There are those conservatives who ask themselves, “What would Jesus do?” There are those who ask, “What would Ronald Reagan do?” There are even a few who ask, “What would Russell Kirk do, other than pour himself a scotch and shake his head sadly before writing another 1,000 pages?” I ask myself, “What would Milton Friedman do?”
Milton Friedman would have supported a bank bailout.
Or it seems he would have, given that a bank bailout is more or less what he prescribed for the last great financial crisis, the one leading up to the Great Depression, which he dwells upon at some length in his Monetary History of the United States, 1867–1960. The vulgarized version of Friedman: The Federal Reserve helped turn a routine if severe recession into the Great Depression by tightening the supply of money and credit. But as economists as different as Paul Krugman and Tyler Cowen have pointed out, the more accurate version is this: The Fed helped cause the Great Depression by allowing the supply of money and credit to tighten. The distinction is important. How did they allow it? By declining to bail out the failing banks...
Free-marketeers tend to think of our orientation not only as an economic position but also as a virtue. (It is.) But there is a danger in letting that belief congeal into dogma and, in consequence, allowing abstractions to obscure realities. It is true that the root evil here was government intervention in the economy: The Fed’s over-loose money after Dot-Bomb and 9/11, combined with tax incentives and the market-distorting actions of Fannie Mae and Freddie Mac, helped create the housing bubble; various government policies then helped turn that bubble into a global disaster. The subprime meltdown was not a failure of what is so often mischaracterized as “unbridled capitalism.” It was as much a failure of regulatory excess as of Scrooge McDuck, literally-rolling-in-it excess.
But it is not necessarily wise to start practicing austerities at the moment of crisis. Those who opposed the bailouts were, I think, seeking to restore the virtues of the free market — at precisely the wrong time. It is as though we had been diagnosed with lung cancer and responded merely by swearing off cigarettes. What about radiation therapy? What, are you crazy? Radiation gives you cancer! And people get sick in hospitals! ....
I suspect that many of us who opposed the bailouts did so based on unjustified optimism. Surely, we thought, the citizens of this commercial republic will have learned their lesson and will hasten to enact reforms that are consistent with their experience and liberal values. Those of us who believed that must somehow have missed the contemporaneous ascent of Barack Obama, whose election as president does not suggest that the nation is ready for a heaping helping of Adam Smith. Professor Cowen demands:
If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929–1931? If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts. Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat? Or is it that natural market forces would have somehow avoided a wrenching surprise deflation? Or do you think the authorities for some reason would have not nationalized the major banks? . . . If we had not done the bailouts we did, we would, within a few months’ or weeks’ time, have received a much worse and costlier bailout run by Congress and Nancy Pelosi. How does that sound?
Sounds like hell on earth, professor.
