April 28, 2009

Flu Fears Add to World’s Troubles

Filed under: Uncategorized — ktetaichinh @ 8:53 pm
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Quite apart from the human toll, a swine-flu outbreak could wreak havoc on another, already weakened patient: the global economy.

From this perspective, it is fear, rather than the disease itself, that could have the biggest impact. In such situations, individuals think twice about venturing outdoors and governments impose restrictions. When SARS hit Toronto in 2003, for example, for every person diagnosed with the disease, another 60 were quarantined, according to BMO Capital Markets.

[Weakened Economy Vulnerable to Flu] Associated Press

As people worldwide sought to protect themselves from swine flu, some investors positioned themselves for an economic fallout from the outbreak. Above, a hand sanitizer dispenser outside the entrance to the trading floor of the New York Stock Exchange.

Travel and leisure industries are obvious potential casualties. Airlines have been cutting capacity already to protect ticket prices from falling demand. An exogenous shock in the form of flu could overwhelm this strategy — and perhaps fuel calls for a government bailout. Of European airlines, British Airways looks exposed, given 30% of its routes cross the Atlantic.

Investors positioning for the fallout might naturally head for pharmaceutical and defensive sectors. Pharma stocks gained strongly Monday. However, the sector won’t necessarily prove a gold mine, since governments stockpiled antiviral drugs after 2005’s avian-flu scare. The U.K., for example, has enough antiviral medication stockpiled to treat half the population for flu symptoms. A vaccine remains at least four months away, according to the World Health Organization.

Traditional defensives also aren’t clear winners. Utilities, for example, are already being hurt by falling industrial demand for electricity. Further disruption wouldn’t help.

If the swine-flu threat kept many people at home, online-service operators such as Netflix and might be expected to benefit. Against that, however, it is unclear how robust the logistics networks those companies depend on would be in such a scenario: Why would mailmen venture out to work if everyone else was housebound?

Unlike the SARS or avian-flu scares, swine flu has emerged during severe economic stress. Threats to public safety make good cover for stealth protectionism at a time of rising unemployment. World trade already faces its fastest decline since World War II. Further barriers to globalization could sharpen this even more. Export-focused emerging economies could suffer — bad news for industrial-sector and commodities investors looking toward China for salvation. The SARS outbreak is estimated to have cost 1% of China’s gross domestic product.

The swine-flu threat may fade quickly. But it adds one more layer of complexity at an already-uncertain time. In the recent market rally, small- and midcapitalization stocks have performed better than large-caps. If swine flu causes fear to displace greed once again, blue chips ought to fare better. Meanwhile, should this prove to be more than a temporary scare, policy makers who have pulled out all the stops already to encourage risk-taking will be back to square one.

Traders Run From the Peso

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Investors hammered Mexico’s currency and sought the relative safety of the dollar as fears mounted over a deadly flu outbreak.

The dollar surged to buy 13.9292 Mexican pesos late Monday, up from 13.3245 Friday, and briefly touched its highest level against the peso since April 1.

“Mexico is going to take it on the chin until this gets a little clearer,” said Win Thin, a senior currency strategist at Brown Brothers Harriman in New York.

The swine-flu scare comes as investors have been wading back into more risky investments, including currencies in emerging markets like Mexico. Before news of the influenza outbreak spread, the peso had been one of the best-performing currencies against the dollar, strengthening about 16% since early March.

The currency had benefited from a sense that global economic conditions weren’t getting any worse and that the Mexican economy could weather the fallout. A recent decision by the Mexican government to seek a credit line from the International Monetary Fund as an additional precaution also reassured investors.

Now Mexico is facing an unforeseen and unpredictable challenge with direct economic implications. Recommendations by various governments to avoid travel to Mexico will hurt the country’s tourism industry, as will reports that an earthquake shook Mexico’s capital Monday.

Jitters over the situation in Mexico combined with slumping stocks in the U.S. to produce a broader retreat from risk-sensitive currencies. Other Latin American currencies, including the Chilean peso and the Colombian peso, also dropped sharply.

Late Monday in New York, the euro was at $1.3032 from $1.3243 late Friday, and the dollar was at 96.80 yen from 97.13 yen.

The euro was at 126.14 yen from 128.62 yen. The pound was at $1.4640 from $1.4658. The dollar was at 1.1554 Swiss francs from 1.1396 francs.

Political Realignment In Southeast Asia

Filed under: Uncategorized — ktetaichinh @ 1:57 am
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April 2009
By Hal Hill

Southeast Asia was at the epicenter of the last major Asian economic crisis in 1997-98, which originated in Thailand and spread quickly to its neighbors. In Indonesia it resulted in the collapse of the seemingly impregnable Suharto regime, followed by a rapid and largely successful transition to democracy. Indirectly, the crisis resulted in the rise to power of Thaksin Shinawatra, and with it an entirely new era in Thai politics. Malaysia too was shaken by these events following the infamous Anwar Ibrahim affair. The crisis also led to apparently permanently lower growth trajectories in three of the region’s larger economies — Indonesia, Malaysia and Thailand. A decade earlier, a similar set of events — a crisis overturning a deeply entrenched authoritarian regime — occurred in the Philippines.

What’s in store this time round? Will the global financial crisis permanently alter the region’s political economy and development dynamics? Does it signal the end of the so-called East Asian model, or at least a substantial modification of it? And what about the Association of Southeast Asian Nations, or Asean?

Three general points need to be emphasized at the outset. First, Southeast Asia’s diversity defies generalizations. The 10 countries differ greatly in their political constructs, economic structures, levels of development and institutions. What may hold for Singapore is unlikely to apply to Burma or Vietnam. Second, the origins of this crisis are completely different from those of 1997-98. The current crisis developed in the asset markets and financial sectors of the advanced economies, principally the United States and the United Kingdom, against a backdrop of huge global imbalances. The Asian financial crisis originated in Southeast Asia, and was explained by a range of local and international factors. Third, the literature on the analytical history of crises and their ramifications is divided. One influential school sees them as an opportunity, in the Olsonian sense of pushing aside tired old regimes that have gone past their use-by date, or to prod timid, sclerotic governments into bolder reforms. An alternative school highlights the fact that crises can disable governments and render them largely impotent, especially if deep economic contractions are accompanied by political turbulence and uncertainty.

We are only just beginning to piece together an accurate story of the impact of the global financial crisis thus far, owing to the absence of reliable, quick-release data for many countries, and to the uncertainty as to whether more financial time bombs will emerge in the U.S. and Europe. Also, some recently released data are difficult to interpret. For example, exports fell alarmingly in January 2009 (by about 35% on average in the region, year on year). But this probably — hopefully — reflects a run-down in inventories around the world, rather than portending a trend indicator for the whole of 2009.

The story is changing fast, and there are two conflicting forces at work in Southeast Asia. The negative factors are the region’s openness to trade, and hence its vulnerability to a sharp decline in global trade volumes, combined with the effect on the region’s generally underdeveloped financial markets of the “flight to safety” as capital flows to jurisdictions perceived to be better protected (a variant of Gordon Brown’s worrying “financial protectionism hypothesis”). The positive factor is that, as a result of the searing experience of 1997-98, governments and investors in Southeast Asia have generally been prudent over the past decade. Countries have run current-account surpluses; fiscal deficits have generally been modest and adequately funded; banks have been conservative; exchange rates are more flexible; and corporations have by and large shunned high-leverage practices. Hence the direct ripple effects of the U.S. subprime crisis, through financial contagion to the region, have been quite limited. A few banks have run into difficulty, such as Bank Century in Indonesia, and others are precarious. But six months into the crisis, there has not yet been a financial collapse on the scale of the U.S. or the U.K.

In the next few months, even though the crisis will inflict some economic distress and social hardship, its effects on the region are likely to be contained. It is not easy to envisage major “transformative” effects. The domestic political dynamics that are in train in several countries are likely to dominate the local landscapes. Indonesia has its parliamentary and presidential elections from April to September (or July if President Susilo Bambang Yudhoyono secures a majority in the first-round presidential elections). In Malaysia, the key issue is whether the transition from Abdullah Badawi to Najib Razak proceeds smoothly, and whether Mr. Anwar’s attractive but shaky coalition can overwhelm United Malays National Organization’s 51-year grip on power. Thailand is governed by a weak, unwieldy coalition with a slim parliamentary majority. It is also locked in a political stalemate between the “red” and “yellow” shirts and, if another general election were held, it is thought likely that it would again affirm majority support for a Thaksin proxy. In the Philippines, a general and presidential election is just over a year away, and the political discourse is now dominated by this event, together with the country’s seemingly unrivalled propensity to flagellate over political scandals large and small. The authoritarian states of Indochina are likely to be immune from political pressures arising out of the slowdown, even the nominally democratic Cambodian regime. Moreover, their economies are still heavily agrarian, and therefore less affected by global currents, and all three have delivered reasonably rapid economic development for more than a decade.

So much for the short term. Unless the crisis is short-lived — and that appears to be increasingly unlikely — what of the challenges for the region medium term and beyond? At least four effects are likely to be evident.

First, more will be expected of governments in hard times. There will need to be better governance, a greater focus on targeted social-support programs and a perception that development delivers broad-based progress. In particular, that means worrying about the disaffected groups and regions outside capital city elites. This issue manifests itself in various forms throughout the region. For example, in Thailand, Mr. Thaksin’s genius was to exploit the grievances of the country’s vote-rich northeast and north regions. In Malaysia, the poorer members of the Indian community feel left out, particularly those whose earnings have been depressed by the 20% or so of the workforce who are recent, mainly low-skill immigrants. There are also complaints from members of the “nonconnected” bumiputera community, who have benefited little from the 38-year affirmative action program. In the Philippines, it is those in the by-passed regions, especially in the apparently endless conflict zones of Mindanao. Rising dropout rates and low standards in the country’s public elementary school system are also a major concern. In Cambodia, one has to worry about the dispossessed in the country’s apparently growing “land grab” problem, in addition to rapidly increasing inequality, particularly between Phnom Penh and much of the countryside. In Indonesia, unemployment is a very serious problem, particularly among the country’s moderately educated urban youth. The country’s lagging regions, mainly in the east, are also a worry. In Laos and Vietnam, the ethnic minorities in remote regions appear to have missed out on much of the benefits of growth. In Singapore, the plight of the less educated elderly citizens is of concern.

The region’s development challenges are of course vastly more complex than this, but the above list is at least illustrative. In good times, with growth, these cracks can be papered over. For the technically minded, the Gini ratio (the most commonly used measure of inequality) may rise, as it has in much of the region, but growth has generally been sufficient to ensure that the percentage of the population in poverty still falls. When growth disappears, and there is a zero-sum (or even negative-sum) game, distributional politics becomes more important, and governments are more likely to be judged harshly for their shortcomings.

Are these crisis effects likely to lead to regime change, as in 1997-98? As noted, crises can have mixed effects. For regimes that have legitimacy and widespread support, are not seen as having caused the problem, and which manage or at least contain the effects, crises often support incumbents. In times of great uncertainty, voters tend to be risk-averse, working on the “better the devil one knows” principle. The evidence of these four variables for Southeast Asia is so far inconclusive. I have not come across a single serious opinion piece in Southeast Asia blaming the current economic contraction on current governments. Of course, there are mounting criticisms of how, and how quickly, governments are responding. At the very least, there need to be social-safety nets in place, however rudimentary, to cushion the increased social distress. Perhaps unexpectedly, Indonesia has been one of the most effective in this respect, with its public-works programs, cheap rice, cash transfers and stay-in-school measures.

Predicting regime change is an inherently hazardous exercise. The two in Southeast Asia that appear to be the most vulnerable currently are Malaysia and Thailand. Ironically, they are two of the region’s more prosperous countries with decades of development success since the 1950s. They are also very different political regimes — one in continuous power for the country’s 51 years of independence and the other a shaky, nonelected coalition. Politically, both handled the 1997-98 crisis quite effectively, albeit in very different ways. But there is widespread disaffection in both countries, and so if the effects of the crisis are not managed adroitly — for example, if corporate bailouts disproportionately favor cronies or social-safety net programs are mismanaged — their governments could crumble. In both cases, moreover, there are opposition figures or movements in the wings, ready to seize power if the opportunity presents itself.

Second, will the crisis lead to a major shift in Southeast Asia’s development strategies? There have been frequent assertions that the crisis marks the “end of the East Asian model,” that these economies need to be “rebalanced,” or that the export-oriented model will have to be jettisoned. The criticisms of the “Washington consensus” — whatever that now means — are mounting, and attitudes toward globalization are turning sharply negative.

Is there any substance to these arguments? The issues are large and complex, and much of the populist rhetoric is vacuous and misleading. First, one would not want to discard a “model” that since the 1950s has delivered the fastest recorded reductions in the incidence of poverty in human history. Second, the empirical evidence overwhelmingly shows that more open economies grow more quickly than inward-looking ones, except of course when the global economy itself is in crisis. Unless one wishes to adopt the extreme — though admittedly not completely implausible — view that the current crisis signals a long-term contraction in the global economy, more open economies will continue to outperform in the longer run. Moreover, as recovery resumes, they will also bounce back more quickly from crises than less open economies.

It is misleading to assert, as some now do, that proponents of liberal economic policies maintain that openness automatically ensures rising prosperity. Colonies were mostly open, and that didn’t help them much. More generally, openness is of course a two-edged sword. Globalization quickly transmits “goods” as well as “bads.” The latter includes not only avian flu and narcotics, but also financial contagion. Governments need to manage globalization strategically, reaping the advantages while taking preventative action against the bads. Educational opportunities need to be widespread — a traditional East Asian strength — to ensure that the population can participate in the opportunities created by globalization. Risk-sharing institutions, private and public, have to be in place to cope with market volatility. In addition, some international transactions, for example short-term capital flows, almost certainly require monitoring if not regulation.

The current crisis has also resulted in the muddled use of terminology, in particular concerning the use of the term “export-oriented strategies.” If this simply means “openness,” that is minimal trade barriers, then there is no case for a change in direction. But if it connotes mercantilism, in the sense of a deliberate strategy to favor exports over imports as a means of accumulating international reserves, such a policy serves nobody’s interests — neither the international public good of an open and trusted global trading regime with manageable trade imbalances, nor the population at home denied consumption opportunities. One caveat has to be attached to the latter argument as it affects Southeast Asia. In the wake of the 1997-98 crisis, countries rightly or wrongly saw reserve accumulation as a means of insulating themselves against another crisis precipitated by a sudden exodus of short-term capital.

Southeast Asian leaders feel justifiably irritated with the current global order. A decade ago, they were lectured to by “Washington” (both the U.S. administration and the international finance institutions headquartered there) on the need for reform and better governance, and the triumph of the Anglo-Saxon variant of economic liberalism. Now the current crisis is emanating from these very countries which, moreover, have added insult to injury by protecting their own financial sectors, with the resultant capital flows exacerbating financial fragility in emerging markets. The results have been costly for emerging markets in the region. Recently, for example, Indonesia raised $3 billion at a historically high yield of 11.2% for its 10-year bonds and 10.5% for its five-year bonds; this is equivalent to about 600 basis points above U.S. Treasurys. Earlier, the Philippines was also forced to pay well above the Treasury rate when it raised a loan of $1.5 billion.

Nevertheless, it is important not to throw the baby out with the bathwater. Trade and investment policies need to stay open, while thinking about new forms of financial regulation and prudential supervision at home alongside a new international regulatory order. Importantly, Southeast Asian countries have by and large not resorted to protectionism or beggar-thy-neighbor currency depreciations — although their leaders sent somewhat mixed signals on protectionist approaches at the annual Asean leaders’ summit in Hua Hin, Thailand in early March, and the “Made in America” sentiments of the Obama administration do resonate through much of the region. The lessons are therefore: stay open; manage globalization rather than hide from it; and encourage internationally coordinated efforts towards a fairer and better regulated global order.

Third, where does Asean fit into this? A global crisis requires a coordinated global response. None of the Southeast Asian economies is in the big league, although collectively Asean is an influential regional association, and Indonesia is a member of the G-20, which appears to be evolving as the key global decision-making group.

As Asean approaches its 42nd birthday, it can take pride in its achievements as the most durable and influential grouping in the developing world. But this crisis is posing a serious challenge to its credibility. One of the strengths of Asean has been its low-key, unthreatening approach to issues, and the harmony it has engendered in a historically turbulent region. But history has shown that Asean is not set up to handle major events such as the current crisis. It was largely impotent during the economic crisis of 1997-98, as it has been during other significant stresses, from the birth of East Timor and Indonesia’s forest fires to the Rohingya issue.

During the current crisis, Asean’s voice has by and large been notable for its silence. As in the last crisis, it was not in a position to provide intellectual or material leadership. Asean was a central player in the so-called Asian Monetary Fund and the Chiang Mai Initiative, both of which grew out of the events of 1997-98. But the former was still born and the latter has been essentially nonfunctional. Moreover, significant standby support arrangements have not involved intra-Asean cooperation. As an illustration, Indonesia has recently entered into an arrangement with the Asian Development Bank, Japan, the World Bank and Australia, even though Singapore and Malaysia have very large foreign-exchange reserves. Additional bilateral swaps are being negotiated around the region, indicating that the technical, governance and operational issues underpinning the cmi have still not been resolved.

But perhaps more important, the region’s leaders have not yet articulated a vision of the way forward. As a group they could have attempted to use their welcome moderation on trade policy strategically, as a weapon to project a broader global agenda involving a coordinate response to the crisis. Whatever the dominant international forum — G-2, G-7 or G-20 — a united voice on behalf of 550 million people, including some of the developing world’s great success stories, would not go unnoticed.

It remains to be seen whether Asean as a regional institution will be permanently damaged by this inaction. A charitable view is that it was never set up for these complex crisis-resolution tasks. A more negative assessment is that it will fade into insignificance — at least in so far as economic cooperation is concerned.

Finally, if, as seems likely, China is able to maintain moderately strong economic growth through the crisis, and to desist from major competitive exchange-rate depreciations (as it did in 1997-98, earning the region’s gratitude), the effect will be to change the regional, and possibly global, strategic architecture irrevocably. Unlike in 1997-98, when there were still lingering reservations in the region toward China, both politically and as a commercial rival, it is now seen as the principal hope for recovery, and the major economic locomotive. In the process, it is seen as an increasingly attractive development partner, over time supplanting Southeast Asia’s two traditionally dominant external powers, the U.S. and Japan, as the major trader, investor and aid donor. Intellectually, the prolonged Japanese recession from the early 1990s had a major effect on Southeast Asian thinking about the “Japanese model,” particularly the desirability of its industrial promotion and planning policies. The current crisis is leading to a similar re-evaluation of the “U.S. model,” especially as it relates to lightly regulated financial markets. In both cases, the rethink has broader commercial diplomacy and geostrategic implications. In the process, China’s “soft power” will be greatly enhanced. Unless of course it misplays its hand through, for example, overbearing strategic interventions abroad or a failure to keep up with the revolution of rising expectations at home.

Mr. Hill is the H.W. Arndt professor of Southeast Asian Economies at the Australian National University in Canberra.

April 27, 2009

FACTBOX: Flu could boost drug makers, hit tourism and trade

Filed under: Uncategorized — ktetaichinh @ 9:17 pm
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(Reuters) – An outbreak of swine flu, which has killed up to 81 people in Mexico and infected others in the United States, Canada, Europe and New Zealand, could have a significant economic impact:

* The World Bank estimated in 2008, before the current global recession, that a flu pandemic could cost $3 trillion and result in a nearly 5 percent drop in world gross domestic product.

* The travel and tourism industries could be severely affected. Travelers may cancel trips and flights and many businesses have plans to limit travel if a pandemic starts.

* The Air Transport Association, an airline trade group, said so far there had been no decision to restrict travel between the United States and Mexico. WHO advises countries that restricting flights would be futile once a disease has started spreading. The U.S. Commerce Department says about 5.9 million U.S. citizens flew to Mexico in 2008.

* Pork producers in the United States and Mexico could see a drop in sales, but there is no evidence that any of the flu cases stemmed from contact with pigs. Prices for hogs fell on Friday to a two-month low in the United States. Mexico is the No. 2 market for U.S. pork, valued at $691.28 million. Russia said it had imposed curbs on meat imports from Mexico and the United Arab Emirates said it was considering banning imports of all pork products from Mexico and the United States.

* Some drug makers may benefit. Roche Holding AG’s and Gilead Sciences Inc.’s Tamiflu and GlaxoSmithKline Plc’s and Biota’s Relenza are both recommended drugs for seasonal flu and have been shown to work against the new disease. Tamiflu is expected to be in greatest demand in a pandemic as it is a pill. Relenza must be inhaled.

* Leading flu vaccine manufacturers, including Sanofi Pasteur, the vaccines division of Sanofi-Aventis SA, Glaxo, Novartis AG and Baxter International Inc, said they were on standby to start the development of a vaccine, which could take months to prepare.

* Oil prices, already depressed by the global recession, could fall further if the outbreak hurts travel and economic activity.

(Writing by Eric Beech)

(For full coverage of the flu outbreak, click on [nFLU])

Q&A: Swine flu: Is SARS a guide for the economic impact?

WHO chief warns H1N1 swine flu likely to worsen– 052209-The U.S. Health and Human Services Department said it was setting aside $1 billion to help companies develop a vaccine against the new strain.

April 25, 2009

Filed under: Uncategorized — ktetaichinh @ 5:22 pm
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The Geithner plan explained- FT

Bernanke speech- Four Questions about the Financial Crisis- FT

Those challenges bring me to my second question: What has the Federal Reserve been doing to address the economic and financial crisis?

The Fed’s mandate from the Congress is to promote maximum sustainable employment and stable prices. In addition, the Fed is expected to contribute to financial stability by acting to contain financial disruptions and prevent their spread outside of the financial sector. Thus, we have been serving as a first responder to the crisis.

The Fed’s basic policy tool for influencing economic activity and inflation is its ability to control very short-term interest rates–specifically, the federal funds rate, which is the rate that banks pay each other for overnight loans. Lower interest rates can be used to stimulate private-sector borrowing and spending at times like the present when the economy is suffering from a lack of demand. In September 2007, shortly after the turbulence in financial markets began and signs of economic weakness started to appear, the Federal Open Market Committee (FOMC), the body that determines the Federal Reserve’s monetary policy, began to aggressively reduce the federal funds rate. By the spring of 2008, we had cut that interest rate from 5-1/4 percent to 2 percent, a highly proactive policy that helped to cushion the economy from some of the effects of the financial turmoil. But, as I mentioned a moment ago, the intensification of the financial crisis in the fall of 2008 led to a further significant deterioration in the economic outlook. The FOMC responded with additional interest rate cuts, and since December, our policy interest rate has been essentially zero. In addition, the FOMC has made clear that it expects economic conditions to warrant holding the federal funds rate low for an extended period…..

April 18, 2009

Risk Mismanagement – Jan 2009

Filed under: Uncategorized — ktetaichinh @ 11:06 pm
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U.S. Stocks Gain, Extend Global Rally; Treasuries, Dollar Fall – 040209

Filed under: Uncategorized — ktetaichinh @ 4:45 pm
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Buffett Penalized as Citigroup Borrows for Less

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April 2 (Bloomberg)

April 16, 2009

Who Was Milton Friedman? By Paul Krugman

The history of economic thought in the twentieth century is a bit like the history of Christianity in the sixteenth century. Until John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936, economics—at least in the English-speaking world—was completely dominated by free-market orthodoxy. Heresies would occasionally pop up, but they were always suppressed. Classical economics, wrote Keynes in 1936, “conquered England as completely as the Holy Inquisition conquered Spain.” And classical economics said that the answer to almost all problems was to let the forces of supply and demand do their job.

But classical economics offered neither explanations nor solutions for the Great Depression. By the middle of the 1930s, the challenges to orthodoxy could no longer be contained. Keynes played the role of Martin Luther, providing the intellectual rigor needed to make heresy respectable. Although Keynes was by no means a leftist—he came to save capitalism, not to bury it—his theory said that free markets could not be counted on to provide full employment, creating a new rationale for large-scale government intervention in the economy.

Keynesianism was a great reformation of economic thought. It was followed, inevitably, by a counter-reformation. A number of economists played important roles in the great revival of classical economics between 1950 and 2000, but none was as influential as Milton Friedman. If Keynes was Luther, Friedman was Ignatius of Loyola, founder of the Jesuits. And like the Jesuits, Friedman’s followers have acted as a sort of disciplined army of the faithful, spearheading a broad, but incomplete, rollback of Keynesian heresy. By the century’s end, classical economics had regained much though by no means all of its former dominion, and Friedman deserves much of the credit.

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The Economic Crisis and How to Deal with It

I don’t want to push the religious analogy too far. Economic theory at least aspires to be science, not theology; it is concerned with earth, not heaven. Keynesian theory initially prevailed because it did a far better job than classical orthodoxy of making sense of the world around us, and Friedman’s critique of Keynes became so influential largely because he correctly identified Keynesianism’s weak points. And just to be clear: although this essay argues that Friedman was wrong on some issues, and sometimes seemed less than honest with his readers, I regard him as a great economist and a great man.


Milton Friedman played three roles in the intellectual life of the twentieth century. There was Friedman the economist’s economist, who wrote technical, more or less apolitical analyses of consumer behavior and inflation. There was Friedman the policy entrepreneur, who spent decades campaigning on behalf of the policy known as monetarism—finally seeing the Federal Reserve and the Bank of England adopt his doctrine at the end of the 1970s, only to abandon it as unworkable a few years later. Finally, there was Friedman the ideologue, the great popularizer of free-market doctrine.

Did the same man play all these roles? Yes and no. All three roles were informed by Friedman’s faith in the classical verities of free-market economics. Moreover, Friedman’s effectiveness as a popularizer and propagandist rested in part on his well-deserved reputation as a profound economic theorist. But there’s an important difference between the rigor of his work as a professional economist and the looser, sometimes questionable logic of his pronouncements as a public intellectual. While Friedman’s theoretical work is universally admired by professional economists, there’s much more ambivalence about his policy pronouncements and especially his popularizing. And it must be said that there were some serious questions about his intellectual honesty when he was speaking to the mass public.

But let’s hold off on the questionable material for a moment, and talk about Friedman the economic theorist. For most of the past two centuries, economic thinking has been dominated by the concept of Homo economicus. The hypothetical Economic Man knows what he wants; his preferences can be expressed mathematically in terms of a “utility function.” And his choices are driven by rational calculations about how to maximize that function: whether consumers are deciding between corn flakes or shredded wheat, or investors are deciding between stocks and bonds, those decisions are assumed to be based on comparisons of the “marginal utility,” or the added benefit the buyer would get from acquiring a small amount of the alternatives available.

It’s easy to make fun of this story. Nobody, not even Nobel-winning economists, really makes decisions that way. But most economists—myself included—nonetheless find Economic Man useful, with the understanding that he’s an idealized representation of what we really think is going on. People do have preferences, even if those preferences can’t really be expressed by a precise utility function; they usually make sensible decisions, even if they don’t literally maximize utility. You might ask, why not represent people the way they really are? The answer is that abstraction, strategic simplification, is the only way we can impose some intellectual order on the complexity of economic life. And the assumption of rational behavior has been a particularly fruitful simplification.

The question, however, is how far to push it. Keynes didn’t make an all-out assault on Economic Man, but he often resorted to plausible psychological theorizing rather than careful analysis of what a rational decision-maker would do. Business decisions were driven by “animal spirits,” consumer decisions by a psychological tendency to spend some but not all of any increase in income, wage settlements by a sense of fairness, and so on.

But was it really a good idea to diminish the role of Economic Man that much? No, said Friedman, who argued in his 1953 essay “The Methodology of Positive Economics” that economic theories should be judged not by their psychological realism but by their ability to predict behavior. And Friedman’s two greatest triumphs as an economic theorist came from applying the hypothesis of rational behavior to questions other economists had thought beyond its reach.

In his 1957 book A Theory of the Consumption Function—not exactly a crowd-pleasing title, but an important topic—Friedman argued that the best way to make sense of saving and spending was not, as Keynes had done, to resort to loose psychological theorizing, but rather to think of individuals as making rational plans about how to spend their wealth over their lifetimes. This wasn’t necessarily an anti-Keynesian idea—in fact, the great Keynesian economist Franco Modigliani simultaneously and independently made a similar case, with even more care in thinking about rational behavior, in work with Albert Ando. But it did mark a return to classical ways of thinking—and it worked. The details are a bit technical, but Friedman’s “permanent income hypothesis” and the Ando-Modigliani “life cycle model” resolved several apparent paradoxes about the relationship between income and spending, and remain the foundations of how economists think about spending and saving to this day.

Friedman’s work on consumption behavior would, in itself, have made his academic reputation. An even bigger triumph, however, came from his application of Economic Man theorizing to inflation. In 1958 the New Zealand–born economist A.W. Phillips pointed out that there was a historical correlation between unemployment and inflation, with high inflation associated with low unemployment and vice versa. For a time, economists treated this correlation as if it were a reliable and stable relationship. This led to serious discussion about which point on the “Phillips curve” the government should choose. For example, should the United States accept a higher inflation rate in order to achieve a lower unemployment rate?

In 1967, however, Friedman gave a presidential address to the American Economic Association in which he argued that the correlation between inflation and unemployment, even though it was visible in the data, did not represent a true trade-off, at least not in the long run. “There is,” he said, “always a temporary trade-off between inflation and unemployment; there is no permanent trade-off.” In other words, if policymakers were to try to keep unemployment low through a policy of generating higher inflation, they would achieve only temporary success. According to Friedman, unemployment would eventually rise again, even as inflation remained high. The economy would, in other words, suffer the condition Paul Samuelson would later dub “stagflation.”

How did Friedman reach this conclusion? (Edmund S. Phelps, who was awarded the Nobel Memorial Prize in economics this year, simultaneously and independently arrived at the same result.) As in the case of his work on consumer behavior, Friedman applied the idea of rational behavior. He argued that after a sustained period of inflation, people would build expectations of future inflation into their decisions, nullifying any positive effects of inflation on employment. For example, one reason inflation may lead to higher employment is that hiring more workers becomes profitable when prices rise faster than wages. But once workers understand that the purchasing power of their wages will be eroded by inflation, they will demand higher wage settlements in advance, so that wages keep up with prices. As a result, after inflation has gone on for a while, it will no longer deliver the original boost to employment. In fact, there will be a rise in unemployment if inflation falls short of expectations.

At the time Friedman and Phelps propounded their ideas, the United States had little experience with sustained inflation. So this was truly a prediction rather than an attempt to explain the past. In the 1970s, however, persistent inflation provided a test of the Friedman-Phelps hypothesis. Sure enough, the historical correlation between inflation and unemployment broke down in just the way Friedman and Phelps had predicted: in the 1970s, as the inflation rate rose into double digits, the unemployment rate was as high or higher than in the stable-price years of the 1950s and 1960s. Inflation was eventually brought under control in the 1980s, but only after a painful period of extremely high unemployment, the worst since the Great Depression.

By predicting the phenomenon of stagflation in advance, Friedman and Phelps achieved one of the great triumphs of postwar economics. This triumph, more than anything else, confirmed Milton Friedman’s status as a great economist’s economist, whatever one may think of his other roles.

One interesting footnote: although Friedman made great strides in macroeconomics by applying the concept of individual rationality, he also knew where to stop. In the 1970s, some economists pushed Friedman’s analysis of inflation even further, arguing that there is no usable trade-off between inflation and unemployment even in the short run, because people will anticipate government actions and build that anticipation, as well as past experience, into their price-setting and wage-bargaining. This doctrine, known as “rational expectations,” swept through much of academic economics. But Friedman never went there. His reality sense warned that this was taking the idea of Homo economicus too far. And so it proved: Friedman’s 1967 address has stood the test of time, while the more extreme views propounded by rational expectations theorists in the Seventies and Eighties have not.


“Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper,” wrote MIT’s Robert Solow in 1966. For decades, Milton Friedman’s public image and fame were defined largely by his pronouncements on monetary policy and his creation of the doctrine known as monetarism. It’s somewhat surprising to realize, then, that monetarism is now widely regarded as a failure, and that some of the things Friedman said about “money” and monetary policy—unlike what he said about consumption and inflation—appear to have been misleading, and perhaps deliberately so.

To understand what monetarism was all about, the first thing you need to know is that the word “money” doesn’t mean quite the same thing in Economese that it does in plain English. When economists talk of the money supply, they don’t mean wealth in the usual sense. They mean only those forms of wealth that can be used more or less directly to buy things. Currency—pieces of green paper with pictures of dead presidents on them—is money, and so are bank deposits on which you can write checks. But stocks, bonds, and real estate aren’t money, because they have to be converted into cash or bank deposits before they can be used to make purchases.

If the money supply consisted solely of currency, it would be under the direct control of the government—or, more precisely, the Federal Reserve, a monetary agency that, like its counterpart “central banks” in many other countries, is institutionally somewhat separate from the government proper. The fact that the money supply also includes bank deposits makes reality more complicated. The central bank has direct control only over the “monetary base”—the sum of currency in circulation, the currency banks hold in their vaults, and the deposits banks hold at the Federal Reserve—but not the deposits people have made in banks. Under normal circumstances, however, the Federal Reserve’s direct control over the monetary base is enough to give it effective control of the overall money supply as well.

Before Keynes, economists considered the money supply a primary tool of economic management. But Keynes argued that under depression conditions, when interest rates are very low, changes in the money supply have little effect on the economy. The logic went like this: when interest rates are 4 or 5 percent, nobody wants to sit on idle cash. But in a situation like that of 1935, when the interest rate on three-month Treasury bills was only 0.14 percent, there is very little incentive to take the risk of putting money to work. The central bank may try to spur the economy by printing large quantities of additional currency; but if the interest rate is already very low the additional cash is likely to languish in bank vaults or under mattresses. Thus Keynes argued that monetary policy, a change in the money supply to manage the economy, would be ineffective. And that’s why Keynes and his followers believed that fiscal policy—in particular, an increase in government spending—was necessary to get countries out of the Great Depression.

Why does this matter? Monetary policy is a highly technocratic, mostly apolitical form of government intervention in the economy. If the Fed decides to increase the money supply, all it does is purchase some government bonds from private banks, paying for the bonds by crediting the banks’ reserve accounts—in effect, all the Fed has to do is print some more monetary base. By contrast, fiscal policy involves the government much more deeply in the economy, often in a value-laden way: if politicians decide to use public works to promote employment, they need to decide what to build and where. Economists with a free-market bent, then, tend to want to believe that monetary policy is all that’s needed; those with a desire to see a more active government tend to believe that fiscal policy is essential.

Economic thinking after the triumph of the Keynesian revolution—as reflected, say, in the early editions of Paul Samuelson’s classic textbook[*]—gave priority to fiscal policy, while monetary policy was relegated to the sidelines. As Friedman said in his 1967 address to the American Economic Association:

The wide acceptance of [Keynesian] views in the economics profession meant that for some two decades monetary policy was believed by all but a few reactionary souls to have been rendered obsolete by new economic knowledge. Money did not matter.

Although this may have been an exaggeration, monetary policy was held in relatively low regard through the 1940s and 1950s. Friedman, however, crusaded for the proposition that money did too matter, culminating in the 1963 publication of A Monetary History of the United States, 1867–1960, with Anna Schwartz.

Although A Monetary History is a vast work of extraordinary scholarship, covering a century of monetary developments, its most influential and controversial discussion concerned the Great Depression. Friedman and Schwartz claimed to have refuted Keynes’s pessimism about the effectiveness of monetary policy in depression conditions. “The contraction” of the economy, they declared, “is in fact a tragic testimonial to the importance of monetary forces.”

But what did they mean by that? From the beginning, the Friedman-Schwartz position seemed a bit slippery. And over time Friedman’s presentation of the story grew cruder, not subtler, and eventually began to seem—there’s no other way to say this—intellectually dishonest.

In interpreting the origins of the Depression, the distinction between the monetary base (currency plus bank reserves), which the Fed controls directly, and the money supply (currency plus bank deposits) is crucial. The monetary base went up during the early years of the Great Depression, rising from an average of $6.05 billion in 1929 to an average of $7.02 billion in 1933. But the money supply fell sharply, from $26.6 billion to $19.9 billion. This divergence mainly reflected the fallout from the wave of bank failures in 1930–1931: as the public lost faith in banks, people began holding their wealth in cash rather than bank deposits, and those banks that survived began keeping large quantities of cash on hand rather than lending it out, to avert the danger of a bank run. The result was much less lending, and hence much less spending, than there would have been if the public had continued to deposit cash into banks, and banks had continued to lend deposits out to businesses. And since a collapse of spending was the proximate cause of the Depression, the sudden desire of both individuals and banks to hold more cash undoubtedly made the slump worse.

Friedman and Schwartz claimed that the fall in the money supply turned what might have been an ordinary recession into a catastrophic depression, itself an arguable point. But even if we grant that point for the sake of argument, one has to ask whether the Federal Reserve, which after all did increase the monetary base, can be said to have caused the fall in the overall money supply. At least initially, Friedman and Schwartz didn’t say that. What they said instead was that the Fed could have prevented the fall in the money supply, in particular by riding to the rescue of the failing banks during the crisis of 1930–1931. If the Fed had rushed to lend money to banks in trouble, the wave of bank failures might have been prevented, which in turn might have avoided both the public’s decision to hold cash rather than bank deposits, and the preference of the surviving banks for stashing deposits in their vaults rather than lending the funds out. And this, in turn, might have staved off the worst of the Depression.

An analogy may be helpful here. Suppose that a flu epidemic breaks out, and later analysis suggests that appropriate action by the Centers for Disease Control could have contained the epidemic. It would be fair to blame government officials for failing to take appropriate action. But it would be quite a stretch to say that the government caused the epidemic, or to use the CDC’s failure as a demonstration of the superiority of free markets over big government.

Yet many economists, and even more lay readers, have taken Friedman and Schwartz’s account to mean that the Federal Reserve actually caused the Great Depression—that the Depression is in some sense a demonstration of the evils of an excessively interventionist government. And in later years, as I’ve said, Friedman’s assertions grew cruder, as if to feed this misperception. In his 1967 presidential address he declared that “the US monetary authorities followed highly deflationary policies,” and that the money supply fell “because the Federal Reserve System forced or permitted a sharp reduction in the monetary base, because it failed to exercise the responsibilities assigned to it”—an odd assertion given that the monetary base, as we’ve seen, actually rose as the money supply was falling. (Friedman may have been referring to a couple of episodes along the way in which the monetary base fell modestly for brief periods, but even so his statement was highly misleading at best.)

By 1976 Friedman was telling readers of Newsweek that “the elementary truth is that the Great Depression was produced by government mismanagement,” a statement that his readers surely took to mean that the Depression wouldn’t have happened if only the government had kept out of the way—when in fact what Friedman and Schwartz claimed was that the government should have been more active, not less.

Why did historical disputes about the role of monetary policy in the 1930s matter so much in the 1960s? Partly because they fed into Friedman’s broader anti-government agenda, of which more below. But the more direct application was to Friedman’s advocacy of monetarism. According to this doctrine, the Federal Reserve should keep the money supply growing at a steady, low rate, say 3 percent a year—and not deviate from this target, no matter what is happening in the economy. The idea was to put monetary policy on autopilot, removing any discretion on the part of government officials.

Friedman’s case for monetarism was part economic, part political. Steady growth in the money supply, he argued, would lead to a reasonably stable economy. He never claimed that following his rule would eliminate all recessions, but he did argue that the wiggles in the economy’s growth path would be small enough to be tolerable—hence the assertion that the Great Depression wouldn’t have happened if the Fed had been following a monetarist rule. And along with this qualified faith in the stability of the economy under a monetary rule went Friedman’s unqualified contempt for the ability of Federal Reserve officials to do better if given discretion. Exhibit A for the Fed’s unreliability was the onset of the Great Depression, but Friedman could point to many other examples of policy gone wrong. “A monetary rule,” he wrote in 1972, “would insulate monetary policy both from arbitrary power of a small group of men not subject to control by the electorate and from the short-run pressures of partisan politics.”

Monetarism was a powerful force in economic debate for about three decades after Friedman first propounded the doctrine in his 1959 book A Program for Monetary Stability. Today, however, it is a shadow of its former self, for two main reasons.

First, when the United States and the United Kingdom tried to put monetarism into practice at the end of the 1970s, both experienced dismal results: in each country steady growth in the money supply failed to prevent severe recessions. The Federal Reserve officially adopted Friedman-type monetary targets in 1979, but effectively abandoned them in 1982 when the unemployment rate went into double digits. This abandonment was made official in 1984, and ever since then the Fed has engaged in precisely the sort of discretionary fine-tuning that Friedman decried. For example, the Fed responded to the 2001 recession by slashing interest rates and allowing the money supply to grow at rates that sometimes exceeded 10 percent per year. Once the Fed was satisfied that the recovery was solid, it reversed course, raising interest rates and allowing growth in the money supply to drop to zero.

Second, since the early 1980s the Federal Reserve and its counterparts in other countries have done a reasonably good job, undermining Friedman’s portrayal of central bankers as irredeemable bunglers. Inflation has stayed low, recessions—except in Japan, of which more in a second—have been relatively brief and shallow. And all this happened in spite of fluctuations in the money supply that horrified monetarists, and led them—Friedman included—to predict disasters that failed to materialize. As David Warsh of The Boston Globe pointed out in 1992, “Friedman blunted his lance forecasting inflation in the 1980s, when he was deeply, frequently wrong.”

By 2004, the Economic Report of the President, written by the very conservative economists of the Bush administration, could nonetheless make the highly anti-monetarist declaration that “aggressive monetary policy”—not stable, steady-as-you-go, but aggressive—”can reduce the depth of a recession.”

Now, a word about Japan. During the 1990s Japan experienced a sort of minor-key reprise of the Great Depression. The unemployment rate never reached Depression levels, thanks to massive public works spending that had Japan, with less than half America’s population, pouring more concrete each year than the United States. But the very low interest rate conditions of the Great Depression reemerged in full. By 1998 the call money rate, the rate on overnight loans between banks, was literally zero.

And under those conditions, monetary policy proved just as ineffective as Keynes had said it was in the 1930s. The Bank of Japan, Japan’s equivalent of the Fed, could and did increase the monetary base. But the extra yen were hoarded, not spent. The only consumer durable goods selling well, some Japanese economists told me at the time, were safes. In fact, the Bank of Japan found itself unable even to increase the money supply as much as it wanted. It pushed vast quantities of cash into circulation, but broader measures of the money supply grew very little. An economic recovery finally began a couple of years ago, driven by a revival of business investment to take advantage of new technological opportunities. But monetary policy never was able to get any traction.

In effect, Japan in the Nineties offered a fresh opportunity to test the views of Friedman and Keynes regarding the effectiveness of monetary policy in depression conditions. And the results clearly supported Keynes’s pessimism rather than Friedman’s optimism.


In 1946 Milton Friedman made his debut as a popularizer of free-market economics with a pamphlet titled “Roofs or Ceilings: The Current Housing Problem” coauthored with George J. Stigler, who would later join him at the University of Chicago. The pamphlet, an attack on the rent controls that were still universal just after World War II, was released under rather odd circumstances: it was a publication of the Foundation for Economic Education, an organization which, as Rick Perlstein writes in Before the Storm (2001), his book about the origins of the modern conservative movement, “spread a libertarian gospel so uncompromising it bordered on anarchism.” Robert Welch, the founder of the John Birch Society, sat on the FEE’s board. This first venture in free-market popularization prefigured in two ways the course of Friedman’s career as a public intellectual over the next six decades.

First, the pamphlet demonstrated Friedman’s special willingness to take free-market ideas to their logical limits. Neither the idea that markets are efficient ways to allocate scarce goods nor the proposition that price controls create shortages and inefficiency was new. But many economists, fearing the backlash against a sudden rise in rents (which Friedman and Stigler predicted would be about 30 percent for the nation as a whole), might have proposed some kind of gradual transition to decontrol. Friedman and Stigler dismissed all such concerns.

In the decades ahead, this single-mindedness would become Friedman’s trademark. Again and again, he called for market solutions to problems—education, health care, the illegal drug trade—that almost everyone else thought required extensive government intervention. Some of his ideas have received widespread acceptance, like replacing rigid rules on pollution with a system of pollution permits that companies are free to buy and sell. Some, like school vouchers, are broadly supported by the conservative movement but haven’t gotten far politically. And some of his proposals, like eliminating licensing procedures for doctors and abolishing the Food and Drug Administration, are considered outlandish even by most conservatives.

Second, the pamphlet showed just how good Friedman was as a popularizer. It’s beautifully and cunningly written. There is no jargon; the points are made with cleverly chosen real-world examples, ranging from San Francisco’s rapid recovery from the 1906 earthquake to the plight of a 1946 veteran, newly discharged from the army, searching in vain for a decent place to live. The same style, enhanced by video, would mark Friedman’s celebrated 1980 TV series Free to Choose.

The odds are that the great swing back toward laissez-faire policies that took place around the world beginning in the 1970s would have happened even if there had been no Milton Friedman. But his tireless and brilliantly effective campaign on behalf of free markets surely helped accelerate the process, both in the United States and around the world. By any measure—protectionism versus free trade; regulation versus deregulation; wages set by collective bargaining and government minimum wages versus wages set by the market—the world has moved a long way in Friedman’s direction. And even more striking than his achievement in terms of actual policy changes has been the transformation of the conventional wisdom: most influential people have been so converted to the Friedman way of thinking that it is simply taken as a given that the change in economic policies he promoted has been a force for good. But has it?

Consider first the macroeconomic performance of the US economy. We have data on the real income—that is, income adjusted for inflation—of American families from 1947 to 2005. During the first half of that fifty-eight-year stretch, from 1947 to 1976, Milton Friedman was a voice crying in the wilderness, his ideas ignored by policymakers. But the economy, for all the inefficiencies he decried, delivered dramatic improvements in the standard of living of most Americans: median real income more than doubled. By contrast, the period since 1976 has been one of increasing acceptance of Friedman’s ideas; although there remained plenty of government intervention for him to complain about, there was no question that free-market policies became much more widespread. Yet gains in living standards have been far less robust than they were during the previous period: median real income was only about 23 percent higher in 2005 than in 1976.

Part of the reason the second postwar generation didn’t do as well as the first was a slower overall rate of economic growth—a fact that may come as a surprise to those who assume that the trend toward free markets has yielded big economic dividends. But another important reason for the lag in most families’ living standards was a spectacular increase in economic inequality: during the first postwar generation income growth was broadly spread across the population, but since the late 1970s median income, the income of the typical family, has risen only about a third as fast as average income, which includes the soaring incomes of a small minority at the top.

This raises an interesting point. Milton Friedman often assured audiences that no special institutions, like minimum wages and unions, were needed to ensure that workers would share in the benefits of economic growth. In 1976 he told Newsweek readers that tales of the evil done by the robber barons were pure myth:

There is probably no other period in history, in this or any other country, in which the ordinary man had as large an increase in his standard of living as in the period between the Civil War and the First World War, when unrestrained individualism was most rugged.

(What about the remarkable thirty-year stretch after World War II, which encompassed much of Friedman’s own career?) Yet in the decades that followed that pronouncement, as the minimum wage was allowed to fall behind inflation and unions largely disappeared as an important factor in the private sector, working Americans saw their fortunes lag behind growth in the economy as a whole. Was Friedman too sanguine about the generosity of the invisible hand?

To be fair, there are many factors affecting both economic growth and the distribution of income, so we can’t blame Friedmanite policies for all disappointments. Still, given the common assumption that the turn toward free-market policies did great things for the US economy and the living standards of ordinary Americans, it’s striking how little support one can find for that proposition in the data.

Similar questions about the lack of clear evidence that Friedman’s ideas actually work in practice can be raised, with even more force, for Latin America. A decade ago it was common to cite the success of the Chilean economy, where Augusto Pinochet’s Chicago-educated advisers turned to free-market policies after Pinochet seized power in 1973, as proof that Friedman-inspired policies showed the path to successful economic development. But although other Latin nations, from Mexico to Argentina, have followed Chile’s lead in freeing up trade, privatizing industries, and deregulating, Chile’s success story has not been replicated.

On the contrary, the perception of most Latin Americans is that “neoliberal” policies have been a failure: the promised takeoff in economic growth never arrived, while income inequality has worsened. I don’t mean to blame everything that has gone wrong in Latin America on the Chicago School, or to idealize what went before; but there is a striking contrast between the perception that Friedman was vindicated and the actual results in economies that turned from the interventionist policies of the early postwar decades to laissez-faire.

On a more narrowly focused topic, one of Friedman’s key targets was what he considered the uselessness and counterproductive nature of most government regulation. In an obituary for his one-time collaborator George Stigler, Friedman singled out for praise Stigler’s critique of electricity regulation, and his argument that regulators usually end up serving the interests of the regulated rather than those of the public. So how has deregulation worked out?

It started well, with the deregulation of trucking and airlines beginning in the late 1970s. In both cases deregulation, while it didn’t make everyone happy, led to increased competition, generally lower prices, and higher efficiency. Deregulation of natural gas was also a success.

But the next big wave of deregulation, in the electricity sector, was a different story. Just as Japan’s slump in the 1990s showed that Keynesian worries about the effectiveness of monetary policy were no myth, the California electricity crisis of 2000– 2001—in which power companies and energy traders created an artificial shortage to drive up prices—reminded us of the reality that lay behind tales of the robber barons and their depredations. While other states didn’t suffer as severely as California, across the nation electricity deregulation led to higher, not lower, prices, with huge windfall profits for power companies.

Those states that, for whatever reason, didn’t get on the deregulation bandwagon in the 1990s now consider themselves lucky. And the luckiest of all are those cities that somehow didn’t get the memo about the evils of government and the virtues of the private sector, and still have publicly owned power companies. All of this showed that the original rationale for electricity regulation—the observation that without regulation, power companies would have too much monopoly power—remains as valid as ever.

Should we conclude from this that deregulation is always a bad idea? No—it depends on the specifics. To conclude that deregulation is always and everywhere a bad idea would be to engage in the same kind of absolutist thinking that was, arguably, Milton Friedman’s greatest flaw.

In his 1965 review of Friedman and Schwartz’s Monetary History, the late Yale economist and Nobel laureate James Tobin gently chided the authors for going too far. “Consider the following three propositions,” he wrote. “Money does not matter. It does too matter. Money is all that matters. It is all too easy to slip from the second proposition to the third.” And he added that “in their zeal and exuberance” Friedman and his followers had too often done just that.

A similar sequence seems to have happened in Milton Friedman’s advocacy of laissez-faire. In the aftermath of the Great Depression, there were many people saying that markets can never work. Friedman had the intellectual courage to say that markets can too work, and his showman’s flair combined with his ability to marshal evidence made him the best spokesman for the virtues of free markets since Adam Smith. But he slipped all too easily into claiming both that markets always work and that only markets work. It’s extremely hard to find cases in which Friedman acknowledged the possibility that markets could go wrong, or that government intervention could serve a useful purpose.

Friedman’s laissez-faire absolutism contributed to an intellectual climate in which faith in markets and disdain for government often trumps the evidence. Developing countries rushed to open up their capital markets, despite warnings that this might expose them to financial crises; then, when the crises duly arrived, many observers blamed the countries’ governments, not the instability of international capital flows. Electricity deregulation proceeded despite clear warnings that monopoly power might be a problem; in fact, even as the California electricity crisis was happening, most commentators dismissed concerns about price-rigging as wild conspiracy theories. Conservatives continue to insist that the free market is the answer to the health care crisis, in the teeth of overwhelming evidence to the contrary.

What’s odd about Friedman’s absolutism on the virtues of markets and the vices of government is that in his work as an economist’s economist he was actually a model of restraint. As I pointed out earlier, he made great contributions to economic theory by emphasizing the role of individual rationality—but unlike some of his colleagues, he knew where to stop. Why didn’t he exhibit the same restraint in his role as a public intellectual?

The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.

In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed—a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there’s a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I’d argue, is a counter-counterreformation.


[*] See Paul A. Samuelson, Economics: The Original 1948 Edition (McGraw-Hill, 1997).


April 12, 2007: Bertrand Horwitz, Milton Friedman in China
March 29, 2007: Anna J. Schwartz, ‘Who Was Milton Friedman?’

April 10, 2009

Commercial Papers – giangle

Thứ Ba 07/10/2008, Fed đã chính thức trở thành counterparty of last resort như Willem Buiter kêu gọi. Fed tuyên bố một công cụ cung cấp thanh khoản mới gọi là Commercial Paper Funding Facility (CPFF) với chức năng cung cấp vốn cho một quĩ đặc biệt (special purpose vehicle – SPV) để quĩ này mua lại các commercial papers (CP). Về bản chất Fed đã chính thức tham gia vào thị trường CP, thị trường tiền tệ thứ hai song song với thị trường tiền tệ liên ngân hàng.

Để hiểu được bản chất thị trường CP, trước hết cần biết nguyên nhân dẫn đến sự suất hiện của thị trường này. Ở Mỹ và nhiều nước khác, vì một số lý do lịch sử, các ngân hàng thương mại không được phép trả lãi suất cho các demand deposit accounts, ví dụ check account. Để được hưởng lãi suất, người gửi tiền buộc phải gửi vào tài khoản tiết kiệm (term deposit), nghĩa lã không được tự do rút tiền ra mà phải đợi đến khi thời hạn tiết kiệm kết thúc. Đây rõ ràng là một điểm bất lợi cho các ngân hàng thương mại và chính là lý do xuất hiện các money market funds (MMF).

Về bản chất các MMF là các quĩ đầu tư tương hỗ (mutual funds) theo nghĩa nó huy động tiền của các nhà đầu tư và tìm cách sinh lợi từ đó rồi chia lợi nhuận lại cho các cổ đông. Do bản chất MMF là quĩ đầu tư nên nó không bị ràng buộc bằng những qui định ngặt nghèo như các ngân hàng thương mại và không bị Fed quản lý. Tất nhiên MMF cũng không được Fed giúp đỡ về mặt liquidity nếu có khó khăn (thông qua discount window). Điểm đặc thù của MMF so với các mutual funds khác là nó chỉ tập trung đầu tư vào các công cụ tài chính rất ngắn hạn và rất an toàn. Tất nhiên lợi nhuận của các MMF sẽ thấp hơn so với các mutual funds bình thường. Nhưng điều đó không quan trọng vì đối với những nhà đầu tư bỏ tiền vào MMF, điều họ cần là một dạng check account có thể rút tiền ra bất kỳ lúc nào mà vẫn được hưởng một mức lãi suất nhất định. Tất cả mọi người đã ngầm định MMF là một hệ thống ngân hàng tồn tại song song với các ngân hàng thương mại.

Mặc dù lợi nhuận luôn đi cùng với rủi ro nhưng trong giới MMF, một qui luật bất thành văn là họ không bao giờ để quĩ của họ “break the buck”, nghĩa là không bao giờ bị lỗ. Một đô la do nhà đầu tư bỏ vào thì khi người đó rút ra ít nhất cũng phải là một đô la, và thường với một ít lãi suất. Chính vì vậy các MMF chỉ đầu tư vào các công cụ tài chính ít rủi ro nhất và có tính thanh khoản cao nhất. Một trong những công cụ đó là các commercial papers (CP) do các công ty (không phải tài chính) phát hành. Vậy CP là gì và tại sao nó lại suất hiện?

Tất cả các công ty sản xuất kinh doanh đều cần một lượng vốn lưu động (working capital) để cân bằng cashflow hàng ngày. Đối với các công ty nhỏ khi mà nhu cầu working capital không quá lớn thì hình thức vay working capital đơn giản nhất là mở một credit line với một ngân hàng thương mại. Đây có thể coi là một dạng credit card cho doanh nghiệp, mỗi doanh nghiệp có một mức hạn định tín dụng nhất định và họ có quyền rút tiền trong giới hạn đó bất cứ khi nào họ cần. Tuy nhiên với những công ty lớn với nhu cầu working capital hàng ngày lên đến hàng chục triệu USD thì mở credit line khá phức tạp và tốn kém vì các ngân hàng thương mại phải để sẵn số tiền đó để doanh nghiệp có thể rút ra lúc nào cũng được. Bởi vậy ở Mỹ và những nước phát triển, các công ty lớn (non-fiancial) thường tham gia trực tiếp vào một thị trường tiền tệ là thị trường CP nơi họ có thể vay working capital ngắn hạn với chi phí thấp hơn chi phí mở credit line ở các ngân hàng thương mại. (Điều này cũng giống như ngân hàng tham gia vào thị trường tiền tệ liên ngân hàng để đảm bảo working capital của mình hàng ngày).

Chính thị trường CP này là cầu nối giữa các doanh nghiệp và các MMF. Các MMF tham gia tích cực vào thị trường này vì các CP thường có thời hạn rất ngắn và rất an toàn. Mặc dù hệ thống tài chính Mỹ bắt đầu bị khủng hoảng từ tháng 8/2007 nhưng thị trường CP hầu như không bị ảnh hưởng. Cho đến cuối tháng 8/2008 thị trường này vẫn tăng trưởng đều đặn và đạt tổng giá trị lên đến $2.3 trillion, một con số đã làm nhiều nhà kinh tế cho rằng cuộc khủng hoảng tài chính không ảnh hưởng đến nền kinh tế thực. Tuy nhiên đến thời điểm Fed công bố CPFF ngày thứ Ba vừa rồi, tổng số CP đã tụt xuống còn $1.3 trillion và số CP được phát hành mới trong tuần cuối cùng của tháng 9 giảm $95bn, một kỷ lục trong lịch sử. Tất nhiên khi Libor tăng cao và cuộc khủng hoảng ngày càng đen tối, nguồn funding từ các ngân hàng thương mại cho thị trường CP đã sụt giảm đáng kể, nhưng nguyên nhân chính dẫn đến sự sụp đổ của thị trường này chính là sự tháo chạy của các MMF.

Ngay sau khi Lehman Brothers phá sản và Fed phải giải cứu AIG bằng $85bn, có một sự kiện nhỏ mà thực ra không nhỏ đã xảy ra. Đó là một MMF thuộc hàng lão làng nhất của Mỹ, Reserve Primary Fund, đã “broke the buck”. Một MMF uy tín nhất đã bị lỗ và lý do là MMF này đã mua $786m CP của Lehman Brothers. Ngay tức thì các “nhà đầu tư” của Reserve Primary đã đổ xô đi rút tiền khỏi quĩ này và chỉ trong 2 ngày 15-16/09 60% trong tổng số tài sản $62.2bn đã bị rút ra. Tất nhiên để trả được tiền cho các nhà đầu tư Reserve Primary buộc phải bán tống bán tháo các CP khác đang nắm giữ gây ra tác động dây chuyền lên toàn bộ thị trường CP. Đến cuối ngày 16/9 Reserve Primary buộc phải tuyên bố ngừng cho giải ngân tất cả các tài khoản của mình, càng làm tăng sự hoảng loạn. Như đổ thêm dầu vào lửa, ngày 18/9 Bank of New York Mellon thông báo MMF của mình cũng “broke the buck” đẩy mạnh thêm làn sóng rút tiền khỏi hệ thống các MMF. Điều này tương đương như một cuộc bank run truyền thống, chỉ khác là đằng sau các MMF không có Fed với vai trò lender of last resort hay FDIC với vai trò bảo hiểm cho số tiền được gửi.

Ngày 19/09, trước cả khi Paulson đề suất kế hoạch $700 tỷ giải cứu hệ thống ngân hàng, US Treasury buộc phải đứng ra làm vai trò của FDIC cho các MMF bảo đảm cho tất cả các khoản đầu tư trong các MMF trong vòng 3 tháng. Và ngày 7/10, Fed đã đứng ra làm counterparty cho tất cả các MMF, nghĩa là đồng ý mua lại CP mà các MMF đang nắm giữ. Đến thời điểm này, một số người bắt đầu cho rằng Fed và Treasury đã sai lầm khi để Lehman Brothers sụp đổ, vì Lehman là player lớn nhất trong thị trường CP. Và thị trường CP là cầu nối trực tiếp nhất giữa thế giới tài chính với nền kinh tế thực. Kể từ khi thị trường này sụp đổ, nhiều công ty tên tuổi như GE, IBM đã gặp phải khó khăn huy động vốn ngắn hạn và GE đã phải hủy một dự án đầu tư. Kinh tế Mỹ sẽ chìm sâu vào suy thoái là điều không ai còn bàn cãi.

Giang Le

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