Bank of England Allows Staff to Question Policies

In June we did a blog article about a speech given by Bank of England Governor Mark Carney in which he looked in the mirror and challenged central banks to do better in working on behalf of the average person. 

Now we have this new article on Project Syndicate by Howard Davies who is the incoming Chairman of The Royal Bank of Scotland. It is called "Central Bank Confidential." This article applauds the Bank of England for actually allowing dissenting voices within its staff to go public with criticism of bank policies. Below are some quotes from the article. 

----------------------------------------------------------------------------------------------------------

"In 1993, the economists Alberto Alesina and Larry Summers published a seminal paper that argued that central bank independence keeps inflation in check, with no adverse consequences for economic performance. Since then, countries around the world have made their central banks independent. None has reversed course, and any hint that governments might reassert political control over interest rates, as happened recently in India, are met with alarm in financial markets and outrage among economists.


In truth, however, there are many degrees of independence, and not all nominally independent central banks operate in the same way. Some monetary authorities, like the European Central Bank, set their own target. Others, like the Bank of England (BoE), have full instrument independence – control over short-term interest rates – but must meet an inflation target set by the government."   . . . . . 


"Groupthink can be particularly dangerous if the central bank is also the banking supervisor, as the 2008 global financial crisis demonstrated. In 2006, every central bank that published a financial stability report (in other words, most of them) concluded that their country’s banking system was in fine shape: well-capitalized and endowed with robust governance and strong risk management.

It seems unlikely that not a single central bank analyst was the least bit worried about the massive growth in credit and leverage at the time. Economists at the Bank for International Settlements – an organization of central banks – were laying out the risks very starkly. And yet not a dissenting voice was heard from the world’s small army of central bank economists."          . . . . 

. . . .   "So it is encouraging that the BoE (Bank of England) is experimenting with a platform that enables a wider variety of views to be heard: a blog called Bank Underground (a reference to the Tube station beneath the Bank’s headquarters) that publishes posts by junior staff challenging – or supporting – prevailing policy.

Click here to read the article and see how the staff reviewed economic models used

--------------------------------------------------------------------------------------------
My added comments:

This article is very interesting in light of Jim Rickards view that central banks are using bad models which will lead them to miss the next major crisis. Here we have the staff at the BOE saying that very thing might happen. They even say "we live in a complex world" which sounds like Jim's complexity theory. Please also note the frank admission from Mr. Davies that the "experts" at all the central banks missed the 2008 crisis and did not see it coming. Here is the link to Bank Underground.


Added note: I mentioned this Bank of England blog article (on problems with models used for forecasts) to Jim Rickards and he replied by letting me know that if anyone has an interest in this topic he covered it in depth in Chapter Ten of Currency Wars. He added that the footnotes in that chapter lead to even more good material.