Who Runs the Asylum?

Four years into a depression and the politicians and their advisors are still running in circles. The Financial Times complains that there has been no satisfactory inquest into the way the West locked itself into the crisis from which governments are unable to escape. But now, in Britain at least, the knives are out…

The Bank of England was run by a “tyrant”, according to David Blanchflower, a member of its Monetary Policy Committee at the height of the financial crisis. Governor Sir Mervyn King was “unprepared for the crisis,” and under his command the Bank was “controlled with an iron fist. Conveniently, that lets the other economists off the hook for their failure to alert Britain.

But what of HM Treasury? It was in charge of the economy. An internal enquiry shifts much of the blame for failure on to low pay. This caused a high turnover of staff, so the institutional memory of previous economic crises was missing when house prices approached the cliff edge at the beginning of 2008.

The Treasury had only three people covering financial stability, and the average age of staff was 32 – as if being long in the tooth would have made a difference. In the US, Alan Greenspan was no spring chicken. He had lived through all the post-war booms and busts, and that did not help the Fed to avoid steering the American housing market into the buffers.

What do they Teach Them?

If young economists are not equipped to understand how the real world works, that’s because the fare that’s dished up in universities is as far from reality as you can get. Elegant mathematical equations are more important than the cash incentives that motivate behaviour in markets. Professional economists are trained to think about a virtual world, not the world in which you and I live. And yet, these are the people who are invited as advisors to policy-makers who shape the laws that seal all our fates.

Is it surprising that we live in a dangerous world? The inmates really do run the asylum.

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