Plenty of writers have claimed that the Federal Reserve fueled last decade’s subprime boom by holding interest rates too low for too long after the dot-com crash. But hardly anyone has tried to explain why the Fed did so.

Yours truly has taken a stab at it, together with my former student (and now eminent Market Monetarist) David Beckworth and my former University of Georgia colleague (and current Özyeğin University faculty member) Berrak Bahadir. Here is our just-published article in the Journal of Policy Modeling.

Our argument, in brief, is that the Fed blew it by not treating the exceptionally high post-2001 productivity growth rate as warranting an upward revision of the Fed’s interest-rate target (as neoclassical theory would suggest). Instead, Fed officials believed they could maintain a below-natural interest rate target without risking a corresponding increase in inflation.

We supply lots of evidence supporting our interpretation and, thereby, supporting the view that excessively easy Fed policy did indeed contribute substantially to the subprime boom. We also show how nominal gross domestic product targeting would have prevented this outcome, and that it would have done so to an even greater extent than strict adherence to a Taylor Rule.

Readers familiar with my arguments favoring a “productivity norm,” as presented in Less Than Zero and elsewhere, will understand the claims made in our paper as a specific application of those more general arguments.

The publishers have kindly allowed us to make the article available here without a pay wall for a brief period only, so consider saving it if you might want to have it for longer.

[Cross posted from Alt‑M.org]

A monetary standard is a set of institutions and rules governing the supply of money in an economy. These rules and institutions collectively constrain the production of money. Through its constraints on money creation, the standard indirectly acts on prices. A monetary standard may also affect the rate of growth of real economic output, but that depends on expectations. Monetary institutions may also affect other economic institutions, which themselves influence economic growth.

Some authors talk about a monetary regime, and still others a monetary constitution. For purposes of this discussion, the same underlying issues are being discussed.

The banking and financial system interacts with the monetary standard and differences in the one may affect how the other operates. Though very important, the banking and financial system is not my main focus.

Modern authors often talk of the “choice” of a monetary standard, but historically monetary standards evolved over time. Gold and silver evolved as the money of choice by an historical process first enunciated by the Austrian economist Carl Menger in 1892.[1]

Sovereigns often tried to choose a monetary standard, as by decreeing either gold or silver to be money. Sometimes their choices were effective and sometimes market forces upended their choices. That was especially likely to occur when a sovereign choose two standards (bimetallism), most often a gold and a silver standard.

If the sovereign chose wisely, he adopted an exchange rate between the two metals reflecting their market prices. Inevitably, over time, the market exchange rate between the two metals changed due to demand and supply factors. Each metal had nonmonetary uses, and demand conditions tended to change over time. So, too, did supply conditions for the two metals.

Once market and official exchange rates diverged, bimetallism became unstable. The metal undervalued in monetary use would tend to disappear into nonmonetary uses. The bimetallic standard evolved into a monometallic standard.

There is an important lesson here. In monetary matters (as in others), a sovereign proposes and the market disposes.

We now live in a fiat money world. That is, we have a fiat monetary standard, which has its own institutions and rules. The standard critique of such a standard is that it does not sufficiently constrain inflation. The value of a U.S. dollar today is a small fraction of what it was in 1913, the year the Federal Reserve System was enacted into law.[2] Differences in the inflation performance of different standards are very important. But they may not be the most important issue.

Consider the case for the gold standard made by one of its most prominent exponents. “The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market.”[3] The linkage between the gold standard, free trade, free capital markets, and global prosperity is the strong argument for a gold standard. It has recently been reprised by Benn Steil and Manuel Hinds.[4]

Mises also made an essentially political argument for the gold standard, or what he termed sound money. “Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the non-observance of old customs by kings.”[5]

The argument is that the gold standard, free trade and free capital flows are interlinked. It exemplifies how the selection or evolution of a monetary standard also affects other economic institutions. Along with the rule of law, they were the source of strong economic growth in both the West, especially in the United Kingdom and the United States in the 19^th century.[6]

My main point in this introductory comment is that the selection of a monetary standard is not merely a technical issue. It is also an embodiment of political values, and one’s view of the relationship between the citizen and the state.

[2] The United States was on the gold standard when the Federal Reserve was created. The movement from gold to fiat money occurred in stages.

[3] Mises, L. von (1966) Human Action: A Treatise on Economics. 3^rd ed. Chicago: Henry Regnery, p. 472.

[4] Steill, B. and M. Hinds (2009) Money, Markets and Sovereignty. New Haven and London: Yale University Press.

[5] Mises, L. von (1971) The Theory of Money and Credit. Trans. H. E. Batson. Irvington-on-Hudson, The Foundation for Economic Education, p. 414.

[6] The United States was legally on a bimetallic standard in the 19^th century (except during suspension in the Civil War). It was not formally on the gold standard until the Gold Standard Act of 1900.

[Cross-posted from Alt‑M.org]

Lately more and more people seem inclined to congratulate the Fed for the great job it has done saving us from another Great Depression and getting the U.S. economy back on its feet. Frankly, I’m getting tired of it.

It’s not that I’m cock-sure that the Fed’s post-2008 actions haven’t achieved anything. It’s just that I’m pretty darn sure that all the people who claim that the Fed has done a bang-up job haven’t any solid reasons for doing so. They remind me of the characters in an episode of The Beverly Hillbillies  who were certain that Granny had a concoction that could cure the common cold–certain, that is, until Granny told them that it took about ten days for the stuff to work.

Some point to Europe’s relatively feeble economy, and the ECB’s belated attempt to revive it by means of Bernanke-style Quantitative Easing, as proof of the Fed’s enlightened conduct. But that comparison may only prove that Europe’s central bank has bungled things even more than ours has. In fact, the comparison doesn’t even prove that much, since U.S. money market conditions appeared to offer better prospects for the success of quantitative easing than those that prevailed in Europe.

Apart from being better than Europe’s, our recovery offers precious little for Fed boosters to brag about. It has been remarkably slow—slower, according to some experts, than the severity of the crisis can itself account for. It has been remarkably incomplete.  And it has landed us in a low low-interest-rate mire from which there’s no easy escape.

But surely, some may object, the Fed’s policies—all that Quantitative Easing and Twisting and Reverse-Repo-ing—have helped. Maybe. But proving the point isn’t just a matter—as some commentators seem to think—of pointing to improved economic numbers, noting that the numbers arrived after the Fed did this and that, and declaring Quod Erat Demonstrandum.

Why not? Because, first of all, economies tend to recover from slumps, if only very slowly and painfully, without the help of fiscal or monetary stimulus. The immediate cause of such slumps is a slow down or collapse of spending or “aggregate demand,” like the one that took place during the last half of 2008. When spending collapses, businesses generally can’t recover their costs. Nor can they hope to keep producing as before, unless the prices of their inputs decline enough to make up for their lower earnings. The ideal remedy is to get spending back up again—and fast—by increasing the total supply of dollars. But suppose you had a negligent central bank that first resisted creating new dollars, and then made sure that new dollars it did create piled up in bank vaults instead of being lent and spent. In that case, spending would remain depressingly low.[1]

What then? Well, eventually, people start to come to grips with the new reality. They stop hoping that spending will pick up again, and start thinking about getting by at a permanently lowered spending level. In economists’ fancy jargon, this means that “aggregate supply” schedules start dropping. In plain English it means that workers start to accept pay cuts they wouldn’t have considered before, while firms settle for lower product prices.

Downward supply-schedule shifts aren’t pretty. No one likes making them—and I’m certainly not recommending them. (I also promise to track-down and give a noogie to anyone who suggests otherwise.) But make them they will—eventually—if the alternative is not selling their services and goods at all. The adjustments might be delayed for a long time, and it might take much longer for them to succeed in getting the economy back to full employment. They might even take more than six years to do so. But it’s hardly likely that they would not have achieved some considerable measure of recovery during such a long stretch of time, unless it was because monetary (or fiscal) authorities discouraged needed adjustments by repeatedly promising to revive spending, and then failing to deliver on those promises.

The last observation brings me to my second point, which is that central bank actions—including some superficially expansionary ones—can delay as well as promote recovery. Policy announcements that end up giving a bigger boost to aggregate demand expectations than to aggregate demand itself are one example. (I continue to be perplexed by all the chatter since 2008 concerning the need to raise, not the actual, but the expected rate of CPI inflation–as if doing that would not have the effect of further raising  supply schedules that are already too high.) And although Quantitative Easing necessarily increases the nominal supply of bank reserves, it doesn’t necessarily increase that supply more than it increases demand: as St. Louis Fed economist Li Wen has observed, when real interest rates on riskier assets are already low relative to the return on reserves, QE can cause some investors “to switch from interest-earning assets to money,” and so can actually end-up reducing instead of increasing an (already excessively low) equilibrium price level.

All of which is a long way of saying that determining the Fed’s actual contribution to the recovery takes some fancy statistical work—so fancy, indeed, that no one is quite sure how to do it. Instead we have, so far, numerous studies reaching different—and sometimes dramatically different—conclusions. (Here is another review of some of them.)

Many of these studies do find that the Fed’s policies succeeded to some degree. But “succeeded” in most of them means succeeded in lowering long term interest rates, which though perhaps a step in the right direction is not at all the same thing as boosting employment or real output.  Those studies that attempt to measure the effect of the Fed’s interventions on output or employment generally report modest gains only, if not negligible ones (see, for instance, the studies by Wen and by Chen, Cūrdia, and Ferrero). Finally, even some of the larger estimates supply only very meager grounds for celebration. One recent Federal Reserve Board study, for example, has the Fed’s combined Large Scale Asset Purchases achieving a 1.2 percentage point peak reduction in the unemployment rate by early 2015. Though large compared to other estimates, this reduction in the unemployment rate is less than half as large as that attributable to the post-2008 decline in labor force participation. Also, because the actual unemployment rate in January 2015 was 5.7%, with 9,000,000 unemployed and an implied labor force of 157,894,737, the gain amounts to only about one job for every $2 million in Fed asset purchases!

Don’t get me wrong: I’m not claiming that the new jobs attributable to Fed asset purchases weren’t worth it: creating money to combat cyclical unemployment isn’t the same as spending it in a state of full employment, so the numbers I mentioned don’t amount to any sort of cost-benefit calculation. What I am saying is that it’s worth pondering whether, had it handled things differently, the Fed might have created a lot more jobs, without having had to create nearly as many dollars. Suppose, for instance, that, instead of engaging in sterilized direct lending, the Fed had taken steps to expand the monetary base as soon as demand started flagging  (or, better still, that it had expanded preemptively, as it had done on some prior occasions when markets were badly rattled). Suppose that it had refrained from paying interest on bank reserves just when the economy was starving for want of lending and spending. Suppose that instead of trying by hook and crook to preserve an obsolete interest-rate target, it had been targeting NGDP growth all along. Suppose, to go a bit further back, that it had not rescued Bear Stearns, or that, having rescued it, it made clear that it did so for reasons that would not entitle larger investment banks to similar aid?[2] Suppose, finally, that instead of “rolling the dice” (as the New York Times put it recently), the Fed had stuck to a tried-and-true monetary rule, or that it had been obliged to follow a novel but potentially superior rule, and that it had also obeyed Walter Bagehot’s sound advice for last resort lending? Is is not possible that by doing some or all of these things it might have allowed the U.S. economy to recover at least as rapidly as it has, if not considerably more rapidly, without having to purchase trillions of dollars worth of assets?

What difference does the extent of the purchases make? Plenty. First, the wealth redistribution effects of the Fed’s policies might have been smaller and correspondingly less unpalatable. Second, the Fed might not have undermined to the extent that it has its ability to tighten money by means of conventional open-market sales. The Fed claims it can instead manage by means of a combination of reverse repos and a higher interest rate on bank reserves; but there are good reasons for being less-than-sanguine about these alternative “exit” strategies: for one thing, to the extent that they succeed in reducing banks’ excess reserve holdings, they do so by permanently increasing the Fed’s share of total financial intermediation (and correspondingly reducing the efficiency of investment), and (so far as repos are concerned) by inadvertently propping-up Money Market Mutual Funds at the expense of commercial banks.[3] Finally, by boosting the prices and lowering the term premium on low-risk assets, the Fed has given an artificial fillip to riskier ones, increasing in like measure the risk of a major correction.[4] In short, after more than six years worth of Fed experiments, we haven’t yet heard the last monetary-policy shoe drop.

Am I suggesting that the Fed could not possibly have done worse? Of course not. Only someone with a severely defective imagination could suppose so. Whatever his shortcomings, Ben Bernanke was far from being an incompetent central banker. In suggesting that we might have done better than Bernanke’s Fed did, I don’t mean that we could have used a better discretion-wielding central banker. I mean that we might have been better off avoiding seat-of-the-pants-style central banking altogether.

I struggle, moreover, to understand why more people don’t take the same view. For if it takes a stunted imagination to suppose that things couldn’t have been worse, it takes a no-less defective one to suppose that we couldn’t possibly improve upon the presently-constituted Fed. Far for supplying grounds for celebration, or warranting complacency, the events of the last decade or so ought to make it more evident than ever that our monetary system is very far from being the best of all possible alternatives.

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[1] If you wonder why any monetary authority would encourage banks to hoard reserves in the middle of a spending crunch, the answer in the Fed’s case is that they did it precisely because they didn’t want Quantitative Easing to lead to increased bank lending and, thence, to a general increase in spending. “It is important to keep in mind,” a Fed source informs us, “that the excess reserves [generated by Quantitative Easing] were not created with the goal of lowering interest rates or increasing bank lending significantly relative to pre-crisis levels. Rather, these reserves were created as a by-product of policies designed to mitigate the effects of a disruption in financial markets. In fact, the central bank paid interest on reserves to prevent the increase in reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions. In such a situation, the absence of a money-multiplier effect should be neither surprising nor troubling.” Got that?

[2] Here, for once, the FCIC got things right:

The lesson taught by the rescue of Bear was that all large financial institutions—and especially those larger than Bear—would be rescued by the government. The moral hazard introduced by this one act irreparably changed the position of Lehman Brothers and every other large firm in the world’s financial system. From that time forward, (i) the critical need for more capital became less critical; the likelihood of a government bailout would reassure creditors, so there was no need to dilute the shareholders any further by raising additional capital; (ii) firms such as Lehman that might have been saved through an acquisition by a larger firm or an infusion of fresh capital by a strategic investor drove harder bargains with potential acquirers; (iii) the potential acquirers themselves waited for the U.S. government to pick up some of the cost, as it had with Bear—an offer that never came in Lehman’s case; and (iv) the Reserve Fund, a money market mutual fund, apparently assuming that Lehman would be rescued, decided not to sell the heavily discounted Lehman commercial paper it held; instead, with devastating results for the money market fund industry, it waited to be bailed out.

[3] This fear that it might trigger such a correction is of course one reason for the Fed’s reluctance to absorb excess liquidity by selling any substantial share of the assets it has acquired.

[4] Actually only 94 MMMF’s are so favored. As Bob Eisenbeis points out, they all belong to a relatively small number of U.S. and foreign financial institutions.

Thanks to those capricious Gods of all-things-internet, this new blog–a joint project of the Cato Institute’s Center for Monetary and Financial Alternatives and the Center for Financial Privacy and Human Rights–makes its first appearance rather later than we intended, and (wouldn’t you know it) just three days after the debut, over at Brookings, of Ben Bernanke’s Blog.

That’s the free market for you: so much wasteful duplication! What we need is a government-run monetary economics blog monopoly.

Just kidding. What we really need is a blog that challenges the powerful and largely unconstrained government monopolies that are presently in command of the world’s monetary systems–monopolies like the Federal Reserve System, of which Ben Bernanke was, not long ago, chairman.

Somehow I doubt that Ben Bernanke’s Blog will take up that challenge.

Enter Alt‑M. If you want to be reassured that the monetary system we’ve got is just dandy, I refer you to Professor Bernanke. If you are convinced that the Fed is a botch job, or simply hope that we can do better, Alt‑M is the money blog for you.

Alt‑M is a revamp of Free​bank​ing​.org, to which I and others here were long contributors, and continues the tradition established by it. Its purpose is to make readers aware of the shortcomings of the Federal Reserve System and other conventional monetary arrangements, and to expose them to and encourage discussion of potentially superior alternatives. It will not shy away from discussion of unpopular and radical alternatives, including such things as free banking, commodity standards, strict monetary rules, currency boards, and cybercurrency. On the contrary: it favors serious discussion of all of these over the mild tinkering with the status quo that’s too-often regarded as representing the farthest limits of conceivable reform. In fact, no amount of such tinkering can even begin to address the more serious shortcomings of, and dangers posed by, existing arrangements.

As Alt‑M’s Editor-in-Chief, I plan to contribute regularly to it. But we also have many other regular contributors, some of whom also contributed to Free​bank​ing​.org, including several of the Center for Monetary and Financial Alternative’s outstanding Adjunct Scholars and Senior Fellows.

So, welcome and willkommen and bienvenue to the internet’s latest and, I hope, soon to be greatest, monetary economics blog. You might not always agree with it. But I promise that you will at least encounter ideas here that you aren’t likely to come across in that other blog.

We’ve got exciting news for the blog!

For several years before the start of free​bank​ing​.org, I had been frustrated by how difficult it was for people seriously interested in monetary policy and the Federal Reserve to find good information and debate. Part of the problem was that great scholars like George Selgin, Larry White and Kevin Dowd didn’t have non-academic institutional backing to promote their work. Seeing the need for a clearinghouse for, well, “homeless” scholars, I created this blog and have been really happy with its success.

Prof. Selgin has since found a home at the Cato Institute as the director of their new Center for Monetary and Financial Alternatives. Rather than spending his time grading students’ papers, he is spending more time writing his own and further promoting the ideas long discussed in this forum!

As a result, we are pleased to announce that the Center for Financial Privacy and Human Rights of the Liberty and Privacy Network will be teaming up with Cato’s Center to cosponsor a rebranded monetary alternatives blog Alt‑M.

At Alt‑M.org, we plan to have the best of both worlds–the energy and talent from a diverse group of experts coupled with all of the institutional advantages Cato has to help us broaden our reach to get the word out. In the freshly redesigned, navigation-friendly layout with easy social media sharing options, all of the blog posts by the free​bank​ing​.org team will be archived over on our new site, don’t worry. We see this as a win-win for everyone.

I don’t think there has been a time since the stagflation era that we’ve seen so much dissatisfaction with the Fed. Bernanke and Yellen don’t have the same stature Volcker and (early) Greenspan did. Not only is the audit the Fed proposal gaining steam, but now fundamental Federal Reserve System restructuring is on the table. And I think few people look to the Euro now as they used to as a model. The time to bolster our efforts to promote alternatives to failed monetary regimes is now.

Thank you for all your support of free​bank​ing​.org over the years. We look forward to continuing to provide the unique content you’ve come to expect here over at Alt‑M.org. So don’t forget to sign up for all the feeds there to get future updates. Shortly, this URL will automatically redirect to the new and improved blog, but keep www​.free​bank​ing​.org bookmarked: we plan on resurrecting this site for another project in the works. Stay tuned!

This morning Justin Merill alerted me, via Facebook, to a recent episode of The Tom Woods Show titled “Against Market Monetarism and NGDP Targeting.” The episode consists of an interview with Austrian monetary economist Joe Salerno, in which Salerno takes issue with Market Monetarists and, especially, with those current or former Austrians, including Larry White and me, who share Market Monetarists’ view that a well-functioning monetary system should avoid fluctuations in aggregate spending.

In the course of the interview Salerno, egged on by Woods, * suggests that when ostensible free banking proponents like Larry White and me treat stability of spending (MV) as a desirable monetary policy outcome, we implicitly endorse a centrally-planned money supply. Evidently it doesn’t occur to him that we like free banking precisely because we consider it, when combined either with a metallic standard or a frozen (or otherwise absolutely limited) stock of fiat (or "synthetic commodity") base money, an excellent device for achieving a stable level of total spending, and far superior in that respect to discretionary central banking. But you can hardly blame him for the oversight: after all, Larry and I have only pointed out this connection in just about every one of our writings on free banking, including my Theory of Free Banking, the first part of which is almost entirely devoted to showing how a free banking system tends automatically to stabilize spending.

It gets worse. When Salerno challenges what he refers to as “Larry White’s program” for having M change so as to offset opposite changes in V, Episode 361 of the Tom Woods Show graduates from scurrilous to spurious. “As people who believe in Austrian business cycle theory will tell you,” Salerno declares, “any creation of money by the Fed always goes through credit markets. That pushes interest rates down below their natural level. And that brings about the series of events that we know as the Austrian business cycle theory. So we think that is not a good policy; it’s a dangerous policy.”

The only problem with this argument is that at least one person who most certainly believed in Austrian business cycle theory would not have agreed with it. No biggie, right? Well, it wouldn't be, were it not for the fact that the person in question happens to have been ... Friedrich Hayek, the Austrian business cycle theory's most important elaborator and exponent.

Though before he put the finishing touches on his famous theory Hayek shared Salerno’s preference for a constant money stock, he changed his mind in the course of writing his best-known works on the subject. Hayek’s mature understanding made its debut in the first English edition of Prices and Production (1931, p. 297), where Hayek observes that “[a]ny change in the velocity of circulation would have to be compensated by a reciprocal change in the amount of money in circulation if money is to remain neutral toward prices.” Somewhat later, in his essay on “Saving” (1933), Hayek observed that “Unless the banks create additional credits for investment purposes to the same extent that the holders of deposits have ceased to use them for current expenditure, the effect of such saving is essentially the same as that of hoarding and has all the undesirable deflationary consequences attaching to the latter.” Apart from minor modifications, this remained Hayek's theoretical position throughout the remainder of the 1930s and for some time beyond.

So, if Larry White doesn’t know his Austrian business cycle theory quite as well as Joe Salerno does, he shouldn’t feel too bad about it: after all, he’s in pretty good company.

__________________

*Apologies to Tom for my inaccurate first impression.

Addendum 1(3-21-2015): As some readers have misunderstood me on the point, let me make clear that I do not mean to suggest that Hayek himself favored discretionary central banking as a means for implementing his ideal! His position resembled White's in that he favored a rule-based system founded on gold convertibility while viewing central banks as the main cause of the then-existing system's failure to approximate his ideal. In fact Hayek resisted calling for monetary expansion in the 30s despite the collapse in spending that had occurred--though he came to regret having done so. The fact remains that Salerno's characterization of the Austrian business cycle theory is inconsistent with Hayek's own understanding.

Concerning Salerno's suggestion that it is wrong for White and others to endorse or rationalize expansionary central bank action even as a "second best" alternative, see my previous post on the matter, the gist of which is that it's meaningless to suggest that a central bank, assuming one exists, "do nothing." Consequently it's impossible to avoid implicitly endorsing a second-best alternative that could be construed as offering "advice" to a central planner. That is what Joe Salerno effectively does in arguing for a constant-M ideal. It is also, in effect, what Hayek did, to his ultimate regret, when he opposed Bank of England expansion in the early 1930s. My point isn't to condemn the implied advice in either case, but simply to point out that saying that a central bank should "do nothing" can also be construed--unfairly--as endorsing a particular monetary central plan.

Addendum 2(3-21-2015): Bill Woolsey weighs in on Salerno's notion of monetary neutrality.

As if to get my work week off to rotten start, my otherwise good pal Don Boudreaux greeted me first thing Monday morning with a link to Robert Samuelson’s Sunday evening Washington Post op-ed on “The Folly of Fed Bashing.” In it, Samuelson takes the Fed’s conservative critics to task for their “misinformed” attacks on the Fed, faulting them for failing to appreciate how much more transparent the Fed’s operations are today than they were some decades ago, and for not understanding that its actions, however undesirable they may seem, are generally “necessary for the nation’s long-term economic health.” As for the perception that “the Fed is a large and aloof agency that needs to be tamed,” it rests, Samuelson says, on a “simplistic” view of the Fed’s history.

Well I can’t speak for others, but I know something about the Fed’s history. And I’ve come to the conclusion, informed by careful consideration, over the course of several decades, of that history, and the history of numerous other monetary arrangements in the U.S. and elsewhere, that the Fed is actually…a large and aloof agency that needs to be tamed.

True, the Fed is in some respects more transparent than it used to be. But it has also been doing things that it never used to do. The ordinary Fed publications and disclosures to which Mr. Samuelson refers shed no light at all on many of these novelties. Not for nothing did Dodd-Frank provide for a special, one-time audit of the Fed’s crisis-related undertakings. Among other things, that audit pointed to some serious conflicts of interest that might otherwise have escaped censure. Yet according to Mr. Samuelson’s supposedly up-to-date Fed history, it should have been just as unnecessary as the recurring audits Fed “bashers” have been calling for.

Would such recurring audits themselves be otiose? The Dodd-Frank audit covers the Fed’s actions up to July 21, 2010. Consequently the GAO isn’t allowed to look into any of the Fed’s unorthodox measures since then, including later rounds of Quantitative Easing, Operation Twist, and its enhanced overnight reverse repo program, not to mention its stress tests and other financial-regulatory measures. More importantly, under existing law it can’t be asked to look into any “emergency” steps the Fed might take in the future. Should we always have to rely on special legislation after the fact to allow Congress to scrutinize unusual Fed actions?

Mr. Samuelson complains about simplistic history. Allow me to complain instead about simplistic conjectures about the future–conjectures to the effect that the Fed will never again engage in the sorts of activities that warranted the Dodd-Frank audit. Such conjectures are after all implicit in claims, like his, to the effect that a permanent enhancement of the GAO’s Fed-auditing powers would only serve to “fulfill conservatives’ political agenda” by allowing Congress to “harass” the Fed and to otherwise undermine its ability to do its job.* Does Mr. Samuelson believe that the GAO “harasses” the other government departments and agencies over which it has unlimited auditing powers? If not, why does he worry that it would harass the Fed? Conservative agenda? Does he think that only conservatives (or conservatives and libertarians) distrust the Fed, and welcome GAO scrutiny of its unusual activities? If GAO officials themselves argue for relaxing present limits on their agency’s Fed-auditing powers, must they be part of a conservative plot?

Samuelson also sees “no obvious advantage” in a measure that would compel the Fed to choose and stick to a monetary rule, such as a Taylor Rule or NGDP growth rule. But while the advantage of such a rule may not be obvious to him, others may find it obvious enough. Either a Taylor or a Sumner-style NGDP growth rule would have called for less expansionary monetary policy in the mid-2000s, and for more expansionary policy in late 2009–reason enough to wonder whether, in complaining (in Samuelson’s words) that a rule “might make policy too inflexible,” Janet Yellen bothered to consider how in practice policy tends to “flex” the wrong way.

Finally, although he recognizes that the Fed isn’t infallible, and even suggests that the recent financial crisis was proof of its fallibility, Samuelson remains convinced that the Fed’s unhindered exercise of almost unlimited discretionary powers has contributed more than rule-based arrangements might to “the nation’s long-term economic health.” On what, I wonder, is this judgment based? Certainly not on recent experience. But a longer view is just as hard to square with the assertion, as Milton Friedman and Anna Schwartz went to great lengths to demonstrate. Mr. Samuelson worries that Fed “bashing”–by which he seems to mean any criticism of the Fed that seeks to justify a reduction of its considerable power–“adds to uncertainty and subtracts from confidence” upon which economic growth depends. In truth, the Fed’s actions are themselves often unpredictable, and especially so when it comes to their influence on the long-run course of prices and spending. Were the Fed really a sort of Ambrose Light of financial markets, as Mr. Samuelson imagines it to be, Fed watching, instead of being a growth industry, would be about as useful–and as boring–as watching paint dry.

But the Fed needs more than mere watching. It needs scrutiny. It needs criticism. Above all, it needs to be reined in–not for conservatives’ sake, but for everyone’s. Mr. Samuelson may not like it. But I, for one, intend to keep bashing away.
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*Like many commentators who take the Fed’s side in the “audit the Fed” debate, Samuelson suggests that there only two possible kinds of GAO audits to which the Fed might be subject: simple “do the books balance” audits, as are already provided for, and ones by which the GAO would “second guess” the Fed’s conduct of ordinary monetary policy. In fact, the Fed does a lot more than engage in ordinary monetary policy, and, as the special audit provided for in Dodd-Frank illustrates, there are correspondingly many ways in which the GAO might scrutinize it’s conduct. The real debate is about these other sorts of scrutiny. To represent it as a debate about whether the GAO (or “Congress”) should be allowed to interfere with the Fed’s conduct of monetary policy is missing the point, if it isn’t something rather worse than that.