T Nation

Did Friedman Subvert Free Markets?


His name is now synonymous with free market, so-called "supply side" economics. But he was a monetarist who advocated central banking, which is incompatible with capitalism. Now the public blames the free market for problems caused by central banking. Did Friedman do far more harm than good by subverting the free market philosophy?


Please explain why you claim current problems are caused by central banking, as opposed to commercial banks being required to lend under conditions historically considered unwise, government running massive deficits, vast numbers of pension plans having been underfunded for decades, Social Security being a Ponzi scheme that due to changing demographics is on its way to near-term collapse, finally near enough that people really see it, businesses and investors facing tax increases and planning accordingly for this, and other causes having nothing to do with central banking?



(Can you say that five times, real fast, without breathing...and end it with "Special Sauce on a Sesame Seed Bun?)

Just kidding...!

And you forgot taking those risky loans; bundling them up; then selling them as investment vehicles...



That's another thing!

(And by the way, though the editing function hasn't allowed it to appear yet, actually I added some more to that lengthy list.)

I wish I could remember the name of it. But what it is, is that an equation or function was developed by someone who's considered a top-level expert in developing mathematical models for investment, a Chinese fellow but unfortunately I don't recall his name.

What it did was provide a single scalar (that is to say, one number) evaluation of risk for pooled commodities based not on history of the individual investments within it, but on correlations of those investments with the outcomes of other investments for which there were histories.

With this equation, now it was possible to take these bundles and generate a number. Voila, this could be rated AAA or whatever (I do think actually numbers were used though.)

The mathematician himself warned that this could easily be misapplied. It had mathematical truth to it but that did not mean it would have practical application in all circumstances.

However to big-shot executives, hey they had the number. This number says it's good. And using this method has worked great for us the last few years: we've made billions. Whaddya mean this method is not good? It's a good number. It's great!

Uh, it was great only while housing values increased.

Can we really expect executives to understand deep details of mathematics used to generate the numbers they think they should trust to decide what is good and bad?

Can't even count on a scientist to understand the p values he cites (reference to another thread) in many cases.

So it was a tragedy of stupidity in a rather arcane matter. They actually did have numbers saying it was great, from financial analysts they considered brilliant, that had had a track record of making billions.

Though common fucking sense should have said that people that put no money down, didn't prove their income, and are signing for a loan that for the first several years is at a much lower payment than soon will be required, with no evidence that they can pay the higher amount, are likely to default especially if housing values go down. And therefore no matter what a number said, these loans were worth much less than face value.


However, all that said, I have never seen how losses became greater as a result of the loans being sold. All I can see happening from that is a change in who wound up on the short end of the stick.

That is to say, if the loans had never been bundled and sold, I cannot see how total losses would not be exactly the same (besides commissions earned from sales.)


Well there is the obvious fact that no matter how lax some standards may have been you can only lend out money that you have.

Had the Fed not printed the money there would have been no money to form a bubble.

Can´t get wet if there´s no water.

There are of course also more complex reasons, especially that cheap money misleads an economy into thinking that there are more resources to finish projects than there actually are. That of course leads to a misallocation of capital, both in time and in sectors of the economy and when people become aware of that there actually no demand for what they were building the bubble burst-

The housing bubble in the US is probably the biggest and best example of the Austrian business cycle theory so far.


I don't remember him advocating central banking. He may have conceded it as real and not likely to disappear, but I don't recall advocating for it. It has been awhile since I have read anything by him, so I guess I cannot argue this with complete confidence. It just struck me as an odd claim.

Friedman was much different from the Austrians. He often made concessions and was more interested in smaller scale reform that would actually stand a chance in the political realities of his time. I have a lecture on MP3 somewhere where he explains this. Rothbard gave him a ton of shit for this, but I doubt their phylisophical beliefs were much different.

Before anyone (lifty) gets riled up, I am not comparing the intellect of Friedman and Rothbard. Just their overall economic phylosophy. In my mind, there are very few that can claim the genius that Rothbard exibited. He is much harder to read but much more detailed and technical.



So let's say the situation had been the exact same except these borrowers had been more financially solid.

Would it have been better for the economy had money not been available to lend them?

You seem to be arguing that non-availability of money, even if to qualified borrowers, is better.

If you are not arguing that then I don't see the applicability of what you're saying.

You're also leaving out all these other factors.

I'm also failing to see where it is a reasonable argument that if not for Milton Friedman, there wouldn't be central banking, therefore -- if granting central banking were the cause -- it is Milton Friedman that is to blame.


That's exactly why he's so dangerous. Capitalism is an absolute proposition- it doesn't exist to different degrees. When you make a concession as important as central banking, you're subverting the whole ideology.


I understand this arguement but I am not sure I buy it. I think it is unrealistic to expect anything more than slow progress towards that ideology. If you want the average voter to cast a responsible vote, you have to make it simple. You have to dumb it down and you can't come off as too radical. This is unfortunate but a reality.

Start talking about the destruction of central banking, massive cuts in regulation, and a significant move towards unfettered capitalism during an election, and you have just lost. You would get my vote, but probably not many of my neighbors.

Maybe times are changing and a radical move right will be possible. I tend to think it will take as much time to undue what has been done as it took to do it in the first place.


Productivity enables profitablility, nothing else.
If you don't understand this, you really need to GTFO of this thread.


If you don't understand my point, you need to get the fuck out.

In fact if you actually believe what you wrote as you wrote it, then also for that reason you have no place discussing these matters. There are people like that and they are worth no one's time. Goodbye.


Exactly. What sane business person would risk their own money.


Be careful, he'll try to accuse you of not knowing what you are talking about.

Well stated, nonetheless.


Trouble maker!



Uhhhh...you need to take a good hard look at what you are arguing against.


It is a mistake or most certainly unproven by you or anyone I've ever seen that at all if indeed any moments in time, the sum of sane businessman having money to lend and wishing to do necessarily matches the amount of sound, profitable ventures that will generate more profit if able to borrow more money.

Where is your proof that it is so?

In fact even with the existence of fractional reserve banking enabling lending beyond this, there can be periods in which businesses with very sound plans and data to back it up, even sure things, cannot obtain loans including from individuals or entities wishing to lend their own money.

Your idea that the latter would be completely sufficient is not in accord with any demonstrated facts. If you disagree, provide the demonstrated facts. Thanx


Bill -

"Gaussian Copula Function" David X. Li

Also, "I have never seen how losses became greater as a result of the loans being sold" - If the loans could not be sold, they wouldn't have been made in the first place. Those who made and then sold the loans didn't care whether the loans would default, because they had no plans to hold the assets anyway. In many cases, subprime loans were made to borrowers who qualified for prime loans simply because the subprime loans could be sold for more money. Unfortunately the payment schedules of those loans made them more likely to default, especially if housing prices fell.


Red Herring much?


As for your second post: no, it is incredibly ignorant to argue that ability to borrow money and availability of such has nothing do with generating profit, because it's all so simple as, everything comes down to productivity. Have that and there you are.

No, if you have the ability to produce goods or services valuable to others but lack money needed to finance some necessary step, and cannot borrow it, the ability to produce disappears or is greatly reduced.

I appreciate that you have gotten a utopian idea that surely money already in the hands of those that earned it would be sufficient to cover all such loans, but that is purely airy-fairy. The practical difficulties that do occur in obtaining financing for productive ventures of extremely sound business plans, even slam-dunk deals, from non-fractional-reserve-banking based sources EVEN IN THE EXISTENCE of such covering the vast majority of such needs shows that it is idiotic to imagine it would do equally well to cover everything, and most certainly, if you disagree with "idiotic," unsupported by fact. Only by utopian dreaming.