Brad DeLong and Josh Bivens send us to a House hearing on monetary policy, in which three conservatives explain why it was totally forgivable for everyone on their side to predict runaway inflation from the Fed’s expansion of the monetary base, and why the failure of that inflation to appear says nothing at all about possible flaws in their approach.

It’s actually kind of amazing. In the exchange Brad highlights, Marvin Goodfriend says, how could you expect anyone to predict that reserves would just pile up and not be lent out — nothing like that had happened since the 1930s. And Larry White then adds that it was all sterilized because the Fed paid a whopping 0.25 percent interest rate on reserves.

Gosh. We had just had the worst financial crisis since, um, the 1930s. Why would anyone possibly think that 30s experience was relevant? I’m thinking, I’m thinking.

And you know, that experience — and specifically the collapse of the money multiplier when you hit the zero lower bound — had been extensively discussed in this 1998 paper (pdf). The author even included a figure showing what happened:

Photo

Furthermore, it just wasn’t true that nothing like that had happened since the 1930s. Exactly the same thing had happened in Japan, and the big expansion of the Japanese monetary base in the early 2000s had exactly the same effect:

Photo

Meanwhile, if you really believe that 25 basis points of interest on reserves is enough to sterilize $3 trillion of monetary base, you shouldn’t be worried at all about the inflationary effects of Fed policy, should you? After all, this makes them look very easy to contain.

But of course it wasn’t the interest on reserves, as both the 30s case and Japan show.

What gets me here is the complete unwillingness to accept the reality test. Here you have monetary economists who made a totally wrong prediction, at a time when other people were not only getting it right, but explaining carefully both the theoretical and the empirical basis for their prediction. Yet the reaction of those who wrongly predicted runaway inflation is to assert that (a) nobody could have predicted (even though some us did) and (b) it’s just special circumstances. The possibility of conceding that their model was wrong never seems to cross their minds.