The Washington Post economics commentator Mike Konczal wrote a very good column recently on why Senator Rand Paul's proposal that the Federal Reserve be "audited" is a bad idea. You should read it; I'd just like to offer a complementary take.
Here's the thing: We know what it means to audit a private bank — it means checking to be sure that it isn't wasting depositors' money or taking undue risks with it. But the Fed isn't in the business of investing, except for tactical purposes. It's there to manage money, not to make it. So what exactly would be audited?
Suppose the Fed is buying somewhat risky assets, like mortgage-backed securities. Is that a good thing or a bad thing? The answer has almost nothing to do with the question of whether there's a chance that some of those securities will go bad. It's all about the effects on the economy. And you know who the likes of Rand Paul would be turning to, to make that assessment — if not outright gold bugs, it would be the group of right-wing econopundits who wrote an open letter to Fed Chairman Ben Bernanke in The Wall Street Journal in 2010 warning about currency debasement and inflation.
As Mr. Konczal says, the whole audit-the-Fed thing is just an excuse to impose hard-money policies, based in turn on fantasies about currency debasement. Remember, Paul Ryan, the top Republican economic official right now, bases his views on monetary policy on a speech in Atlas Shrugged.
What to Do When You're Wrong
As the commentator Barry Ritholtz recently reminded us in an online post, we have just passed the third anniversary of the publishing of that debasement-and-inflation letter, in which the econopundits warned that the Fed's quantitative easing policies would have dire consequences. They were utterly wrong.
Also, rereading the letter now, you have to wonder what kind of economic model the group had in mind. The writers asserted that: "The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment." So they'd be inflationary without being expansionary? How was that supposed to work?
In his discussion, Mr. Ritholtz took the wrongness as a reason not to listen to these people, and it certainly is a warning sign. My view, however, is that you don't just want to look at whether people have been wrong, but also to ask how they have responded when events didn't go the way they predicted. After all, if you write about current affairs and you're never wrong, you just aren't sticking your neck out enough.
Stuff happens, and sometimes it's not the stuff you thought would happen. So what do you do then? Do you claim that you never said what you said? Do you lash out at your critics and play victim? Or do you try to figure out what you got wrong and why, and revise your thinking accordingly?
I've been wrong many times over the years, usually on minor things but sometimes on big ones. Before 1998 I didn't think the liquidity trap was a serious concern; Japan's example suggested that I was wrong, and I eventually concluded that it was a big concern indeed.
In 2003 I thought the United States was potentially vulnerable to an Asian-crisis-style loss of confidence; when it didn't happen I rethought my models, realized that foreign-currency debt was crucial, and changed my view. The case of the euro was a bit different: I was very pessimistic about the strategy of austerity and internal devaluation, which I thought would have a terrible cost — and I was completely right about that.
I also guessed that this cost would prove politically unsustainable, leading to a crisis for the euro itself. So far, at least, I have been wrong. My economic model worked fine, but my implicit political model didn't. O.K. — so it goes.
Have any of the signatories to that 2010 letter admitted being wrong and explained why they made mistakes? I mean any of them. Not as far as I know. And at that point this becomes more than an intellectual discussion. It becomes a test of character.