…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.
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.” …
