Milton Friedman: Greenspan 'overdoing it'
WASHINGTON, May 01, 2001 (United Press International via COMTEX) -- In an
interview with United Press International's Economics correspondent, Ian
Campbell, on April 30, Milton Friedman, the Nobel-winning economist, said that
Fed Chairman Alan Greenspan may be overdoing interest rate cuts, that inflation
was sure to rise if monetary policy is not tightened and that it may be
impossible for the U.S. economy to avoid recession.
Friedman said Greenspan was erring on the side of a too-loose monetary policy in
order to avoid a repeat of the Depression of the 1930s or the slump in the
Japanese economy in the 1980s.
"Monetary policy has shifted too much toward easing," Friedman said. "With the
rates of monetary growth occurring now there's a very serious danger of higher
inflation."
Asked why Greenspan was not concerned about the rapid growth in the money
supply, Friedman said he was sure Greenspan was concerned.
Friedman's belief was that "in the background of Alan's mind is that you have
had three periods of rapid economic expansion in which new technology has been
an important factor and production has been rising at more than 4 percent per
year. The first is the United States in the 1920s; the second is Japan in the
1980s; and the third is the United States in the 1990s ... The first two ended
in disaster. Alan wants to make sure that the third one doesn't end the same
way."
Friedman called Greenspan the best Fed Chairman since 1913 but said it was "very
hard to account for ... the extraordinary confidence in Alan Greenspan. U.S.
Treasuries reflect inflationary expectations of only 2-3 percent over 10 years
or so."
Friedman also warned that the dollar was overvalued and the euro undervalued.
"They will come together," he said.
Having grown for almost a decade the U.S. economy slowed abruptly in the fourth
quarter of last year. Fed Chairman Alan Greenspan has responded by cutting the
Fed Funds rate by 2 percentage points in the first four months of this year. Is
he right to be cutting interest rates so rapidly? Does the marked pick-up in
monetary growth not pose some inflationary risk?
We asked the Nobel Prize economist Milton Friedman, for his views.
Campbell: Alan Greenspan appears to be cutting rates at present as though he is
not concerned about the pace of money supply growth.
Friedman: I'm sure it does concern him. But monetary policy has shifted too much
toward easing. You need a psychoanalyst here as much as an economist, but I
think in the background of Alan's mind is that you have had three periods of
rapid economic expansion in which new technology has been an important factor
and production has been rising at more than 4 percent per year. The first is the
United States in the 1920s; the second is Japan in the 1980s; and the third is
the United States in the 1990s. In all three cases there was a raging bull
(stock) market, they went on for the same length of time and were of a similar
size. The first two ended in disaster. Alan wants to make sure that the third
one doesn't end the same way.
Campbell: In the previous cases was monetary policy wrong before the bubble
burst or after it?
Friedman: Afterward. In the case of the 1920s one feature that was different
from today was that there was a sharp decline in the money supply, of about a
third, from 1929-33. It started in a mild way at the end of 1929 and then
worsened with successive bank failures and became very serious in 1931. In the
Japanese case monetary growth has been too low since the bursting of the bubble.
You had negative monetary growth after 1989 for a quarter or two and in the
1990s very low monetary growth. You have had much too low monetary growth in
Japan in the 1990s and it is still too low. I suspect that Alan is very
concerned not to suffer the same fate and would rather err on the side of a too
loose monetary policy than a too tight one.
Campbell: The United States has had a period in the 1990s where it appeared to
abolish the business cycle. But in the record current account deficit and very
low savings rate you have signs of excess. Wouldn't it be better to accept the
need for a slowdown? Isn't it reckless to encourage consumers and companies to
borrow more at a time when the economy needs to slow down to reduce some of its
excesses?
Friedman: You have to remember that the function of the (interest rate) cuts is
to increase the quantity of money in the small market for federal funds.
Long-term rates are more important for the economy.
Campbell: Yes; and often they will go up if inflationary expectations rise.
Friedman: Yes. But at present they are not doing so. What it's very hard to
account for is the extraordinary confidence in Alan Greenspan. U.S. Treasuries
reflect inflationary expectations of only 2-3 percent over 10 years or so. That
is a very optimistic prediction.
Campbell: You would say that inflation must rise?
Friedman: If recent double digit rates of money growth continue for long, higher
inflation is almost sure to follow.
Campbell: Do you not feel that after the boom in asset prices and growth in the
second half of the 1990s that the United States must enter a recession now and
that it's a mistake to try too hard to avert it through monetary policy? That
doing so risks adding inflation to the slowdown?
Friedman: Its true that you may not be able to avoid recession now. But it was
excessively tight monetary policy that produced the 1930s and the 1990s in
Japan. What you're arguing, with some justice, is that there's a risk of
creating a repeat of the stagflation of the 1970s.
Campbell: Should the Fed not have done more to check the stock market boom of
the second half of the 1990s?
Friedman: No. The Fed should be concerned only with the prices of final goods.
In 1995-98 the economy behaved very well. There was a real bubble in the new
economy stocks but no more than a strong bull market in the old economy ones.
Campbell: So what is your assessment of Alan Greenspan's record as Fed chairman?
Friedman: To judge by results, he's done a splendid job. I am a great admirer of
Alan Greenspan. He's been the best Fed chairman since 1913. But I think Alan may
be overdoing it now. With the rates of monetary growth occurring now there's a
very serious danger of higher inflation.
Campbell: What do you think would be a suitable growth rate for M2?
Friedman: Around 5 percent.
Campbell: More or less the same rate as targeted by the much-criticized European
Central Bank?
Friedman: Yes.
Campbell: And how about the dollar?
Friedman: It's overvalued. The euro is undervalued. They'll come together.
By IAN CAMPBELL, UPI Economics Correspondent
Copyright 2001 by United Press International. |
