Home > Miscellaneous Musings > Mr Bean’s New Monetary Adventures

Mr Bean’s New Monetary Adventures

A central banker admits they are all idiots.

This is rare.

In a damning comment on the models used by central bankers and other economic forecasters, he stressed: “The moral from this is that one should not expect to be able to predict the timing and scale of these sorts of events with any precision.” The best policymakers can hope is to “be more alert to the vulnerabilities” building up to a crisis.

“It is somewhat analogous to seismologists trying to predict earthquakes along a fault line,” Mr Bean said. “It is impossible to predict the day and magnitude of a shock with any precision, but it may be possible to say something about the likelihood of an earthquake occurring within a given period from seismic measurements and indicators of latent stress.”

His comments suggest that countries can not ever prepare properly for recessions because the depth and timing will always take forecasters by surprise. For “downturns associated with financial or banking crises… One would need to be endowed with perfect foresight to have been able to predict how the financial crisis would unfold”, he added.

Mr Bean argued that one of the problems is the available data is limited in its use and, therefore, forecasts of recessionary behaviour will not be accurate if the information is applied correctly. Mr Bean claimed: “Deviations of outturns from central forecasts should be unpredictable if those forecasters are using the information that is available to them efficiently.

“While it was predictable that the availability of credit would tighten as risk aversion rose and financial institutions rushed to de-leverage their balance sheets, it was far harder to know by how much.”

The UK economy shrank by 6.5pc from peak to trough during the recession, which lastest 18 months from the second quarter of 2008, the deepest contraction since the 1930s. In August 2008, the Bank put the chances of contracting more than 1.5pc at just “1 in 20”, Mr Bean admitted.

“It is a fair bet that, if we had, then we would have put the chances of a contraction as large as the ONS’s current estimate as being virtually negligible,” he added.

While forecasters may not be expected to get it right all the time, the past recession demonstrates that “financial institutions and policymakers could – and should – have been more alert to the vulnerabilities that were building during the years leading up to the crisis and therefore to the possibility of a major shock to the financial sector and to the economy more generally”.

To ensure that policymakers are more aware of a brewing storm in the financial system in the future, “financial data collection will need to be more flexible,” he said. “Almost certainly the seeds of the next financial crisis will sprout in a different corner of the financial system from this one.”

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