That is where I part company, what he says in the interview you linked.

Now I do believe that the Federal Reserve did things that exacerbated the preceding credit boom. But it was the credit boom of the 20's that turned to bust that caused the depression.

He says the Fed could have fixed it. No. They would have done exactly what Bernanke has attempted to do. Prop up insolvent banks and add liquidity to the system. We are getting through Bernanke what Friedman is talking about in that lecture. I believe it is wrong. He thinks the government can fix a problem that he has mis-diagnosed.

We are in a bust of a credit boom brought about by excessive easy credit brought about by a Fed that could not stand to see a correction. It was called the Greenspan put when the prior chairman did it. Excessive credit causes malinvestment so business thinks there is more demand than there really is. The credit spends just like real money but it is fleeting. Once the consumer or businesses tap out all the credit they can service, the boom turns into a recession. Then the Fed has to make a choice. Let the malinvestments play out and the recession bring demand back in balance with the ability to service the debt load, or goose the economy by adding liquidity to make the recession go away. The problem with making the recession go away is the problem really does not go away but is only mask. The malinvestments and inability for the public, business (and even the government if it overspends) to service even heavier debt loads.

Same thing happened in the 20's that led up to the great depression. Excessive debt, excessive speculation on margin in the markets, not enough real output to service it all. The Fed then could have played extend and pretend like they are doing today. They chose not to.

This time we are taking "the other path".

Mises said there are only two ways to bring about resolution to a boom turned bust brought about by excessive debt levels. Either through the voluntary abandonment of extending more credit, of by the complete destruction of the currency. One way debt that can not be serviced defaults and the system comes back into balance where production can service the debt. The other way the money is made worthless so that the debts can be paid off with money worth almost nothing. In the great depression the Fed tried the first method and let the chips fall where they may. Bernanke is trying the other road that Friedman suggests.

We will all get to see how it plays out.

John

Edit: don't know how this got under cfdr's post but it should have been under Novato's