Milton Friedman, writing about the role of monetary policy, once wrote: “From the infinite world of negation, I have selected two limitations of monetary policy to discuss.”

For this champion of monetarism, the limitations at the time (1968) were the inability of monetary policy to peg interest rates and unemployment for more than limited periods. As we face a turn in the credit cycle, the effectiveness of monetary policy is again under scrutiny. The shift in monetary policy in the US and Europe is a key reason for buoyant equity markets even as credit markets remain dysfunctional. Applying Friedman’s language to financial markets, I have three propositions to negate – or at least to question.