearns because their portfolio was just full of assets that were risky and not valued correctly. They deserved to be eliminated. And if the Fed had taken such an action in the case of Bear Stearns, I think the market would have respected the Fed, and thought, ‘these are principled people who know what they’re doing’.”
“If they’re going to go into the business of rescuing every failing firm,” she concluded, “we won’t have a capitalist system . . . People are responsible for the decisions they make. If they’ve made wrong decisions, lost money and don’t have the funds to operate, well, it’s time to leave the market. And that’s what the Fed’s responsibility is, not to shore up firms that have no reason to continue.”
(Hat tip to Peter Cohan, who notes: “Milton would have let the failed institutions fail. But it’s too late to know whether his ideas would have worked.”)