Given that Ben Bernanke has been repeating his name like a mantra, it shouldn't be a surprise that some sharp eyes have found an interview where famed monetary economist Milton Friedman endorses just the kind of creative policy the Fed has recently adopted -- i.e. purchasing long-term securities in attempt to stimulate the economy. Here he is talking about the Japanese case we often invoke today:
During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it's been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan's argument is, “Oh well, we've got the interest rate down to zero; what more can we do?”
It's very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
What I like about this is the term "high-powered money," apparently used by economists to refer to cash in the hands of the public and the Fed, so-called because it is the base that the rest of the banking system, especially bonds, is built from -- when a bank takes a cash deposit, that's high-powered money, because it can lend out most of it while maintaining its value for a customer, thus multiplying the supply of money. The trick the Fed is trying to do now, on Friedman's recommendation, is to get more of that high-powered money flowing through the economy, rather than keeping it dormant in banks.
What I'm excited about is that we've finally got a term that's friendly both to economists and the public. Who knows what quantitative easing means? But everyone can get behind putting more of that high-powered money in the system. Every American wants more power!
-- Tim Fernholz
