Classical libertarianism: The economic perspectives of Milton Friedman including his likely views on the ‘proper’ role of government in the subprime mortgage debacle

Abstract

This study presents the libertarian ideas of Milton Friedman, the Nobel Prize in Economics awardee in 1976 and the most influential libertarian of the twentieth century. Specifically, the foundations of Milton Friedman's libertarianism, which are private property rights, competitive markets, economic, political and civic freedoms and the limited role of Federal government, are articulated. Further, public policy issues where Milton Friedman's suggested reforms have been successfully implemented in varying degrees are also detailed. They include (1) floating the dollar, (2) ending the military draft, (3) repealing interest rate ceilings, (4) treasury innovations such as auctions and inflation indexed bonds, (5) ending rent control, (6) deregulation in industries such as banking and telecommunications and (7) promoting market completion and individual choice in primary and secondary schools. Also, presented are Milton Friedman's likely economic assessments of the Federal government's, including both the Federal Reserve System and the Department of Treasury, economic stimulus programmes to resuscitate the economy from the subprime mortgage debacle. These inferences about Milton Friedman's likely economic assessments are based upon his published economic writings and a recent interview with his long-time collaborator, Anna Schwartz. Mr Friedman's likely economic assessments, as a short list, include (1) the grade for the monetary policy of the Federal Reserve System in the subprime mortgage debacle was below average because it did not address the fundamental problem of the financial markets being unable to accurately price the risky securitised subprime mortgage products and the mistaken belief that credit default swaps (CDSs) would adequately hedge their future asset risks, (2) that the Paulson II economic stimulus plan lacked any rigorous and systematic economic justification because it rewards financial institutions that have performed poorly and because it results in partial nationalisation of the financial services system, (3) the Paulson plans result in a large increase in government size via a large increase in government expenditures and (4) there will be multiple challenges to capitalism as the primary resource allocator. Also discussed are the determinants of the subprime mortgage debacle including (1) the increased demand for securitised mortgage products resulting in significantly lower mortgage lending standards for home loan borrowers and (2) the belief that CDSs could/would reduce the risk associated with the ownership of subprime mortgage tranches. These two phenomena have led to a number of sinister economic results such as (1) the absence of market clearing transactions and hence (2) market prices for securitised subprime mortgages, (3) meaningful assessments of the probabilities of default/bankruptcies of many firms in the financial services industry.