Ramesh Ponnuru has it exactly right in criticizing George Will’s terrible column recently that criticized the Fed’s recent decision for more quantitative easing. He says he supports the spirit of Will’s criticism, but thinks all of his conclusions are wrong.
It’s in applying those principles that he goes astray:
Uncertainty is exacerbated by the Fed’s exercise of its vast discretion, including QE1, QE2 and, perhaps soon, QE3 (or QE5, including two “twists” also aimed at lowering borrowing costs). Bernanke, who promises more “policy accommodation” to support the economic recovery, is inadvertently vindicating Milton Friedman’s belief that “the stock of money [should] be increased at a fixed rate year-in and year-out without any variation in the rate of increase to meet cyclical needs.”
Friedman adopted that view at one point in his career — admittedly, the most influential point — because he thought that the velocity of money (the rate at which it changes hands, or the inverse of the demand for money balances) was fairly stable. If velocity is stable, then stabilizing the growth of the money supply stabilizes nominal spending. (The money supply × velocity = nominal spending = the price level × economic output. Or, M*V = P*Y.) Stabilizing nominal spending is the best way for a central bank to stabilize an economy, because most labor and debt contracts are negotiated in nominal terms. By stabilizing the growth of M*V or P*Y, the bank is providing the most important form of stability it can, and letting market actors make their arrangements against that backdrop.
The economy still has lots of problems right now–many of them induced by too much government–but loose money isn’t one of them! Does the Fed run the risk of increasing inflation? Let’s hope so, because we need a little more inflation right now, at least until spending starts to recover. I think even Friedman would agree with that and would have likely encouraged more Fed asset purchases long ago.