David R. Henderson  

Tyler Cowen's Response

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On this blog a couple of days ago, I challenged Tyler Cowen on two issues. He responded to both in the comments section of my post and on his own blog today. His responses on both are unsatisfactory. Here's why.

1. The issue of whether Milton Friedman would have advocated a bailout of banks last fall.

I said he would not have but, instead, that if he had feared a collapse of the money supply, as many of us did, he would have advocated that the Fed purchase more bonds to get more liquidity into the banking system. In their book, Free to Choose, Milton and Rose Friedman write:

The [Federal Reserve] System could have provided a far better solution by engaging in large-scale open market purchases of government bonds. That would have provided banks with additional cash to meet the demands of their depositors. That would have ended--or at least sharply reduced--the stream of bank failures and have prevented the public's attempted conversion of deposits into currency from reducing the quantity of money. Unfortunately, the Fed's actions were hesitant and small. In the main, it stood idly by and let the crisis take its course--a pattern of behavior that was to be repeated again and again during the next two years.

That is not a bailout, at least as that term is normally understood. And remember that Bernanke et al, in advocating the bailout last fall, were not just advocating what the Fed already had the power to do.

Tyler cites an interview with Friedman but I read through the interview and can't find any mention of bailing out banks. He does say that if the Fed wasn't going to do its job as lender of last resort during the 1930s, then the FDIC should have done it. But that's his second-best; his first-best is to have the Fed do its job.

Interestingly, also, Tyler doesn't respond to the two monetary economists, Bill Woolsey and Jeff Hummel, who supported my analysis in the comments section. Rather than repeat them here, I recommend that you go to my post and scroll down.

Update: Larry White has now added 2 comments supporting my analysis.

2. Tyler's Accusation of Pretense

Tyler didn't address this issue. He appeared to address it in the comment section of my post But he didn't address it. Instead, he pointed out that he had been critical of many others besides libertarians. He's right. He has. And one of his best criticisms was of Naomi Klein's book.

But that doesn't address what I said. An accusation of pretense comes pretty close to an accusation of lying and I don't recall him making such accusations against non-libertarians. Again, as I said in my original post, I may be wrong, which is why I asked readers if they could find counter-examples. But to present it as a true counterexample, you can't just cite a criticism: you need to cite an example where he accused someone of pretense.

Moreover, I'm not saying that Tyler should have accused her of pretense. I prefer discussions in which people don't do that, which is why I like so much of what Tyler does. I was simply pointing out an asymmetry.


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CATEGORIES: Monetary Policy



COMMENTS (16 to date)
Jaleel White writes:

It's probably worth noting that Anna Schwarz did not say bailouts are bad per se in her recent anti-Bernanke op-Ed in the NYT. She criticized him for the lack of clarity in his policy, but did not say anything hinting that the idea of a bailout was in and of itself bad. Perhaps she has written that elsewhere. It would be interesting to hear her take on this debate. Any of the celebrity economists commenting on this debate have her number? Larry White? Jeff Hummel? Tyler? Megan? Bruce? Lets agree to let her settle it and give Anna a call.

David R. Henderson writes:

I know Anna, but talking to her wouldn't settle it. What we would get is Anna's viewpoint, not Milton's.

Tyler Cowen writes:

David, I don't understand the first part of your response. You are simply repeating that Friedman favored money supply growth, which of course is true. I cited plenty of sources, including Friedman himself, on the lender of last resort issue and that Friedman favored such a role and in an extensive form if needed. Your post even seems to admit that Friedman *preferred* to have the Fed as lender of last resort, which seems to concede the point that Friedman favored bailouts.

Woolsey's remarks are dealt with in my response post and in the McArdle post I linked to. You cite them but you don't show they have force vis-a-vis my response.

You refer to White's comment, which says Friedman only favored LLR to solvent banks. We don't know this is true but at the very least we do know, and Friedman very likely knew, that if the Fed is the LLR there is some chance they won't get the money back. More importantly plenty of the current bailouts were to solvent banks and I'm saying Friedman would have favored at least those bailouts. I made it very clear that Friedman might not have favored all the bailouts but he very likely would have favored some of them. I also noted quite specifically that the loans to illiquid but potentially solvent banks have very much been called "bailouts" under the current terminology. So we are back at: Friedman probably would have favored bailouts as that term is used today.

I don't know if I ever used the word "pretense" before but certainly I have described a great deal of intellectual behavior in terms of self-deception, on both sides, left and right. I even wrote a whole paper on the topic and have numerous blog posts devoted to just that topic, self-deception in discourse. I've made it quite clear -- repeatedly -- I see it as a general phenomenon and not the monopoly of one side or the other. I am a little upset that you are describing with my views without considering this evidence at all; the only thing you are citing is the non-evidence of what you can't remember. These are even relatively regular and well known posts on MR and my paper on self-deception is on my home page and there is a whole chapter on the universality of self-deception in my book. Or how about my numerous posts where I describe modern liberals as wanting to self-deceive that they can help everyone on the issue of health care?

To describe my views as singling out one side or the other is very far from the truth and the truth is there in black and white. I think you are showing somewhat that you are simply more sensitive, and remember it more clearly, when I criticize libertarians. I would actually ask you as a friend and in the spirit of scholarly discourse to write a correction and apology on this point. The only evidence you ever had was that you couldn't yourself remember the other instances.

Furthermore, I don't see why any particular criticism to one side always needs to be balanced with a criticism to the other side. If you criticize me once, does that mean you then need to criticize Krugman, or maybe someone else, an equal number of times? It simply doesn't follow.

As a final aside, a "pretense" can mean "something imagined" or a "claim" (without foundation). Check the definitions on the web. To call something a pretense is surely critical but again I think you are overreacting to how critical it is.

Tyler Cowen writes:

And David, forgive me if I am belaboring this, but in my last comment-response I *did* cite cases where I accused "the other side." I mentioned the pieces already, if you would like here are direct quotations:

"Ms. Klein also tellingly remarked, "I believe people believe their own bullshit. Ideology can be a great enabler for greed."

When it comes to the best-selling "Shock Doctrine," that is perhaps the bottom line on what Klein herself has been up to."

Or how about:

"One has to wonder if anyone who has read [Henry] George could lend a hand to the production of the screed of mistruths and error that is The End of Poverty. I prefer to be subtler, but this movie does not allow it."

Keep in mind those are pieces *I already cited* in my last comment/response to you. I don't see why you call the citation of them not satisfactory without going back and reading them. That is some pretty tough language from me (and there are other examples in those pieces and elsewhere).

Or how about?

"Even the true moments and claims give the informed viewer the feeling of being ripped out of context. It was sad to see Bill Easterly, Joseph Stiglitz and Amartya Sen appear in the film as commentators (the latter two are Nobel laureates); I wonder if they know what kind of misinformation they are lending their names to..."

Am I not hitting hard enough to satisfy you?

Nobody writes:

I agree with Cowen that Henderson has overreacted to Cowen's accusation of pretense by libertarians;

I agree with Henderson that Cowen is tougher on libertarians than on leftists/conservatives;

Cowen is doing a service to libertarians by taking them seriously, exposing their weaknesses and forcing them to think hard;

Asking Henderson for a correction and apology is ridiculous;

Cowen is stretching the definition of "bailouts" to make it appear that Friedman would have approved them in the current crisis. But this is usual debate tactics and has led to an interesting discussion. So it is ok.

John Turner writes:

As a frequent reader of both EconLog and MR, and as a libertarian, I’ve got to give this round to Tyler. I’m sorry David, but Tyler has defended his statements quite thoroughly and with many pertinent references. Earlier today Arnold showed humility and said, “I think I have to give this round to Bryan.” From my perspective, it appears that now would be an appropriate time you said the same thing about Tyler.

Richard A. writes:

What would Friedman had thought about the FEDs decision to drive down the money multiplier by driving up reserves? As I recall, I think Friedman was critical of the FEDs decisions to increase reserve requirements in 36 and 37.

A historical what if question -- who could Bush have appointed to head the FED other than Bernanke, that would not have gone for this big bailout? Suppose Bush had appointed someone like John Taylor instead.

Niccolo writes:

Could someone explain why bailouts are being conflated with a bank that increases the supply of money - if they are?


It seems like what Cowen says is that Friedman's point was about the Fed failing to act to stop the contraction of the money supply.

Why does this mean bailing out failed banks?

Tyler, thank you for clarifying above that the set of policies you have been including under the rubric of "bailouts" is wider than the set to which I and (as I read him) David have been including. This dissolves some of the controversy. David opposes bailouts in the narrower sense of loans and other subsidies to keep open insolvent financial firms, while favoring monetary policy to prevent the money stock from shrinking. If Milton Friedman endorsed Bagehot-type LOLR policy as a means for preventing M contraction in the pre-FDIC period, then he didn't favor bailouts in David's sense, but did in your expansive sense. Later, as David notes, Friedman preferred open-market purchases rather than loans as the method of countering contraction.

You reply to my claim that "Friedman only favored LLR to solvent banks" as follows: "We don't know this is true but at the very least we do know, and Friedman very likely knew, that if the Fed is the LLR there is some chance they won't get the money back. More importantly plenty of the current bailouts were to solvent banks and I'm saying Friedman would have favored at least those bailouts."

I think we do know that the claim is true. Bagehot's policy was to make last-resort loans only to solvent banks, and we know that Friedman explicitly cited Bagehot as a guide to what the Fed should have done in 1929-32.

We also know that for the present period, post-FDIC Act, Friedman (1960) explicitly favored shutting the discount window. The Fed was to make no loans to commercial banks, and only use open market purchases to expand the monetary base. It follows that Friedman favored a regime in which the Fed could not have made ANY of the loans that the Bernanke Fed has made, whether to solvent banks, insolvent banks, or non-banks. Friedman would NOT have approved even of what you call the current bailouts to solvent banks.

By the way, in the doubling of the Fed's balance sheet, growth in traditional LOLR-type discount-window loans (what Friedman supported for the pre-FDIC period) accounts for quite a tiny share of the expansion.

Tyler Cowen writes:

Larry, thanks for the clarifications. There are many points on the table but just to consider one I would stress that I used the word bailout in what is now quite the standard sense. For instance read this list of "bailouts": http://investment-blog.net/the-list-of-bailouts-you-want-to-remember/. A very large number of those, whether by count or dollar value, would fall under the Friedman standard of what is OK. And my very first post showed that very many of these banks are now doing OK and would not count as insolvent. While the earlier Friedman was fine with the discount window, to be more speculative I do also believe the later Friedman would have reopened Fed lending in light of 2008, etc. given the alternative consequences. It is possible that he just didn't think such a crisis was going to come along.

Jaleel White writes:

It don't have it in front of me, but I recall that in Monetary History F&S argue that the policies that would have been sufficient to stop the Depression in it's early stage would not have been sufficient by 1932-1933. Which stage were we at in late 2008?

Also of note is his praise for the FDIC, specifically because with it there are "no bad banks", and no bank failures. So given the absence of the FDIC in the shadow banking sector, would he have supported actions like that operated similarly? Can the Feds actions with AIG and FNMAE be described as such?

Bill Woolsey writes:

David:

I didn't take offence at the word "pretence." I took it to mean something more like ignorance and even self-deception rather than anything close to lying. And Cowen didn't say "all libertarians." I know a good number of libertarian monetary economists who understand these things well and I also know a good number of libertarians who are harshly critical of Friedman at least partly because of his support for "inflation" during the thirties, but there may be some libertarians who count the current huge increase in base money as an undersirable inflationary "bailout" of banks and also cite Friedman as "proving" the Depression resulted from the Fed "causing" a 30% drop in the money supply. I don't think that using the term "pretence" to describe such a contradiction to be the same as an accusastion of lying.

An interjection on another note:

I don't think that using what Milton Friedman may have argued were he alive is a quality line of pursuit. It is deeply disturbing to read speculations about how someone might have thought were he still alive to speak for himself.

What Milton Friedman may have argued or said with regard to the current economic crisis, or with regard to the Fed's or Bernanke or Paulson's responses to it, is not something we can know.

It's tempting to lay claim to being a spokesman for someone famous who can no longer speak for himself.

That Milton Friedman died before this current economic crisis may have been a relief for him personally. I cringed in February 2008 and was beyond thinking of what Friedman's response might have been. I know he would have had strong feelings and responses throughout 2008 and 2009.

You all should be ashamed of yourselves, though, to be trying to say in public what Friedman might have thought. You all look like you have private agendas trying to lay background claims to Friedman's legacy.

What matters now are _your_ opinions. At best if your opinions coincide with those of someone else's who is famous, it may be fun to speculate. What is consistent with the thought and legacy of someone so thoughtful and renowned as Milton Friedman might be fun to tease out or identify with.

But to quarrel or even speculate over what he might have said is unseemly. Quarreling over what Milton Friedman said sounds like a rude infight over who inherits the historical legacy of Milton Friedman.

To do this at all, much less in the week after Rose Friedman just died, is shameful.

It's time to leave Milton Friedman out of it. It's not what Milton Friedman might have thought. It should not be about what you each thought--or even what you can each document--about what Milton Friedman might have thought.

It's about what you think now for yourselves.

Bill Woolsey writes:

Cowen the debater.

I should be thankful that he was willing to mention my name in this comment thread after supposedly responding to my arguments in a post without quotation or citation and instead just quoting and citing a post by Megan McArdle.

I was drawn into the discussion by Bartlett (also quoted favorably by Cowen) who seemed to me to be making extreme statements about how banks must be bailed out in order to expand the money suppply. Whether or not banks should be bailed out, it is not necessary to increase the money supply. Money and Banking 101. (I just looked at his bio.. why did I think he was an economist? I guess because he generally said sensible things about supply-side economics.)

McArdle's "response" seemed to be uninformed by basic money and banking or monetary theory. Confidence, currency holding, velocity.. yes, the right terms, but not in a coherent way. But she is not even an economist, so what can one expect? (English and MBA)

Perhaps there is some kind of "bottom line" ethic to punditry. Was the bailout a good idea or not, and if it is, pile on the arguments in favor regardless of quality.

And now Cowen is down to claiming that Friedman would have approved of some of the things Bernanke did that some people describe as a "bailout."

This is a fallacy. The bailout was a good idea. That is because some things that some people count as part of the bailout would even have been supported by Milton Friedman.

The word "bailout" is being used in an ambiguous way. The total set of policies followed by Bernanke, Paulson, and Geithner, and anything done by Bernanke that anyone calls a "bailout."

Well, the parts of Bernanke's policies that Friedman clearly would have supported (like base money increasing in the face of a falling money multiplier,) are not what most of us mean by "bailout" when we criticize "the bailout."

Cowen surely undestands this, but perhaps noneconomists like Barlett and McArdle can be confounded. Even Milton Friedman would have supported having the government borrow money and buy stock in Goldman Sach's, Bear Sterns, and Citibank. Well, really, he might have supported having the Fed make some loans to some banks even when there is some risk that the banks might default.

Maybe, though I would expect he would be in there with Lucas favoring increases in base money through purchases of long term bonds and also with those of us who reject the policy of having the Fed target funds to weak sectors of the credit market, basically trying to jump start securitization.

Richard A. writes:

"Well, the parts of Bernanke's policies that Friedman clearly would have supported (like base money increasing in the face of a falling money multiplier,)..."

But was base money increased in response to a falling money multiplier? It appears that the FED deliberately drove down the money multiplier to offset a massive increase in the monetary base.

Bill Woolsey writes:

Richard A.

I think that is part of it, yes. The Fed paid interest on reserves so that it could direct credit rather than the market. Still, I think even if the Fed didn't pay interest on reserves, (or even charged something less than the cost of storing currency,) that reserve balances would have increaced and the money multiplier fell.


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