Monday, April 27, 2009

Monetarism Defiant

I confess, I'm a Monetarist. This article is a rare interview with one of the founders of the Monetarist movement in economics, Anna Schwartz. Anna along with Milton Friedman believe that the quantity of money in the system determines growth and inflation. This story is really a short interview with Anna, now in her 90's about the current crisis. A few quite interesting tidbits:

On Bubbles

“A too-easy monetary policy induces people to acquire whatever is the object of desire in a mania period,”

On Bernanke

...the Fed and the Treasury “try to break news on a daily basis and they look for immediate gratification,” she says. “Bernanke is looking for sensations, with new developments every day.”....“but he (Bernanke) is fighting the wrong war today; the present crisis has nothing to do with a lack of liquidity.”

On Bank Bailouts

“Doing so is shifting from trying to save the banking system to trying to save bankers, which is not the same thing,” Schwartz says. “Ultimately, though, firms that made wrong decisions should fail. The market works better when wrong decisions are punished and good decisions make you rich.”

On Deflation

“The risk of deflation is very much exaggerated,” she answers. Inflation seems to her “unavoidable”: the Federal Reserve is creating money with little restraint, while Treasury expenditures remain far in excess of revenue. The inflation spigot is thus wide open. To beat the coming inflation, a “new Paul Volcker will be needed at the head of the Federal Reserve.”

Its a short, but very good article that I wish the people at the Federal Reserve and the administration would listen too (as the last administration should have).

Is it possible that knowing the past doesn't necessarily mean we aren't doomed to repeat?

Scott Dauenhauer CFP, MSFP, AIF