Andy Haldane caused quite a stir this month when he suggested the economy was like a coiled spring waiting to go off. As the Bank of England’s chief economist has discovered, it’s harder to be a Tigger than an Eeyore. Predictions of impending disaster tend to be forgotten even when they don’t come true. Much less slack is given to those predicting that things will turn out well.
Haldane could well be proved right. Consumer and business confidence is on the rise and if – a big if, admittedly – the government continues to support the hardest-hit sectors appropriately as the economy is unshackled, it is quite possible there will be an explosion of pent-up demand.
But even if Haldane is wrong, it’s important to have people making the upbeat case. It would be a much greater cause for concern if all nine members of the Bank’s monetary policy committee (MPC) thought the same way.
The dangers of groupthink were well illustrated by the financial crisis of 2008-09. Central bankers, investment bankers, the International Monetary Fund and most of the media believed that liberalisation of the financial system had made it safer, when the opposite was the case.
Warning signs from the US housing market were ignored. Dangerous levels of risk-taking was permitted. All sorts of nonsense was peddled about how sophisticated financial instruments that few actually understood would make everybody better off. There was a collective failure to recognise that something could go seriously wrong with a supposedly foolproof model. Eventually it was recognised that herd mentality had led to the near-implosion of the banking system, but only after the event.
The MPC’s maverick voice back then was David Blanchflower, who called for much tougher action to deal with the looming crisis. He got it right.
Currently, there is quite a lively debate among MPC members about what is likely to happen to the economy. Jan Vlieghe, for example, published a speech last Friday in which he envisaged the possibility of negative interest rates should growth fail to meet the Bank’s…