Milton Friedman admits entire life was a lie

by Russ Roberts on October 23, 2008

in Politics

In one of the most shocking and eerie moments in the history of Congress, the ghost of Milton Friedman recently completed an appearance on Capitol Hill before the House Committee of Government Oversight and Reform. Appearing just eight days before Halloween, Friedman’s ghost admitted that markets weren’t perfect and that sometimes people make mistakes.

"But wasn’t your whole life a rosy, the glass is always filled to the brim Pollyanna paean to the power of markets and the evil of regulation?" Chairman Waxman demanded of the ghost.

Not at all, Friedman replied. "That’s a parody of a parody," he said. But Friedman was forced to admit in a tense exchange that recent events had forced him to reconsider some of the views he had held for his 94 years on this earth.

"From my new perspective up above—" Friedman began before being interrupted.

"You’re sure it isn’t down below?" Waxman interjected.

"Whatever," the ghost replied. "From my new perspective, I can see I might have been wrong. Markets aren’t perfect. Government is. We need a stimulus package. And a more aggressive Fed."

Some witnesses to the testimony felt that these remarks about the Fed cast doubt on the integrity of the ghost’s testimony.  But Waxman seemed energized by what seemed to be a confession.

"That’s the spirit," Waxman replied. "I’m glad you finally can admit that you were wrong. And while you’re at it, admit that the Great Depression wasn’t caused by a contraction in the monetary supply but by a naive belief in laissez-faire capitalism that prevented Herbert Hoover from doing anything when the economy collapsed."

At this point in the questioning, the phantasm flickered and faded, then disappeared. Some claim the whole episode was merely a pre-Halloween bit of video editing. But others insist it was real. After all, Alan Greenspan had admitted that his whole intellectual life was a lie. How could anyone, even the great Milton Friedman, fail to see the light when it was so obvious to so many?

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Oil Shock October 23, 2008 at 7:04 pm

Greenscam being an early admirer of Ayn Rand was for a Gold standard and hard money. In 1966, he wrote an essay titled "Gold and Economic Freedom". Ironically, went on to become a Central Banker. He supervised the biggest expansion of credit and money out of thin air backed by nothing.

Early greenscam was not a Friedmanite, he was even more rooted in free market in the Misesian mold.

His whole life became a lie, the moment he became and advisor to Richard M Nixon.

Recently, Fox business interviewed Greenscam ( from 2007-08 ), which is floating around on youtube, where Greenscam, in a moment of honesty, said that he still believes in Gold standard. His 19 years at the helm of the politbureau, was a complete lie, he was doing something he never believed in.

ANyways, here is Mish's take on Greenspan…

Only the free market can judge risks. The failures are not of the free market, the failures happened because we did not have a free market.

Instead we had governments sponsorship of the GSEs, government sponsorship of the ratings agencies, micro management of interest rates by the Fed, fractional reserve lending compounded by Greenspan himself authorizing sweeps of checking accounts.

Sweeps permitted nearly every penny of money that is supposed to be available on demand to be lent out. Money that you think is in your checking account is simply not there. It has been lent out.

Acton. October 23, 2008 at 8:11 pm

Friedman was a pretty big cheerleader for imaginary banking and money backed with a wink and nudge from our pals in Washington. This crisis is basically pretend-value gone bad, maybe he, like his old pal greenscam (I love this), should get some of the blame. I don't know.

Ward October 23, 2008 at 8:42 pm

Alan Greenspan has besmirched his dubious legacy in numerous ways but this latest episode only prooves his Randian creditionals that theory be damned its all about Al. Its his world and we just live in it.

Per Kurowski October 23, 2008 at 8:42 pm

Greenspan today basically said that he had always believed that the market and the companies were the best positioned to take care of their own interest… what?

Why would he then be part of that regulating group that came up with the minimum capital requirements based on some vaguely defined concept of risk and imposed the credit rating agencies as their great risk surveyors in the world risk thereby officially endorsing their infallibility, tempting the rest of the world to blindly follow the opinions of those who sooner or later had to fail.

As I have previously written on my TeawithFT.blogspot, why doesn’t Greenspan do as old soldiers and just fade away and save himself some embarrassment?

Methinks October 23, 2008 at 8:55 pm

Per Kurowski,

Thanks to you, I've been inspired to learn more about Basel II. What a disaster.

Oil Shock October 23, 2008 at 10:43 pm
Oil Shock October 24, 2008 at 1:04 am

Now that we are on the topic of Alan Greenspan, it is worth reading this hilarious obituary for Greenspan by libertarian Bill Bonner, written in 2005…..

For years, we have been working on Greenspan's obituary. As far as we know, the man is still in excellent health. We do not look forward to the event; we just don't want to be caught off guard. Maybe we could even rush out a quickie biography, explaining to the masses the meaning of Mr. Greenspan's life and work.

We see something in Alan Greenspan's career – his comportment, his betrayal of his old ideas, his pact with the Devil in Washington, and his attempt to hold off nature's revenge at least until he leaves the Fed – that is both entertaining and educational. It smacks of Greek tragedy without the boring monologues or bloody intrigues. Even the language used is Greek to most people. Though the Fed chairman speaks English, his words often need translation and historical annotation. Rarely does the maestro make a statement that is comprehensible to the ordinary mortal. So much the better, we guess. If the average fellow really knew what was being said, he would be alarmed. And we have no illusions. Whoever attempts to explain it to him will get no thanks; he might as well tell his teenage daughter what is in her hotdog.

Alan Greenspan is the most famous bureaucrat since Pontius Pilate. Like Pilate, he hesitated, but ultimately gave the mob what it wanted. Not blood, but bubbles. Greenspan's role in the empire is more than that of a Consul or a Proconsul. He is the Prefect. He is the quartermaster who makes sure empire has the financial resources it needs to ruin itself.

Read the rest here

Bill Bonner is the co-author of "Financial Reckoning Day: Surviving the soft depression of the 21st Century", "Empire of Debt: The Rise of an Epic Financial Crisis" and "Mobs, Messiahs & Markets: Surviving the Public Spectacle in Finance and Politics"

t.f. October 24, 2008 at 1:37 am

Correct me if i am wrong.

Mr. Greenspan didn't intervene the market by setting low interest rate early this decade. Instead, by not intervening, the market itself set rates low, given the optimistic sentiment, fancy financial products as well as the government guarantees.

Given the monetary system, which is not under a gold standard, however, no intervention means more and more money destined to be created.

Therefore, he would have two choices in his tenure:

1) Going back to gold standard (this option is politically incorrect) and

2) intervene (to sort of counter the mistake by the fiat money system). There is no middle road.

So, now, he is blamed by two group of people for conflicting kinds of crimes:

1) libertarians blame him for not going back to gold standard.

2) the mainstream blames him of not intervening.

Am I right, Mr. Roberts? Your response would be very much appreciated.

J P October 24, 2008 at 6:41 am

This is the worst part. Even if the government continues to screw up with the crisis, eventually the market will recover in fairly short order (years). However, the besmirching of free markets will echo forward for decades.

Better we have a depression within Markets, than a recession of Markets.

Don Mynack October 24, 2008 at 9:49 am

What are you talking about, t.f.? The Fed lowered rates 13(!) times from 2001-2003, until the rate fell all the way to 1.00% (!) in 2003. Oddly enough, shortly thereafter the housing market reached it's peak and subsequent explosion. By that time, raising the rate again didn't matter, and we could see the ultimate futility of jacking around with interest rates to control fiat currency.

t.f. October 24, 2008 at 12:06 pm

Don, thanks for your response. i am just confused about the operation of the U.S. interbank market.

As i understand it, it is a market in which banks lend to one another, at a certain rate — the "effective" federal funds rate.

What Greenspan did on those 13 times was to move the "target" federal funds rate, by altering the money supply.

In this mechanism as i understand it, the Fed could have done nothing on the money supply, or on intervening the market in any sense. Still, the Fed had to change the "target" as it merely followed the "effective" rate set by bankers.

For instance, the "effective" rate is now 0.93%, and the "target" rate is 1.5%. By following a free-market practice, the Fed should announce a rate cut of 50 basis point.

Is that how it works? If yes, when he did cut interest rates, he was actually following a free market ideology.

Therefore, he is not to blamed for cutting rate. But he is blamed for being unable to intervene and unable to artificially keep rates above the natural market rate. Am i right?

Martin Brock October 24, 2008 at 12:19 pm

Money that you think is in your checking account is simply not there. It has been lent out.

So what? Australia, Canada, the U.K., New Zealand, Sweden and Mexico all have no reserve ratio. No law prevents their banks from leveraging deposits a thousand fold, although the U.K. does have "voluntary" standards.

Extending credit doesn't require your deposits at all.

Given the monetary system, which is not under a gold standard, however, no intervention means more and more money destined to be created.

First, a gold standard doesn't imply a 100% reserve banking system.

Second, a gold standard with a 100% reserve requirement doesn't prevent credit exceeding the volume of gold. This requirement only prevents gold bankers from extending the credit, and this limitation on gold bankers is itself an intervention. Free bankers don't regulate themselves this way.

Suppose I've built a house with timber from land I own using tools I own and no labor other than my own. I own this house and land free and clear.

You're a dairy farmer. I write you a mortgage on the house and land, i.e. I transfer title to you in exchange for your promise to pay me $500/month for 30 years.

What interest rate have I charged?

Russ has $100,000 worth of gold, but he prefers to own a promise of $500 worth of milk each month for the next 30 years, so he exchanges his gold for my note.

What interest rate has Russ charged?

Now, I have the gold, and you owe Russ $500/month. Each time you pay him, he uses the payment to buy milk from you, or you just hand him the milk each month.

What's the "money" in this scenario? The gold? The house? The milk? Your cow? Your labor? The land? The grass your cow eats on the land?

"The gold" is a largely arbitrary answer to this question. A more meaningful answer is "the credit".

Oil Shock October 24, 2008 at 12:20 pm


Fed is like a dog trying to catch it's tail.

Here is the answer to your question

Most think the Fed follows market expectations. Count me in that group as well. However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn't the market to blame if the Fed is simply following market expectations?

This is a very interesting theoretical question. While it's true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.

For example: If market participants are expecting the Fed to cut on weakness and the Fed does, market participants gets into a psychology of expecting more cuts on more weakness. Here is another example: If market participants expect the Fed to cut rates when economic stress occurs, they will takes positions based on those expectations. These expectation cycles can be self reinforcing.

Read the whole thing here

J Scott October 24, 2008 at 6:33 pm

The world is upside-down.

""Whatever," the ghost replied. "From my new perspective, I can see I might have been wrong. Markets aren't perfect. Government is. We need a stimulus package. And a more aggressive Fed.""

It seems our perceptions of Comrade Greenspan were skewed—and selling out to a commie like Waxman. This will not have a happy ending.

jay October 24, 2008 at 7:43 pm

Say it ain't so, uncle milton! say it ain't so!

T L Holaday October 24, 2008 at 8:38 pm

Management elected by shareholders are subject to the same kind of perverse incentives that malmotivate officeholders elected by citizens.

Sam Grove October 24, 2008 at 9:59 pm

"WWII Cured the Depression" is taking no more comments.. wahhh.

Martin Brock October 25, 2008 at 7:25 am

"Alan the Penitent" is dead now too.

The developers of this web site can't protect my posts, but the Treasury Department of the Federal Government, under the wise tutelage of John McCain, can protect my "investments", and all those wise CEOs and board members can protect "shareholders" too.

I wish I were as Godly as a CEO, but I'm just a lowly software developer. If I were a CEO, especially a bank CEO, maybe economists would construct theories of my omniscient omnibenevolence too.

Agreed but shareholders as people (although there may be several degrees of removal until you reach people) are ultimately the ones who are incentivized to act in the interest of the long term value of the corporation.

"Shareholders" is just another legalistic, collectivist abstraction. The only people who matter are individual board members and individual corporate officers. These individuals act in their individual self-interest. That's all. Period.

You might as well tell me that "the American people" ultimately act in the interest of "the long term value" of "the American economy" through their elected representatives and executives.

The phrase "divide and conquer" comes to mind when reflecting on how management can subvert the interests of the shareholders.

It's not simply "management" vs. "shareholders" either. It's individual corporate officers and individual board members, as well as their attorneys and more central rulers continually changing the rules of the game.

A "market" is simply a place where, or a process whereby, we exchange things. What we may exchange and the precise rules of exchange make a big difference in the ultimate distribution of entitlements. That's not "the market". It's "property" (or "propriety").

If a state enforces your right to dictate my every action for my entire life, then you own me and may trade me in a market. We can talk about a "market dynamic" in this scenario. We can even talk about a "free market", but in this scenario, I sure ain't the "free" entity in the theory.

If I sell myself into slavery, I still ain't the "freest" entity in the theory, because my sale only indicates my choice among limited alternatives that left me preferring my own enslavement to the other alternatives.

Martin Brock October 25, 2008 at 7:57 am

Solution to "the problem"? If your house is worth less than you owe on it, default on the loan now. That's what you're supposed to do. It's the right thing to do. If you don't behave this way, house prices don't reflect the ability of homeowners to pay for houses, because most of us buy houses on very long term credit, and we don't really have a clue what the houses are "fundamentally" worth. We only know the price we pay.

But the mortgages aren't really the problem. At least, they aren't the whole problem or even most it.

If mortgages were the whole problem, we'd still be on Plan A, and Paulson would be buying securities backed by mortgages on trailers at a premium to their current market value, because Barney Frank made all these friendly bankers write bad mortgages instead of simply handing money to poor people.

But that's not happening, because this theory of "the problem" is crap, sort of like the software operating this web site is crap at the moment.

Barney Frank is not a wise oracle either, and subprime mortgages encouraged by the CRA through FNMA (which are only a small fraction of subprime mortgages) play some role in the problem, but they aren't the problem, because the problem would exist regardless of these factors.

Mathieu Bédard October 25, 2008 at 8:58 am

I don't get it. What is the point of this post?

Martin Brock October 25, 2008 at 9:01 am

"Of Property" (from The Third Treatise Of Civil Government)

You're lost in a desert on the brink of death from thirst. In the distance, you see an oasis with a body of fresh water. Spirits lifted, you rush toward the oasis to find me sitting behind a bench. I wear an ornate wig, and an armed man stands beside me.

You: My kingdom for a drink!

Me: May I see the title?

You: Title?

Me: The title to your kingdom. May I see the title to your kingdom?

You: Well, I wasn't being literal. I meant that I'm dying of thirst and need a drink from your reservoir.

Me: I see. So you have no kingdom. What do you have?

You: I have a terrible thirst.

Me: Anything else?

You: Well … no, not at the moment.

Me: I see. Sir, water is very scarce around here. If I simply give it away to every passerby, the water supply could …

You: I don't see anyone else around here.

Me: Sir, if you interrupt me again, my friend here will remove you from the oasis. I'll tell you what I'll do. Sign this agreement entitling me to direct your actions without exception for the rest of your life, and you may have a drink.

You: How far is the next oasis and in which direction?

Me: Sir, if you persist in these impertinent questions, my friend here will remove you from the oasis.

You: Do you have a pen?

Me: Sir, pens are very scarce around here. Do you have any children?

That's property. It's not theft (apologies to Proudhon), but it's not labor either (apologies to Locke). It's not reason. It's not eloquence. It's force. Thanks to George Washington for clearing that up.

Martin Brock October 25, 2008 at 9:03 am

I don't get it. What is the point of this post?

I don't get your question. What specifically are you asking about the post?

Mathieu Bédard October 25, 2008 at 9:09 am


Russ is obviously trying to get a message out through irony. But I somehow don't get it. It must be something with me since you guys don't seem to have any problem understanding this. What is he really trying to say?

Martin Brock October 25, 2008 at 9:26 am

O.K. I thought you were addressing my post. Mine is a lot like Russ's. It's just irony for the sake of irony. Life is absurd. What else is a man to do?

But here's my take on Russ's post. Russ's preceding post on Greenspan says that Greenspan didn't really say what the reporter reporting Greenspan's words said that Greenspan said.

Greenspan only said that particular factors in particular firms didn't act in the interest of the firms. That's no mystery, really, because people don't act in the interest of firms. People act in their own interests, regardless of what they say they're doing, even regardless of what they think they're doing.

I'm not even sure that Greenspan understands what he said, but that's what he said.

Russ's second post is a reductio ad absurdum on the first post with Friedman playing the role of Greenspan.

Per Kurowski October 25, 2008 at 10:29 am

Did Congress never ask Greenspan about his opinion?

If anyone had answered “I presume that the self-interest of organizations, specifically banks and others, is such that they are capable of protecting their own shareholders” we would never ever dream of appointing said person to anything that has to do with banking regulations. Since this is what Alan Greenspan now tells us he always believed does that imply that in their confirmation hearings the US Congress never asked him about his views? Can Bernanke be hurriedly recalled to Congress for a brief follow-up question?

The saddest part of the story though is that had only Alan Greenspan regulated according to his beliefs, he would never ever have imposed upon the banks the opinions of some few credit rating agencies, and these agencies would therefore never ever have been officially empowered as the supreme risk guides, and therefore they would never ever have been so much enabled to have so much of the market follow them over the subprime precipice.

Martin Brock October 25, 2008 at 10:48 am

… they would never ever have been so much enabled to have so much of the market follow them over the subprime precipice.

Central planners can't tell you what securities are worth. That's true. This fact does not imply that securities are always worth the asking price, or ultimately yield the selling price, in the absence of central planners. Central planners don't create subprime mortgages. In fact, central planners do create "prime" mortgages, because they define "prime".

Martin Brock October 25, 2008 at 7:48 pm

All I see in the video is a lot of talk of "conservatism". If anyone still believes that "conservatism" means limited government or even lower taxes, he needs his head examined. The Bushniks expanded central authority and raised taxes more than any crowd of politicians in my lifetime, future taxes and inflation taxes. They've sold more entitlement to tax revenue than I thought possible eight years ago, and they've rushed hysterically to authorize another trillion dollars worth in the last few weeks of their waning power, as John McCain calls on the state to "protect the investors".

No thanks. The lesser of two evils is still evil, and McCain isn't obviously the lesser evil anyway. I won't be voting in the Presidential election, but don't bore with the sad pretense that the Republicons are any better than the Democratz. I've swallowed that koolaid once too often.

Martin Brock October 25, 2008 at 8:47 pm


A chart in your video shows U.S. GDP growing at an annual rate of 2.8% between 1988 and 2007 while German GDP grew at only 1.5%. You imply that state economic policy had something to do with it.

Here is the Census Bureau's International population database.

During this period, from '88 to 2007, Germany's population grew 5.6%. The U.S. population grew 22.9%, four times as much. I don't have the figures at the moment, but I'm sure that Germany's population profile is also older, so the difference in the growth of the working age population is undoubtedly greater still.

So the difference in per capita GDP growth is much smaller and the difference in productivity growth is smaller still.

Do socialists have fewer children?

They do in fact, but I don't think this explanation of the lower growth in Germany is what you had in mind.

Martin Brock October 25, 2008 at 9:03 pm

You also show a chart of job creation in the U.S. and Europe since 1980, apparently suggesting that Europeans aren't employing themselves, again presumably because they aren't electing enough Republican-like politicians.

If you look at this cart, you'll see that the nations in your chart (except Italy which is a lot like Germany) all have older populations aging earlier than ours and thus have more slowly growing working age populations.

So your job creation chart really shows a fall in the rate of growth of the European workforce, a matter of demographics, preceding by a couple of decades a similar fall in the growth of the U.S. workforce starting just about now.

Do Republicans have more children?

Maybe so, but your video doesn't tell the story this way.

Martin Brock October 25, 2008 at 9:10 pm

I have three children, as you might suspect, but I ain't no Republican no more. I expect I'll be shooting Republicans before I ever vote for one of 'em again.

Methinks October 26, 2008 at 6:36 pm

I have three children, as you might suspect,

Oh good! Now that you're getting married (congratulations, btw), do you think you might have more? I'm pretty old to have kids unlikely to have any and I'm going to need your kids to work and actually produce for the oldies that refuse to work beyond 65 but live into their 90's (although, with a combination of Obama's socialized medicine and America's love of cheeseburgers and cars, we may actually not live as long as we are now). Don't worry, I don't have kids because all I do is work and I plan to do this until I die (like Murial Siebert, only less senile). So, I won't be sucking your kids' blood to fund my retirement.

Do socialists have fewer children?

The populations of socialist countries tend to be less optimistic. Perhaps the zero-sum nature of their economies. They also tend to be more anti-immigrant.

It's too bad were were cut off on the other thread.

Martin Brock October 26, 2008 at 9:10 pm

Oh good! Now that you're getting married (congratulations, btw), do you think you might have more?

Second marriage. All of my children are legitimate. My new bride also has two and tells me she'd rather serve time than have another.

I'm pretty old to have kids …

You keep that tail up just the same.

I'm going to need your kids to work and actually produce for the oldies that refuse to work beyond 65 but live into their 90's …

You sure are.

I don't have kids because all I do is work and I plan to do this until I die …

That makes two of us. I can't claim all the time I spend here as "work", but I don't plan to retire either.

Methinks October 27, 2008 at 1:13 pm

Second marriage. All of my children are legitimate.

Didn't mean to imply they were born out of wedlock. Sort of thought they were. But, would being born out of wedlock really make them less legitimate? I always hated that distinction because it's stupid and is placed on children, not their parents.

"…tells me she'd rather serve time than have another."

Ouch. See? Now that's why I just avoided all that.

I can't claim all the time I spend here as "work", but I don't plan to retire either.

Work ebbs & flows. Right now, there's an ebb. Plus, I'm the boss and it's good to be queen. On the other hand, I don't take vactions, so it all balances out.

Martin Brock October 27, 2008 at 10:53 pm

I always hated that distinction because it's stupid and is placed on children, not their parents.

I agree, but I'm really very conservative about the family. In my way of thinking, the natural father of your children is your husband whether either of you like it or not. That's not exactly marriage by common law (which we have in Alabama), but it should be.

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