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You've got to be careful with Friedman's work. He's highly persuasive, but presents an incomplete picture. For example, he dogmatically asserts that "market po

You've got to be careful with Friedman's work. He's highly persuasive, but presents an incomplete picture. For example, he dogmatically asserts that "market power" is not an obstacle to market efficiency. According to Friedman, monopolists are only problematic to the extent that they corrupt government to their ends. The book's central thesis is that Fed monetary policy made the depression worse. That is widely accepted by economists of all stripes. However, Friedman also argues that the Fed should boldly step in as a lender of last resort. He ignores the fact that no institution can make a realistic solvency determination during a crisis. What that means in practice is he supports things like TARP. This amounts to a statement that the cost of financial panics (which are an inherent characteristic of all systems with maturity transformation) should be born by the public rather than the financial sector. That is a political decision, not a technical economic one. A lot of economics from the Friedman era is about clothing political choices in technical jargon.

aliante 6y ago
> should be born by the public rather than the financial sector. Given the size of the financial sector, I am not sure those are not all that different.
- rmrfstar 6y ago
  Currently around 12% of GDP. In the New-Deal era it was around 3%.
  - arkis22 6y ago
    In the new deal era IT was 0% of GDP. Now 25% of the SP500 is FAANG. Not even mentioning the change in health care stocks. Financialization occurs when you can be explicit about costs and benefits. Finance does it with dollars, IT does it with bytes. There is certainly a case to be made that it's gone too far. But honestly you should be pleased if people can move billions of dollars to a positive end with a mouse click. Stock values follow profit. If the finance industry can encompass 100% GDP and break down everything into profit and costs that can be allocated to the individuals with the correct risk profile, we're doing extremely well.
    - rmrfstar 6y ago
      > If the finance industry can encompass 100% GDP There are ideologically pro-finance economists who strongly reject this assessment [1]. [1] https://www.ft.com/content/4b70ee3a-f88c-11e4-8e16-00144feab7de https://www.ft.com/content/4b70ee3a-f88c-11e4-8e16-00144feab...
      - arkis22 6y ago
        I don't have a sub to FT. I do however doubt there are many economists who would be against the idea of digitizing cash flows, losses, and profits. It just makes for more efficient decision making. The two - ideally - aren't materially different.
partiallypro 6y ago
> He ignores the fact that no institution can make a realistic solvency determination during a crisis. What that means in practice is he supports things like TARP. I don't think either of these sentences are true. Friedman wasn't for bailouts for those that did wrong, he simply knows that a deflationary spiral can occur if there is a cascading banking failure. Which is what happened in the Great Depression, and what was avoided in 2007/08. It should also be noted that TARP made the public money. > Should be born by the public rather than the financial sector. That is also not true. The issuer of money explicitly a tool of the government (even if the Fed itself is technically private.) The reason the Fed has to step in, is because the actual equation for money supply includes the velocity of money. If economic activity crashes, the money supply goes down. That is accelerated further due to complex financial instruments such as derivatives. The Fed shoring up balance sheets with low interest loans alleviates that during economic downturns. There is a side effect that some firms are able to use this opportunity to enrich themselves, but it is rarely at a great cost to the public, relatively speaking.
- rmrfstar 6y ago
  Abstract away all the money supply stuff. Banking systems have multiple equilibria [1]. That is one way of saying that financial crises are like floods. They are a fact of life, and happen from time to time. Who should pay for flood insurance, the public or the people building on flood plains? If the public pays for the flood insurance, there will be too much construction in the flood plain. The fact that TARP provided a small accounting profit to the Treasury is sort of immaterial. It was a free put that was never exercised. People should pay a premium for insurance. An efficient market prices risk... [1] https://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model https://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model
nojito 6y ago
TARP was a resounding success. There was nothing political about it, because it was sound policy that worked.
- rmrfstar 6y ago
  It was a resounding success in the same way that the federal flood insurance program is a resounding success. It mitigates a crisis, but sets up horrible long-term incentives.

aliante 6y ago

> should be born by the public rather than the financial sector. Given the size of the financial sector, I am not sure those are not all that different.

rmrfstar 6y ago
Currently around 12% of GDP. In the New-Deal era it was around 3%.
- arkis22 6y ago
  In the new deal era IT was 0% of GDP. Now 25% of the SP500 is FAANG. Not even mentioning the change in health care stocks. Financialization occurs when you can be explicit about costs and benefits. Finance does it with dollars, IT does it with bytes. There is certainly a case to be made that it's gone too far. But honestly you should be pleased if people can move billions of dollars to a positive end with a mouse click. Stock values follow profit. If the finance industry can encompass 100% GDP and break down everything into profit and costs that can be allocated to the individuals with the correct risk profile, we're doing extremely well.
  - rmrfstar 6y ago
    > If the finance industry can encompass 100% GDP There are ideologically pro-finance economists who strongly reject this assessment [1]. [1] https://www.ft.com/content/4b70ee3a-f88c-11e4-8e16-00144feab7de https://www.ft.com/content/4b70ee3a-f88c-11e4-8e16-00144feab...
    - arkis22 6y ago
      I don't have a sub to FT. I do however doubt there are many economists who would be against the idea of digitizing cash flows, losses, and profits. It just makes for more efficient decision making. The two - ideally - aren't materially different.

partiallypro 6y ago

> He ignores the fact that no institution can make a realistic solvency determination during a crisis. What that means in practice is he supports things like TARP. I don't think either of these sentences are true. Friedman wasn't for bailouts for those that did wrong, he simply knows that a deflationary spiral can occur if there is a cascading banking failure. Which is what happened in the Great Depression, and what was avoided in 2007/08. It should also be noted that TARP made the public money. > Should be born by the public rather than the financial sector. That is also not true. The issuer of money explicitly a tool of the government (even if the Fed itself is technically private.) The reason the Fed has to step in, is because the actual equation for money supply includes the velocity of money. If economic activity crashes, the money supply goes down. That is accelerated further due to complex financial instruments such as derivatives. The Fed shoring up balance sheets with low interest loans alleviates that during economic downturns. There is a side effect that some firms are able to use this opportunity to enrich themselves, but it is rarely at a great cost to the public, relatively speaking.

rmrfstar 6y ago
Abstract away all the money supply stuff. Banking systems have multiple equilibria [1]. That is one way of saying that financial crises are like floods. They are a fact of life, and happen from time to time. Who should pay for flood insurance, the public or the people building on flood plains? If the public pays for the flood insurance, there will be too much construction in the flood plain. The fact that TARP provided a small accounting profit to the Treasury is sort of immaterial. It was a free put that was never exercised. People should pay a premium for insurance. An efficient market prices risk... [1] https://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model https://en.wikipedia.org/wiki/Diamond%E2%80%93Dybvig_model

nojito 6y ago

TARP was a resounding success. There was nothing political about it, because it was sound policy that worked.

rmrfstar 6y ago
It was a resounding success in the same way that the federal flood insurance program is a resounding success. It mitigates a crisis, but sets up horrible long-term incentives.