Tuesday, December 16, 2008

The final death of Milton Friedman

Zero percent interest for the Federal Reserve funds rate.

We have now reached the limits of Milton Friedmanesque conservative monetarism. You can't go below zero percent interest unless you actually *pay* people to take your money, and for some reason folks aren't willing to do that. As Federal Reserve Chairman Ben Bernanke explained in one of his papers from the early 1980's, at zero percent in a deflationary environment, people will simply stuff greenbacks under their mattresses.

So we've done everything possible on the supply side, and arrived at liquidity trap, where we're pushing on a string but the string is going nowhere because there's no demand pulling on its other end. Beyond this point, all that is left is Keynesian demand-side stimulus spending. Paul Krugman points that out in his papers and his latest book. The question is whether our politicians, in the pay of wealthy oligarchs who stand to benefit greatly by snapping up the remaining assets of the nation for cheap when deflation makes it impossible for us to pay our debts, will have the guts to implement such bold policy proposals or will allow themselves to be cowed by the failed Friedman disciples of the "Chicago School", whose ideas have reached the limits of applicability once we enter the reign of zero percent interest and deflation.

-- Badtux the Economics Penguin

Oh yeah, about TARP...

4 comments:

  1. It won't help, it's still going to topple.

    ReplyDelete
  2. it might even be too late for keynes.....

    ReplyDelete
  3. the Great Depressing....

    ReplyDelete

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