Did Milton Friedman support bailouts?

Hugh Rockoff does a 72 pp. deep dive on Milton Friedman on bailouts.  This is an excellent paper, as he also considers Friedman’s columns and spoken words over the years and he also fleshes out Friedman’s thoughts on what we now call “shadow banks” (he worried about them).  Friedman was willing to accept a fair number of bailouts, here is one excerpt:

In the bailout of Continental Illinois, a case that Friedman thought had been handled well, depositors and other creditors were protected, but shareholders were mostly wiped out and management was replaced. The protection of depositors and other creditors created an advantage for large banks: they could raise funds more easily because they, like Continental Illinois, were “too big to fail.” However, Friedman thought that as long as shareholders and managers were forced to pay dearly when a financial institution was bailed out there would still be an adequate incentive for bank managers to exercise prudence.

More generally:

For Friedman this meant that in the case of financial institutions the benefits of a bailout might outweigh the costs.

And more speculatively:

No one can channel an economist as brilliant and creative as Milton Friedman. Nevertheless, having come this far I will make an attempt. I believe that it would have been consistent with his earlier views for Friedman to have been reluctant to condemnthe program of bailouts undertaken in 2008, to use the phrase that he used when questioned about the rescue of LongTerm Capital Management. I think he would have recognized that the repos issued by Lehman Brothers and other investment banks were similar to uninsured deposits in commercial banks, thus making possible a destructive panic. In other words, he would have recognized the logic of the contention that 2008 was a run on repos and similar to earlier financial panics (Gorton, Laarits, and Metrick 2018). He might have reminded us of the consequences of the failure to provide help for the BoUS in 1930. However, he might well have been critical of the structure of the bailouts, especially with respect to how various classes of stakeholders were treated.

I recall being excoriated in 2009 for suggesting that Friedman would have endorsed some version of the bailouts of that time.

Via the excellent Douglas Irwin.  And here is my older CWT with Doug.



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