An interesting story in the Wall Street Journal about economist Anna Schwartz. She was Milton Friedman’s coauthor on their classic work, “A Monetary History of the United States”, and she has some interesting comments on the recent financial crisis:
Credit spreads — the difference between what it costs the government to borrow and what private-sector borrowers must pay — are at historic highs… This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”
…”firms that made wrong decisions should fail,” she says bluntly. “You shouldn’t rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich.” The trouble is, “that’s not the way the world has been going in recent years.”
“I don’t see that they’ve achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job.”