The Bank of England has held short-term interest rates very close to zero for several years, with devastating consequences for the incomes of millions of frugal people. The Bank’s latest wheeze suggests that savers pay the banks for the privilege of holding their money. The Bank has pumped hundreds of billions of pounds into the economy through quantitative easing.
All these policies are open to question. For example, quantitative easing has many critics amongst distinguished monetary economists.
Despite this, the actions of the Bank are deemed to be a Good Thing, for the Bank is independent. The decisions of its experts are untainted by the touch of mortal, corrupt politicians. Yet just how expert is its expertise?
In 2007, the Bank plotted its ‘fan charts’ around its central forecast of GDP growth in the UK over the next five years. These show the range of uncertainty the Bank attaches to the central projection, which is plotted in lines which fan out around it. The further ahead the forecast, the greater the range of uncertainty. So these lines look like a fan on the chart.
According to these charts, there was, for all practical purposes, a zero probability of a recession in the UK during the period 2007-2012. Scarcely a year after they were published, the UK entered its deepest recession since the 1930s.
When the crisis struck, the Governor appeared paralysed by the weight of his academic knowledge. As capitalism itself teetered on the brink of disintegration, he spoke of the ‘moral hazard’ of bailing out banks, seemingly oblivious to the real and massive dangers of banks collapsing in a cascade of failures, like so many dominoes.
The Bank was granted its independence by Gordon Brown. Regrettably, George Osborn imitated him by assigning the economic forecasts of the Treasury to the independent Office for Budget Responsibility. At least Robert Chote, the director of the OBR, is under no illusions that independence somehow ensures his forecasts will be more accurate.
Brown eulogised and revered the cult of the expert, not just at the Bank but across a whole range of social and economic policies. Mere politicians, let alone ordinary voters, are deemed incapable of participating in discussions unless they are familiar with the latest piece of multiple regression analysis waved by an expert bearing a clipboard.
If the experts had genuine expertise, this would be perfectly reasonable. It makes good sense to let an engineer design a bridge. But the level of real understanding in the social sciences – including economics – is very much lower than most experts care to admit. It is no accident that Hayek remarked: ‘in the design of successful policies, the role of intellect is grossly exaggerated’.
The time has come to get rid of the insidious cult of the expert, to end the independence of the Bank and to restore decisions to democratically elected politicians. If they get it wrong, at least we can have the pleasure of kicking them out.
As published in City Am on Wednesday 6th March 2013