Monday, 16 July 2018

A 20th Century Old Lady trapped in a 21st Century world

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I might be a bit old fashioned but I still have respect for the Bank of England. I have watched with plenty of interest but also with some concern how the Old Lady – I used that term of endearment in front of some younger members of our guild recently and they apparently didn’t have a clue who I meant - has been dragged through the mud.

Anthony Peters, SwissInvest Strategist

She has been accused in no uncertain terms of incompetence and irresponsibility both going into and coming out of the crisis – or not coming out, as the case may be.

The first of three reports which have commissioned on the performance of the Bank has now been published and it fairly rubbishes the Bank’s economic forecasting abilities and questions the structure which places officials in a straitjacket when it comes to disagreeing with the “house view”.

(See a synopsis of of the report)

I would like to raise a hand in defence of the Bank and its people. However, before that, I must remind that central banking pays significantly less than the markets do and that the discipline governing the way the Bank thinks determines that its research departments. Their methodologies remind more of academic institutions than they do of banks.

The Bank of England is trapped in a world defined by 20th century economic theory which it is frantically trying to apply to the 21st century environment.

Investment banks can swing from buy to hold to sell as quickly as they like but central banks are expected to have and to stick by a view through a complete cycle. Just imagine what would occur in markets if the Banks suddenly declared that it had been wrong and that it was reversing its policy?

One of the principal roles of the central bank is to ooze calm. That is should publish research which generally points in the direction in which it hopes and believes the economy is or should be going is, I suppose, in the nature of the beast. Alas, I have a very different beef.

21st Century blocks

It is, in my humble opinion, well beyond time to review how we measure economic performance. The Bank of England is trapped in a world defined by 20th century economic theory which it is frantically trying to apply to the 21st century environment.

When you wake up to discover that your axioms are in fact no longer axiomatic, you find things difficult. It is very easy to criticise post-factum and castigating the Bank for not having forecast the outcome, now that we know what it is. It is also easy to state that “outside forecasters” were better at analysing and predicting events than was the Bank.

But are the “outside forecasters” one house or all of the many, many hundreds, if not thousands, which publish periodical research? Were they all better than the Bank or was it simply that there were just enough who got it right to make the BoE, which has only one voice (which is listened to by all), look foolish.

There is an old one-liner which defines an economist as the person who predicted five out of the past two recessions. This is certainly not something the central banks wants to be involved in. Therefore it is somewhat natural that it should be trying to talk up the economy – I recall how the press reacts every time the Governor warns that things will be tough for a while and if popular sentiment is regarded as a key driver of recovery, then the Bank must try to avoid the criticism for undermining potential positive outcomes.

Central bankers also struggle to get up in the morning, also breakfast on cornflakes and toast and also get crushed in the tube on the way to work – just like the rest of us. They do the best they can but with constraints which most other folks in the City would run a mile from. What they lack is the ability to chop and change their approach as they see the world around them changing. They are expected to be consistent in their analysis and if they find that they are analysing past-due data, well, tough luck.

It was the government which defined the Bank’s remit in terms of managing inflation and now everyone appears to be surprised that its analytical structures are geared to that, even though it is not the prime issue facing the economy today. If outside forecasting is so much better, why don’t we just simply outsource the job – to which of the thousands of outside sources is a different matter entirely.

Wonderful things, rear view mirrors, aren’t t they?


Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful week-end. As the first frost hits and as the trees shed, may your young ones come out and help you with sweeping the leaves rather than just leaving the sweeping to you.                      

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