How did the 2008 global financial crisis challenge Friedman's theories?

Sure, here is the translation:

Alright, let's talk about this fascinating topic. To make it clear, we need to break it down step by step, almost like telling a story.

First, we need to know what Friedman's "Martial Arts Manual" is

Imagine the economic world as a martial arts world (Jianghu). Before Friedman, the most popular "kung fu" in this world was Keynesianism, which argued that "the government should act as the Alliance Leader of the Martial World." When the economy faltered, the government (the Leader) had to step in quickly, spending on investments and cutting taxes, like channeling internal energy to weakened practitioners.

But Friedman, the Grandmaster, disagreed. He founded two supreme skills: "Monetarism" and "Free Markets."

Monetarism: He believed that the chaos in the Jianghu world, like soaring prices (inflation), had one root cause – too much "money." "Money" here means the money supply. He argued that the government's (central bank's) primary job wasn't constant stimulus or cooling efforts, but managing the printing press to ensure the money supply grew steadily and slowly. Simply put, it’s "manage the water tap well, don't deluge the fields."
Free Markets: He firmly believed that "the market is the best referee." The government should be small ("small government"), mind its own business, avoid meddling (i.e., deregulate), and let businesses and individuals compete freely. He believed that countless individuals pursuing self-interest would, through an "invisible hand," ultimately make the whole Jianghu world prosperous and orderly. Simply put, it’s "let everyone play by themselves, don't give misguided orders."

These two theories became extremely influential in the 1970s and 80s, helping many countries (like the US and UK) solve problems of economic stagnation and high inflation (stagflation). Friedman thus achieved legendary status, and his theories became the mainstream.

Then, in 2008, the `Jianghu` world suddenly experienced a cataclysmic event

The 2008 financial crisis, simply put, happened when Wall Street's financial institutions took their "financial innovation" games too far. They bundled many unreliable mortgages (subprime loans) into seemingly attractive financial products (like CDOs) and sold them globally. With light regulation, everyone assumed the market was smart enough to handle it, so the game kept getting bigger.

As a result, when housing prices fell and these loans couldn't be repaid, those "attractive financial products" instantly turned into "toxic assets". The chain of trust within the entire financial system snapped. Banks stopped lending to each other, companies couldn't borrow – it was as if the bloodstream in the human body suddenly stopped flowing, and the entire economy was on the verge of collapse.

How did this earthquake shake the foundations of Friedman's theory?

This crisis was like a sharp slap across the face of several core tenets of Friedman's theories.

Challenge One: Is the market truly that "efficient" and "rational"?

A key assumption of Friedman's theory is the "efficient market hypothesis," meaning the market is smart and asset prices reflect all available information, making major mistakes unlikely.

Reality's Slap: The 2008 crisis precisely demonstrated that the market can become utterly foolish and greedy at times. Rating agencies slapped AAA ratings – the highest possible – on "toxic assets," and countless intelligent investors bought them up frantically. Where was the "efficiency"? The whole market descended into a collective, irrational frenzy before collapsing. This shows that trusting the market to handle everything alone carries enormous risks.

Challenge Two: Is "deregulation" really a panacea?

Friedman was a staunch advocate of "deregulation," believing regulations stifle efficiency and innovation. Deregulation significantly increased in the US financial sector from the late 20th to early 21st century.

Reality's Slap: In hindsight, it was precisely the lack of financial oversight that allowed Wall Street's "ambitions" to run wild like unbridled horses. Banks could mix high-risk activities with traditional banking; complex, incomprehensible financial derivatives could trade unregulated. Friedman's theory trusted "market participants to control their own risks," but in reality, faced with enormous profits, they not only failed to control risks but also infected the entire world. This prompted reflection: Doesn't the free market horse need a sufficiently strong "reins" (regulation)?

Challenge Three: Is "managing the water tap" enough?

The core of Friedman's monetarism is that the central bank only needs to maintain a steady growth in the money supply.

Reality's Slap: After the crisis erupted, the financial system was paralyzed. The problem was no longer simply about "too much or too little money." The "money" was blocked in the pipes and couldn't flow. At that point, the US Federal Reserve acted completely contrary to Friedman's prescription. They took extreme measures:
- Quantitative Easing (QE): Directly purchasing vast amounts of government bonds and "toxic assets," essentially flooding the market with huge amounts of "water" (liquidity) – far beyond "slow growth."
- Rescuing Giants: Directly bailing out "too-big-to-fail" financial institutions. These were quintessential examples of "forceful government intervention," resembling the kind of Keynesian policies Friedman spent his life opposing. The reality proved that when the financial system itself is on the brink of collapse, merely controlling the "water tap" cannot save the day: the government "repairman" must step in to urgently fix the pipes.

To summarize: So, was Friedman wrong?

There's no simple "right" or "wrong" answer to this question. A more accurate way to put it is:

The 2008 financial crisis exposed the "limits of application" and "blind spots" in Friedman's theories.

His theories are undeniably powerful in tackling inflation and boosting economic efficiency, a point no one can deny.
However, they underestimated human irrationality and greed, and the immense capacity of the financial system to self-generate risks once deregulated.
They offered almost no effective solutions for dealing with systemic financial collapse – such an extreme "black swan" event. When the crisis hit, governments worldwide instinctively reached for the toolbox of Friedman's old rival, Keynes.

So, the 2008 financial crisis didn't completely "kill" Friedman's theory, but it made economists and policymakers globally realize that no single economic theory is a universally applicable cure-all. Friedman's "free market" and Keynes's "government intervention" are like the "sword and qi" in martial arts novels – each has strengths, and each has vulnerabilities.

After this crisis, discussion shifted significantly towards how to combine the two approaches. For example: in normal times, rely more on the market, maintaining a "small and efficient" government; but concurrently, build a robust financial regulatory system as a "safety net" to guard against the next similar collapse.