Yeh, the scale of banks' bankruptcy was much smaller than the current banks' bankruptcy, not so many Friedmanites realised. In 1929, Friedman's claim of temporary money supply for rescuing these private banks may have worked because the bankruptcy occurred because of the fear of people assuming banks could bankrupt.
By contrast, 1990s and 2000s are the entirely different problem!
The financial crisis in 1990s was based on the immaturity of Asian financial institutional policy. I agreed with Stiglitz that these Asian financial institutions were not mature enough to let run independently. He claimed that the IMF should have had a great role to induct them, and more the foreign direct investment from the advanced nations should be injected into.
The ongoing financial crisis is tremendously much more problematic than these previous world financial crises! This problem also involves the "financial accounting" which allows institutions to involve the aggregate market value of the assets investment they have purchased which is their potential gain from asset investments (This is called "Unrealised Profit" in the pure cost accounting because it cannot be simply shown in the balance sheet based on the "Cost Total System" which is based on the total sales revenue minus the total cost).
Before the late 1990s, the financial law in majority of nations did not involve the aggregate market value of their shares purchased. However, from the late 1990s and early 2000s, the financial law in all the advanced nations started allowing involving any potential gain from asset investment. This change in the financial law dramatically changed the attitude of financial institutions in the advanced nations. All these financial institutions started to purchase a lot of shares. This resulted in that, although the profit comes from the total sales revenue subtracted from the total cost is smaller or even loss, the book involving the potential profit (the current value of share minus the value of share when it was purchased) shows the profit is huge.
The opposite case scenario of this financial accounting is Chinese government. Nowadays, Chinese profit based on the sales revenue minus the total cost is higher than the profit based on the aggregate market value because the value of all the foreign currency and all the national debts of the advanced nations, which Chinese government has purchased in the past to depreciate Chinese currency, become depreciated dramatically.
Therefore, unlike in 1929, the central bank could not predict the adequate volume of money supply it should have poured into the market to rescue these banks involved in this activity to increase the "aggregate market value" of their total asset investment. Some of the shares these financial institutions are foreign, different industries, and toxic. Therefore, although I would support Friedmanite bank rescue program in 1929, I am deeply sceptical about his theory applied in the current crisis. Many socialists tend to blame capitalism. But, I would rather blame the national authorities who regulate the financial accounting law. This problem is way beyond the central banks' responsibility and accountability on their loss.
If it were based on the accounting based on the revenue coming from the pure monetary saving and investment, yes Friedmanite policy should have applied. However, this problem highly involves the mal-management, which Friedman should have said there needed a strict crackdown on these financial institutions.
As a matter of fact, one of my lecturer in my MSc in Strathclyde uni was Friedmanite, and he highly criticised the current global financial market situation. He strongly disagrees with the Euro, the sub-prime loans (He said that such a private sector business involving the risk of bankruptcy should not have taken place), and the over-expansion of the current banking system.
Furthermore, the current financial recapitalisation was done by the fiscal policy rather than the monetary policy which Friedman insisted to use.
I know Friedman would have supported rescuing banks by the excess money supply, but some guys would say that it was Friedmanite policy to rescue these banks having involved in race of increasing their aggregate market value. However, if there are a violation of equity, such as the fiscal policy to rescue these mal-managed institutions by using the innocent tax payers' money, and the problem is beyond the accountability of central bank such as the ongoing financial crisis, the responsibility of monetary policy is very limited, Friedman would have said if he follows his original role.
Speaking of Hayek, I am more likely to detest Hayekian than follow. Hayekian theory strongly insists the importance of "tradition" and "traditional moral guide line" (I really despise them!) which Hayek defined as a key to stabilise economic and social order. In addition, Hayek is morea political philosopher than an economist, I would say, meanwhile Friedman is a pure mathematical economist. Hayekian ethics follows the school of Natural Law as same as Edmund Burke. This is why Hayek humiliated Friedman as an anarchist.
This is why Hayekian theory can be also applied to European Social Democracy seen in Germany and Scandinavian nations. Hayek did not particularly support free market economy nor fundamental reconstruction of economic structure unlike Friedmanite. Furthermore, the huge difference between Hayek and Friedman is that Hayek was deeply sceptical about Macroeconomics whilst Friedman put emphasis on Macroeconomics. As a matter of fact, North Western European economic policy is highly microeconomics, and hardly regards of macroeconomics. Hayek would be happy with the continental European economic policy, which is yet Socialistic and has installed the common currency, whereas Friedman would be upset about and against the current continental European economic structure...!
