The Story from the Inside: In This Exclusive Account of Decision-Making at the Bank of England, David Blanchflower, Who This Week Joins the New Statesman as Our Economics Columnist, Reveals How Mervyn King's Mistakes Made the Recession Worse
Blanchflower, David "Danny", New Statesman (1996)
The risk of a long-lasting economic depression is not over. There have been some positive signs recently, and the worst may be behind us--but we should not get too carried away. Retail sales have risen a little and there are some positive signals from the housing market. There was even some evidence of positive GDP growth in France and Germany. Nonetheless, in the United Kingdom, money supply growth remains weak, banks are still not lending and mortgages are hard to come by. The latest surveys for construction and manufacturing still show contraction. Negative equity is on the rise, as are mortgage defaults. Unemployment is climbing fast and a million jobless young people under the age of 25 are in danger of becoming a lost generation.
One year on from the financial crash and the ensuing recession, the question remains: how did we get into this mess in the first place? In my view, and as I have consistently argued over the past two years, the economy would have been in much better shape today had the Bank of England's Monetary Policy Committee (MPC)--on which I sat as an external member for three years until 31 May--not kept interest rates so high, especially from the beginning of 2008. House prices had peaked by the end of 2007 and business and consumer confidence surveys had collapsed. By the second quarter of 2008, based on both output and employment, the UK economy had moved into recession. But my colleagues on the MPC did not join me in voting for rate cuts until October 2008.
So why did the committee get it so wrong? From my perspective, it was hobbled by "group think"--or the "tyranny of the consensus". Governor Mervyn King, the old iron fist of the Bank of England, with his hawkish views on rates, dominated the MPC. Short shrift was given to alternative, dovish views such as mine. I focused on the empirical data suggesting Britain was heading for recession; Mervyn and the rest of the committee focused on their theoretical models and the (invisible) threat of inflation. In fact, the Bank of England may more suitably be called "the Bank of Economic Theory". Unfortunately, the economic theories failed just when we needed them most.
Throughout this crisis …
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Publication information: Article title: The Story from the Inside: In This Exclusive Account of Decision-Making at the Bank of England, David Blanchflower, Who This Week Joins the New Statesman as Our Economics Columnist, Reveals How Mervyn King's Mistakes Made the Recession Worse. Contributors: Blanchflower, David "Danny" - Author. Magazine title: New Statesman (1996). Volume: 138. Issue: 4966 Publication date: September 14, 2009. Page number: 16+. © Not available. COPYRIGHT 2009 Gale Group.
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