IT’S OFFICIAL. The experts who guided the global economy were flying blind. They failed to see the financial crisis coming because “The macroeconomic models available at the time of the crisis typically ignored the banking system”.
The confession – a case of what lawyers call “wilful blindness” – appears on page 10 of the OECD’s post mortem report into their role in the credit squeeze that struck down western banks in 2008.*
The OECD reported the results of its inquest in London today. Mortified by its failures, the OECD has now embarked on “horizon scanning to help plan ahead for unlikely, but potentially costly, events that might trigger a future crisis that could be very different in nature from the recent financial crisis”.
Those events are not “unlikely”. They are predictable. And the OECD, by failing to enlighten the governments of its 34-member countries, must be held accountable for the tragedies as they unfold.
The Coming Economic Crises
Despite the fine-tuning of their model of the global economy, the OECD and the economists whom they consulted are still flying blind. Take the case of the breakdowns in the new business cycle.
- Five years from now, a recession will disrupt western economies. The OECD cannot either confirm or falsify my prediction.
- Fourteen years from now, a depression will strike down the global economy. Again, the OECD is helpless: it cannot refute my forecast.
Why not? Because their economic model suffers from flawed assumptions and gaping holes in the data. As I explained in a previous blog land values are the key indicator of the health of the economy. True to form, the British government for one has decided to scrap the land price index published by its Valuation Office. Another case of wilful blindness?
To be fair, the OECD’s record is no worse than all the other government agencies and private forecasting consultancies. Still, because of their lamentable record, they had to blame someone. At the top of their list is the wage-earner. We are told that the largest forecasting errors over 2007-12 “have occurred in countries with more stringent pre-crisis labour and product market regulations”. Sub-text: inflexible labour markets – which gave some measure of protection to workers – hindered the recovery. Workers were to blame for the forecasting errors!
And so, now, because of the disconnect between the real world and the make-believe world cherished by economists, we learn that the OECD has “relied on a ‘muddling-through’ assumption”. Is this what taxpayers expect for their support for the Paris-based think-tank?
Where the Blame belongs
In the 20 years between the Thatcher/Reagan Big Bang de-regulation of banks in the 1980s, and the Big Bang that bankrupted the banks in ’08, UK and US governments repeatedly lionised the bankers. People were repeatedly assured that financial de-regulation created jobs, increased national income and poured money into the public purse.
So the existence of the financial sector was hardly a secret! Why, then, did the economists who guide governments fail to build the influence of the bankers into their equations?
Through ignorance? The OECD does confess to “limited understanding of macro-financial linkages”.
To conceal a guilty secret? The OECD is silent on who pocketed the big bucks courtesy of junk economics.
Whatever the explanation, the foundations of the western economy will continue to deteriorate under cover of wilful blindness. The OECD has decided to centralise its assessments. To what end? Their report explains: “[T]o help ensure that projections for individual countries are based on a common general world view”. If our world is a mad-house, the patients have taken control.
* OECD (2014), “OECD forecasts during and after the financial crisis: A Post Mortem”, OECD Economics Department Policy Notes, No. 23, February.