# Did Monetarism work in the early 1980's? Is it a Quack Philosophy? **URL:** \ **Category:** Great Debates\ **Created:** [September 26, 2013, 6:35pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744 "2013-09-26T18:35:53Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 27, 2013, 3:45pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/21 "2013-09-27T15:45:30Z")
> [@naita](#): > > Norway’s Central Bank - [The objective of monetary policy](http://www.norges-bank.no/en/price-stability/monetary-policy-in-norway/the-objective-of-monetary-policy/) > > Uniqueness disproven. Yeah, I was going to go back and qualify that since I figured that there had to be at least a couple exceptions \*someplace \*on the planet, but I was too lazy. 🙂 ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [September 27, 2013, 7:47pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/22 "2013-09-27T19:47:21Z")
> [@puddleglum](#): > > Bernanke is a committed monetarist and learned so much from Friedman. That is how he was able to rescue the economy from a second great depression. Here is a speech where Bernanke talks about Friedman’s influence [" Among economic scholars, Friedman has no peer. "](http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/) This speaks only to Bernanke’s deeply held ideological beliefs. Bernanke was completely blindsided by the crisis (Irving Fisher was blindsided by the first Great Depression, so there’s no surprise Friedmanites were befuddled by the current one) and has done much to prolong the suffering since then. His actions have been a godsend for investment bankers, I will give you that much. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 27, 2013, 7:56pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/23 "2013-09-27T19:56:36Z")
> [@WillFarnaby](#): > > This speaks only to Bernanke’s deeply held ideological beliefs. Bernanke was completely blindsided by the crisis (Irving Fisher was blindsided by the first Great Depression, so there’s no surprise Friedmanites were befuddled by the current one) and has done much to prolong the suffering since then. His actions have been a godsend for investment bankers, I will give you that much. What do you mean by blindsided? Bernanke was appointed in 2006 which I believe was well after the Bush administration had decided to do virtually nothing to regulate trading in derivatives. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [September 27, 2013, 9:29pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/24 "2013-09-27T21:29:06Z")
deltasigma: Please don’t tell me you believe that the best way to conduct monetary policy is to target M2 or some other monetary aggregate, while ignoring other indicators. Because that’s pretty much what monetarism is. It was defensible before it was tried. But nowadays it has few serious defenders. Friedman was a bright guy, and he has a lot of followers. But generally speaking they don’t advocate making M2 (or another single monetary measure) the sole metric anymore. Variants of the Taylor Rule are what is put forward. ## I’m not trying to put words in your mouth, btw: I’m just trying to clarify. I suspect the answer is, “No, not really: I don’t believe that.” I’ve been trying to find a Brad DeLong’s essay on Friedman where he points out the many points of vindication and the fewer places where his ideas didn’t pan. But I can’t find it now. Settle for this: > [@Brad DeLong](#): > > One problem is that “Friedman” is underspecified. There are many Friedmans, including: > > 1. The Keynesian Friedman of “A Framework for Monetary Analysis” > 2. The incredibly rigid financial regulatory straightjacket Friedman of “A Program for Monetary Stability” > 3. The pro-bailout Friedman of “The Great Contraction” > 4. The late Friedman who concluded that money stock-targeting had not lived up to expectations. > 5. The early Friedman who believed that keeping the nominal money stock on a smooth growth path would eliminate any possibility for large disturbances in velocity. > > These guys are not all consistent, not all the time. [http://delong.typepad.com/sdj/2009/09/tyler-cowens-ultimate-milton-friedman-post.html](http://delong.typepad.com/sdj/2009/09/tyler-cowens-ultimate-milton-friedman-post.html) Number 4 and 5 are most relevant to the OP. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 27, 2013, 9:38pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/25 "2013-09-27T21:38:03Z")
Ruh? A little context here would help since I have no idea what you’re getting at. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [September 28, 2013, 2:04pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/26 "2013-09-28T14:04:24Z")
> [@deltasigma](#): > > What do you mean by blindsided? Bernanke was appointed in 2006 which I believe was well after the Bush administration had decided to do virtually nothing to regulate trading in derivatives. Blindsided as in had absolutely no idea it was coming. You know. The standard definition of “blindsided”. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 28, 2013, 2:59pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/27 "2013-09-28T14:59:37Z")
> [@WillFarnaby](#): > > Blindsided as in had absolutely no idea it was coming. You know. The standard definition of “blindsided”. Well duh, neither did anyone else. That tends to be the nature of fraud. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [September 29, 2013, 3:42am UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/28 "2013-09-29T03:42:00Z")
> [@deltasigma](#): > > Ruh? A little context here would help since I have no idea what you’re getting at. I can’t parse that either. Let me try to summarize. Lots of people believe that monetary policy is effective. Monetarists believed that the best way to conduct monetary policy was to conduct open market operations such that the money supply grows at a constant rate. Milton Friedman was a big proponent of this view. Later, apparently, he appears to have disavowed it if I understand DeLong’s claims properly. I’m not surprised, as I respect Friedman: he was a long contributing member of the reality based community. Monetarism simply has fallen out of favor among both liberal and conservative economists. Friedman remains popular with both, albeit for perhaps somewhat different reasons. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 29, 2013, 4:06am UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/29 "2013-09-29T04:06:26Z")
You’ve lost me. When did monetary policy fall out of favor and how are you defining a liberal vs a conservative economist? Do mean hawkish vs dovish regarding inflation - because that’s something different I would think. As our understanding of the intricacies of our financial system have improved, monetary policy has become an increasingly important tool to be used in stabilizing that system. You only have to go back to the market crash of 1987 to see that. Greenspan threw open the discount window of the fed and was giving away money to anyone who asked because he knew that’s what was needed to avoid a credit crisis. And as soon as the crisis had passed, he removed the excess liquidity. And as this understanding as grown, confidence in using monetary policy in more creative and some would say potentially more dangerous ways has also grown. Do you think anyone outside of a very elite circle thought that you could really get away with pumping nearly $3T worth of liquidity into the system over the past 6 years w/ creating inflation? No. They would have locked you up in a psych ward. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [September 29, 2013, 8:33pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/30 "2013-09-29T20:33:54Z")
> [@deltasigma](#): > > You’ve lost me. When did monetary policy fall out of favor and how are you defining a liberal vs a conservative economist? Do mean hawkish vs dovish regarding inflation - because that’s something different I would think. Monetary policy never fell out of favor. [Monetarism](http://www.britannica.com/EBchecked/topic/389146/monetarism), a school of thought, has fallen out of favor. Those are different things. Felstein and Mankiw don’t push monetarism for example. The New Monetarist [Scott Sumner](http://www.themoneyillusion.com/?page_id=3445) does not push monetarism as I defined it above. > [@](#): > > As our understanding of the intricacies of our financial system have improved, monetary policy has become an increasingly important tool to be used in stabilizing that system. You only have to go back to the market crash of 1987 to see that. Greenspan threw open the discount window of the fed and was giving away money to anyone who asked because he knew that’s what was needed to avoid a credit crisis. And as soon as the crisis had passed, he removed the excess liquidity. That policy is fully consistent with what Friedman and Schwartz espoused in _A Monetary History of the United States_. “Lend freely during a financial crisis”, isn’t a new idea. I think you are correct though that faith in the relative effectiveness of monetary policy rose between, say, 1960 and 1990. (This may be where we are speaking at cross-purposes). > [@](#): > > And as this understanding as grown, confidence in using monetary policy in more creative and some would say potentially more dangerous ways has also grown. Do you think anyone outside of a very elite circle thought that you could really get away with pumping nearly $3T worth of liquidity into the system over the past 6 years w/ creating inflation? No. They would have locked you up in a psych ward. ## I disagree. Those familiar with the liquidity trap - a concept taught to undergraduates - wouldn’t have found that surprising. I scoffed at fears of hyperinflation when the Fed vastly expanded its balance sheet. When short term rates are near zero, bonds become close substitutes for cash. So further monetary expansion is like pushing on a string. Also, if the growth comes back and the economy overheats, the Fed merely has to reverse course. I think what’s going on here is that bond traders and economists weren’t entirely on the same page in 2006 - and both groups (of bright people) were unaware of that. The US had not experience an ultra-low rate environment since the 1930s and while economists were all too familiar with the Great Depression (it was a seminal event for them) folk memory of it among bond traders had disappeared. I mean the 1930s may as well be the stone age for a financial wizard. But that’s just speculation on my part. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 29, 2013, 9:04pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/31 "2013-09-29T21:04:43Z")
I don’t have much interest in the purely academic topics since they don’t do anything to inform the trades I make. But you’re dead wrong about the vast majority of people not believing that the unending rounds of QE were going to create their own kind of financial Armageddon. I suppose you don’t remember gold going to over $1800 and ounce - as just one example. Plus I just checked wikipedia for liquidity trap and it seems to be regarded by many economists as a fiction which only came back to prominence in the 90’s when Japan lowered rates to zero and it had no effect. But as I said, I read and listen to the financial press pretty extensively and I don’t think I ever recall the term being mentioned in relation to QE. Plus, if I understand the idea correctly, there is a big difference between a spike in the savings rate where people are hoarding cash and banks having a few trillion in excess reserves. You and I can’t decide tomorrow to take our extra cash and start making loans. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [September 29, 2013, 10:25pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/32 "2013-09-29T22:25:05Z")
> [@deltasigma](#): > > I don’t have much interest in the purely academic topics since they don’t do anything to inform the trades I make. Ok, then the problem was terminological. I was referring to a near-dead theory. > [@](#): > > But you’re dead wrong about the vast majority of people not believing that the unending rounds of QE were going to create their own kind of financial Armageddon. I suppose you don’t remember gold going to over $1800 and ounce - as just one example. My understanding is that gold is a sideshow, insofar as global asset allocation is considered. Also, you would expect the prices of non-interest bearing assets to rise when real interest rates collapse. We’re drifting off topic here but many of these issues were discussed in real time on this and other message boards. Here’s a thread you might enjoy from July 2010, after vast expansions of the Fed balance sheet: [The BBQ Pit: So where’s the inflation, fucktards?](http://boards.straightdope.com/sdmb/showthread.php?t=571079) My opening salvo: > [@So where's the inflation, fucktards?](https://boards.straightdope.com/t/so-wheres-the-inflation-fucktards/546932/32): > > Personally, I think the fears of hyperinflation that were circulating a year ago were delusional (or, rather, they were based upon a framework that has been resoundly refuted.) I find it highly plausible thought that core inflation could go to 3-4% – heck I think core inflation should go that high, so that we can avoid liquidity traps in the future. But 3-4% inflation is nothing to get hysterical about, unless you are predisposed to that emotion anyway. Scylla: " I can’t recall any credible analysts seriously predicting “hyperinflation.” Are you sure that’s the word you mean?" ## MfM: “My understanding is that serious analysts were receiving _questions_ from their clients regarding, yes, hyperinflation which they politely batted back. It was unclear to me whether the confusion was due to economics or the clients’ confused definition of hyperinflation.” > [@](#): > > Plus I just checked wikipedia for liquidity trap and it seems to be regarded by many economists as a fiction which only came back to prominence in the 90’s when Japan lowered rates to zero and it had no effect. But as I said, I read and listen to the financial press pretty extensively and I don’t think I ever recall the term being mentioned in relation to QE. Once the Fed funds rate drops to 0.25%, you have left the realm of conventional monetary policy. While Bernanke c. 2002 thought that this wouldn’t necessarily be a problem (arrange a helicopter drop!) I don’t think this was a matter of settled opinion. One ~1970s-1990s macro text I recall opined that it wasn’t clear whether there was a liquidity trap during the Great Depression, “But there certainly isn’t one now”. Still, it _was_ a notion that made it into intermediate macro texts. Admittedly, I skimmed a few of those texts some time back and realized that my undergraduate professors had emphasized the concept more than most, not that they were especially fixated on the topic. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 29, 2013, 10:33pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/33 "2013-09-29T22:33:10Z")
I don’t think you’re using the term correctly. This was a credit crisis not a liquidity trap. The savings rate did in fact go up during the crisis but that was long after the fact and it wasn’t all that remarkable. The real issue was the fact that institutions were no longer willing to lend and the reason for that was the fact that they literally had no fucking idea what sort of loan loss reserves they were going to need. That was the whole idea behind creating such huge excess reserves for the member banks. Yes, part of it was to increase liquidity, but the fed knew full well that a lot of that money was going to be parking its ass right in the those reserve accounts for a very long time - years at least, until it became clear what sort of loss exposure the big banks had in the aftermath of the crisis. If you want to call that a liquidity trap, I guess it’s not a violent distortion of the concept, but I think you’re confusing the issue. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [September 29, 2013, 11:36pm UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/34 "2013-09-29T23:36:41Z")
> [@deltasigma](#): > > I don’t think you’re using the term correctly. This was a credit crisis not a liquidity trap. They are not mutually exclusive concepts. > [@](#): > > The savings rate did in fact go up during the crisis but that was long after the fact and it wasn’t all that remarkable. A liquidity trap occurs when conventional monetary policy loses its traction. ZLB or zero lower bound is another description, possibly a better one. The idea being that there’s an interest rate that can boost aggregate demand sufficient that a GDP shortfall can be narrowed. But today, that interest rate is negative. While excess reserves play a role in this story, I can’t see how household savings fits in. > [@](#): > > That was the whole idea behind creating such huge excess reserves for the member banks. Yes, part of it was to increase liquidity, but the fed knew full well that a lot of that money was going to be parking its ass right in the those reserve accounts for a very long time - years at least, until it became clear what sort of loss exposure the big banks had in the aftermath of the crisis. > > If you want to call that a liquidity trap, I guess it’s not a violent distortion of the concept, but I think you’re confusing the issue. I agree that this aspect is better conceived as falling under the category of credit crisis. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 30, 2013, 12:02am UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/35 "2013-09-30T00:02:47Z")
I’m sorry if I came off as being a bit impatient there. It’s just that trying to read the markets is so overwhelming given all of the noise out there that if you’re not absolutely brutal about picking out only what has practical value, it’s just a matter of time before you’re on the street muttering to yourself and scaring the pigeons. To be honest with you, most of what I know about the markets I’ve had to learn since I’ve been trading. I guess business school helped with the basics and maybe I’m taking a lot of that for granted, but in terms of the nuances, any of the finer points, if you’re not following the business press pretty much on a daily basis, you shouldn’t be logging into your trading account. The really humorous thing is, I don’t even do it to manage my investments. The bulk of those are in separate accounts I rarely even look at. The trading is mostly a hobby, and one I almost gave up on at one point. But once you divorce the emotional aspect from it and decide to put some actual effort into it, it can be a lot of fun. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [September 30, 2013, 2:50am UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/36 "2013-09-30T02:50:38Z")
> [@deltasigma](#): > > Well duh, neither did anyone else. That tends to be the nature of fraud. Uhh, many who valued Austrian insights on asset bubbles were in fact not blindsided. If part of your ideology is the denial of the existence of bubbles, it’s likely you don’t see them coming. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 30, 2013, 7:43am UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/37 "2013-09-30T07:43:40Z")
> [@WillFarnaby](#): > > Uhh, many who valued Austrian insights on asset bubbles were in fact not blindsided. If part of your ideology is the denial of the existence of bubbles, it’s likely you don’t see them coming. LOL. Like any serious economist regards von Mises as anything more than an irrelevant historical footnote any more. Get a grip. Besides that, the problem was less the asset bubble and more the fraudulent loans and fraudulent ratings. ---
**Author:** ![Imasquare](https://avatars.discourse-cdn.com/v4/letter/i/5f9b8f/32.png) [@Imasquare](https://boards.straightdope.com/u/Imasquare)\ **Post date:** [September 30, 2013, 8:25am UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/38 "2013-09-30T08:25:04Z")
> [@njtt](#): > > And unemployment went through the roof and stayed there. > > If Friedmanism deserves credit for lowering inflation (I don’t know if it really does, but if) it very probably also deserves the blame for years of austerity and high unemployment. Which is more important, I wonder. Not so. In the 90s unemployment was below 4% in both the US and the UK. ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [September 30, 2013, 10:46am UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/39 "2013-09-30T10:46:47Z")
> [@deltasigma](#): > > LOL. Like any serious economist regards von Mises as anything more than an irrelevant historical footnote any more. Get a grip. > > Besides that, the problem was less the asset bubble and more the fraudulent loans and fraudulent ratings. You made the claim that nobody saw the crisis coming. I made the claim that Austrians saw it coming. You were wrong. No amount of Krugmanesque demagagoguery will change that. Like I said, if you’re ideologically bound to denying the existentence of bubbles, I can understand why economists who predicted a bubble and subsequent bust may cause consternation. If “serious economists” had no clue about the brewing crisis, it speaks much of a rigid ideology to continue listening to these economists without acknowledging valuable insights from less “serious” ones. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [September 30, 2013, 10:50am UTC](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744/40 "2013-09-30T10:50:22Z")
Except you seem to have no idea what actually caused the crisis so you’ll forgive me if I don’t take you very seriously. [Previous page](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744.md?page=1) [Next page](https://boards.straightdope.com/t/did-monetarism-work-in-the-early-1980s-is-it-a-quack-philosophy/669744.md?page=3)