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| Nobel Laureate Milton Friedman |
“I know of no severe depression, in any country or any time, that was not accompanied by a sharp decline in the stock of money, and equally of no sharp decline in the stock of money that was not accompanied by a severe depression.”
Was Friedman right this time too – was this recession/depression caused by a “sharp decline in the stock of money.” If so, what was its origin? Let’s start with a look at the top of the international financial system.
The Central bankers’ Bank for International Settlements (BIS) in 1988 in its “Basel I” regulations imposed an 8% capital reserve standard on member central banks. This almost immediately threw Japan (which had banks with 3-5% capital reserves) into a 15 year economic depression as those banks contracted credit to comply with Basel I. In 2004 Basel II imposed “mark to the market” capital valuation standards that required international banks to revalue their reserves according to changing market valuations (such as falling home or stock prices). The US implemented those standards in November, 2007. Almost immediately, in December 2007 the US stock market collapsed and credit began drying up as banks withheld loans to comply with the 8% capital requirement as collateral valuations, particularly on homes, began to drop. The snowball effect of tightening credit, which reduces economic activity and values further, which resulted in further tightening of credit, etc., has produced a worldwide recession/depression.
Was Friedman to blame for that, or was the BIS and implementation of its Basel II regulations?
For those unfamiliar with the BIS – it is the central bankers’ bank. It is above all governments, is exempt from the laws of its host country – Switzerland, and its regulations, which are adopted among its 53 member Central banks, become in effect part of the banking law of those nations without legislative approval (such as that of the US Congress). Yet they effect the economies of those member nations and that of the world, as we are still experiencing, a’ la Japan. The BIS is in most respects, when combined with the IMF (International Monetary Fund) and World Bank, a worldwide version of the US Federal Reserve System. Here is former JP Morgan Chase CEO Walter Shipl ey on this point re the IMF:
“The same thing is true on the international front. The world clearly needs the global equivalent of the Federal Reserve. That is what the role of the IMF is.”
What was Milton Friedman’s attitude towards the Fed (and towards the BIS/IMF/World Bank combo which is the global equivalent of the US Fed). For starters, he squarely blamed the Great Depression on the Fed:
“The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 … Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.”. —Milton Friedman , Two Lucky People, 233
Friedman was opposed to the very existence of the Fed:
“Any system which gives so much power and so much discretion to a few men, [so] that mistakes ‑‑ excusable or not ‑‑ can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic ‑‑ this is the key political argument against an independent central bank. . .To paraphrase Clemenceau: money is much too serious a matter to be left to the Central Bankers.”
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