David Blanchflower: Tyrant King held the Bank in thrall - but they all got it wrong
Economic Outlook: You were either an insider on Sir Mervyn’s good side or you were out
A couple of weeks ago, it was an earthquake: this week, it was a hurricane. I managed to get the last flight out of Boston for my third Atlantic crossing of the week just before the airport closed. My family were all fine but the town where my father-law has a condo on the Jersey shore had a major problem as their roller-coaster was washed away, and was last seen heading towards France.
I write this driving through the snowy Highlands where Danny Alexander, our Chief Secretary to the Treasury, was once the head of communications at Cairngorm National Park. That's the same heroically underqualified Danny Alexander who argued in a BBC interview that the Coalition would have still gone ahead with austerity two years ago if it had known the economy was going to grow by just 0.6 per cent instead of the 6 per cent forecast by the Office for Budget Responsibility in June 2010.
Interestingly, in his maiden speech in Inverness on the August 27, 2010, he made it clear that the Coalition should be judged on what it delivered. "We have steadied the ship, but if we wish to remain on course we must deliver on the plans we have set out". He even went on to claim that the coalition was all warm and cuddly. "So the spending decisions for which I am responsible will be guided by clear principles: To support private sector growth that lasts, that is more balanced across the people and places of the UK. To promote fairness and opportunity. We are all in this together."
The boat, just like the roller coaster, is sinking, plus the Government has promoted unfairness and lack of opportunity for so many. This week's news: Comet failed, Ford closed its UK plants and UBS fired thousands of its workers. Plus the construction and manufacturing PMIs were bad. More troubled waters are ahead.
And then there those three reviews – by Bill Winters, David Stockton and Ian Plenderleith – on what went so terribly wrong at the Bank of England. The report by Mr Stockton on forecasting was especially sensible and hard-hitting. Recall that the unelected Sir Mervyn King for a long time resisted the very idea of reviewing the Bank's failings despite frequent protestations from the Treasury Select Committee (TSC). How dare anyone question the great man? I have always been sympathetic with calls from elected MPs for greater transparency from unelected officials. Did Sir Mervyn's opposition suggest he had something to hide?
I gave evidence to two of the reviews. The three confirmed the picture of the Cruel Tyrant who ruled all; this meant that alternative, but frequently correct, views were given short shrift. Disastrously, the Bank of England under Sir Mervyn's rule failed to spot the greatest recession in a century or act on the evidence they were given that the Libor was being fiddled or even the imminent failures of Northern Rock, RBS and HBOS. A tyrant looks more to his own advantage rather than that of his subjects and uses extreme and cruel tactics – which describes Sir Mervyn perfectly. The reviews revealed that the staff were too scared to provide advice that he didn't like because their careers depended on pleasing the Tyrant; so the quality of advice was ostensibly lower than it should have been.
At the Bank of England, you were either an insider on Sir Mervyn's good side or you were out, like me. Paul Tucker was seemingly an insider who benefited from his patronage, and must shoulder a lot of the blame for the failures; Mr Tucker is unsuitable to be the next governor, he doesn't have the leadership skills for the job nor does he command the respect of the Bank staff. The "too dumb" explanation works here as well. He also failed to spot the recession or the double dip. It took me more than a year on the MPC to discover that Sir Mervyn's hands had been all over the forecasts before external members of the MPC ever set eyes on them.
I could never get the forecasting team to show me the results with the so-called top-down judgements removed. That is, the forecasts were largely made up to fit his conceptions. When I told Mr Stockton, the former research director at the US Federal Reserve, this, his response was that Alan Greenspan and Ben Bernanke never ever told him to alter a single number. Mr Greenspan apparently took delight in disagreeing with the staff's judgements.
I made clear in my evidence to Mr Stockton that, the way the forecasting process was set up by Sir Mervyn, it was almost impossible for any member to dissent. Mr Stockton criticised the process by which the committee signs up to its "best collective judgement" on inflation and growth, and argued that "the financial crisis highlighted just how wrong the consensus view can be at times". He has sensibly recommended that the MPC actually gets to vote on the forecast in addition to the policy decision, and that there should be a separate staff forecast, as is the case in the US.
Mr Stockton went on to question the MPC's "overly optimistic" and ultimately hopeless predictions of rapid growth that has never appeared. The committee had made "somewhat larger forecast errors for growth" than the average of external forecasters, and failed to apply "systematic, detailed quantitative analysis".
The taxpayer had not had good value for its money as the MPC's forecasts have been worse than useless. The TSC looks like it will have a field day when the three reviewers appear before it to give testimony on the November 20; it will be uncomfortable viewing for Sir Mervyn and Mr Tucker. Good.
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