Admittedly, I've expended a lot of ink -- or, rather, worn out a few keys on the computer keyboard -- railing against the incompetence and delusions of the mainstream forecasting crowd.
Not surprisingly, few of them have felt it necessary to answer to me or to the broader public for their failure to anticipate one of the worst financial crises this century and the first global economic downturn since World War II.
However, when Queen Elizabeth II starts asking questions about what went wrong, then it's not so easy for the experts -- at least those who live and work in the United Kingdom -- to ignore her or fob her off with a bogus response.
As it happens, their answers, as detailed by The Observer in "This Is How We Let the Credit Crunch Happen, Ma'am," acknowledge more professional culpability than I would have expected:
A group of eminent economists has written to the Queen explaining why [almost] no one foresaw the timing, extent and severity of the recession.
The three-page missive, which blames "a failure of the collective imagination of many bright people", was sent after the Queen asked, during a visit to the London School of Economics, why no one had predicted the credit crunch.
Signed by LSE professor Tim Besley, a member of the Bank of England monetary policy committee, and the eminent historian of government Peter Hennessy, the letter, a copy of which has been obtained by the Observer, tells of the "psychology of denial" that gripped the financial and political world in the run-up to the crisis.
The content was discussed at a seminar at the British Academy in June that was attended by economic heavyweights including Treasury permanent secretary Nick MacPherson, Goldman Sachs chief economist Jim O'Neill and Observer economics columnist William Keegan. The letter explains that as low interest rates made borrowing cheap, the "feelgood factor" masked how out-of-kilter the world economy had become beneath the surface, with some countries, such as the United States, running up enormous debts by borrowing from others, including China and the oil-rich Middle Eastern states, that were sitting on vast piles of cash.
Despite these yawning imbalances, they say, "financial wizards" managed to convince themselves and the world's politicians that they had found clever ways to spread risk throughout financial markets - whereas "it is difficult to recall a greater example of wishful thinking combined with hubris".
"Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well," they say. "The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction."
That meant when the reckoning came it was extreme, starting in summer 2007 and culminating in the near-collapse of the entire world financial system after the bankruptcy of Lehman Brothers last autumn.
"In summary, Your Majesty," they conclude, "the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."
Besley stressed that the experts had not been in "finger-wagging mode" and had agreed that the causes of the credit crunch were extremely complex. "There was a very complicated, interconnected set of issues, rather than one particular person or one particular institution."
Other experts at the seminar last month included Paul Tucker, deputy governor of the Bank of England, Vernon Bogdanor, the constitutional expert from Oxford University, and HSBC's chief economist, Stephen King.
A spokesman for Buckingham Palace said the Queen has displayed a particular interest in the causes of the recession, summoning Bank of England governor Mervyn King to a private audience earlier this year to explain what he was doing to tackle it.
Official figures published on Friday revealed that Britain's economy has now been contracting for 15 months, and the recession is deeper than any since the 1930s, outside of wartime.
Robin Jackson, chief executive and secretary of the British Academy, said: "The global recession is a huge development, and it is reasonable to ask to what extent it could have been foreseen. What's more, we can't say 'never again' if we don't fully understand what occurred. The academy forum was an opportunity to get an exceptional range of experts, participants and commentators in one room, sifting fact from fiction and shedding light on what had gone on. We hope Her Majesty - and indeed others - will find our letter informative."
The academy plans to hold a second seminar later in the year to ask how best to prevent another such crisis occurring. Besley denied that economics as a profession had been discredited by the scale of the crisis, but admitted that unconventional ideas - about how herd psychology and bouts of irrationality can grip financial markets, for example - had sometimes received "less play" during the boom years.
He said the academy hopes to provide a forum for airing economic differences: "What we need is a forum where people can come together on a very open basis, to provide challenges and have a debate."
Professor Luis Garicano, to whom the Queen directed her question when she visited the LSE in November last year, said: "She seemed very interested, and she asked me: 'How come nobody could foresee it?' I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives, but in many cases they were being paid to do the wrong things from society's perspective."
TRY DUMB!
Do I need to tell you the story of the carpenter, told the other day in the comments section on Economists View. The carpenter who realized, all too clearly that housing prices couldn't deviate from income for too long. sold his house near the peak of the boom in 2005 and rented. The story finishes poorly because he subsequently lost his job in the housing downturn but at least has a nice cushion. The writer concluded that it was really the Fed and their economists who should be out of work. By the way incomes and lodging prices are avery fundamental relationship in economics.
I am 62 years old, a retired economist myself, in the U.S. not the UK, and having dealt with these people all my life I can say that "dumb" is the only word that comes close to capturing it. By the way, dumb doesn't change overnight and as you have often said here we have a lot of dumb ahead of us.
SS
Posted by: SS | July 27, 2009 at 07:55 PM
Excuses, euphemisms and continued ignorance!
'A large number of people gamed the system' just doesn't sound as nice as "behaved according to their incentives".
And "no single authority had jurisdiction" means 'our hands were tied as there were/are no laws against that. We need more laws!'.
But especially not even mentioning a single name of someone who saw it coming all the way - that's the cherry on top.
The Queen should outspoken reject this poor cover-up and ask for another letter from a group that consists half of people who realized what was going on years ago!
Posted by: michael | July 27, 2009 at 10:14 PM
It would be wrong to try to assess blame for the economic situation and not include those who bought (and those who sold) houses the buyer couldn't afford in addition to those who financed them. It would be wrong also not to include those who also took vacations they could not afford by putting them on their credit card, and then simply adding another credit card for more purchases they couldn't afford, as well as the financial institutions that allowed that to happen. We also must blame marketers who created the environment where The American (global) Dream could be summarized as: buy more, buy more expensive, buy more tech, buy newer, but buy. We will really get past denial only when we come to grips with the fact that we suffered from a collective societal miscalculation and mistakes in judgment that was across all spectrums, buyers as well as sellers as well as those who financed the purchasers and those who were supposed to regulate what and how things were done. The effort to place blame can best be solved if we all look to the sky after we shot a massive mirror into space and turned it to face earth. Then, once we conclude that the reason for the current situation was due to such a wide scope of the population and so many factors, we can start to understand that it will require broad changes in society to prevent the same situation from happening again, different perhaps only in degree.
Posted by: Doug Poretz | July 27, 2009 at 11:27 PM
Maybe Her Majesty should take a look on Amazon at all the 'Coming Collapse' books variously in print from 2005, 2006, 2007 etc.
This depression was predicted alright.
Posted by: Jonathan | July 27, 2009 at 11:54 PM
Doesn't the Queen know about the role her offshore tax haven Crown possessions played in fueling the speculative bubble?
Posted by: LoisT | July 28, 2009 at 08:01 AM
'Difficult to Recall a Greater Example of Wishful Thinking Combined with Hubris' I like Panzner but there are times I must disagree with him.
I would replace the top sentence with VENALITY
Posted by: roger | July 28, 2009 at 11:35 AM
Check out this link setting out work being done by people who did see it coming:
http://www.debtdeflation.com/blogs/2009/07/15/no-one-saw-this-coming-balderdash/
Posted by: Julian | July 28, 2009 at 08:38 PM