In The Economist of February 19th, 2009, p. 38, “Bagehot”, see below, it is claimed that there is a "Lack of understanding of the credit crunch" and a "lack of financial literacy", also by politicians. In addition it is stated that “politicians are panicky and confused”.
It is good politicians are blamed as they are accountable for mistakes, but the wrong arguments are used.
Firstly, politicians know exactly what is going on, why it happened and what we should have done to prevent it. Secondly, they all have working knowledge of economics and finance.
Profits, prices, loans, shares and incomes were much higher than could be explained. There were many warnings. Everybody knew it would end soon, within a few years 30% would have to be written off, and by then the trick was to get out in time. As profits kept pouring in, being puzzled why it was so easy, they tried another year, encouraged by,
indeed, our politicians.
Politicians tend to be financial opportunists. They have as much to gain as the bankers. A successful politician at retirement age tends to have a very comfortable home and a well-filled bank and share account, generally a wealth much larger than would be possible in the previous profession. An when the “bonus” is high, it is difficult not to be seduced.
They pretend to be “panicky and confused” but are really using the trick of group hiding. Pretending ignorance they hope to sit out the current recession and not losing their seat. After all, financial stakes are high.
Therefore we should “regulate the regulators” or “regulate the politicians”.
PS. In Amsterdam, we are still using our learning's from the tulip speculation in the 17th century.
Blissfully unaware
SIR – Bagehot bemoaned the “spiral of ignorance” and lack of knowledge among British politicians about the financial crisis (February 21st). Unfortunately this is, and will continue to be, an institutional problem. Research commissioned by the Industry and Parliament Trust in 2008 discovered that just 13% of Members of Parliament have ten years’ or more business experience, and 86% of business leaders say that “too often, legislation is passed with insufficient regard to its impact on business.”
The fact remains that many parliamentary candidates in recent decades are career politicians and lack in-depth financial experience. In the present economic environment our policymakers must be able to understand complex financial issues, rather than behave in such a way that is “panicky and confused”.
Sally Muggeridge
Chief executive
Industry and Parliament Trust
London
SIR – Without defending government ministers for their lack of understanding, it appears that most professions are befuddled by the economic situation, particularly economists.
Harry Whitbread
London
Feb 19th 2009
From The Economist print edition
Lack of understanding of the credit crunch is magnifying its damage
THE BBC’s “Today” programme is the main current-affairs show on British radio. Last year it recruited a new presenter, Evan Davis, who is also an economist. An amusing pattern has since developed. Quizzed about the credit crunch, a politician delivers some carefully memorised remark about, say, quantitative easing. Then the guest experiences an audible moment of existential horror, as Mr Davis ungallantly presses him for details.
The tide has gone out and, with a very few exceptions, Britain is swimming naked: almost nobody appears to know what he is talking about. The havoc of the financial crisis has stretched and outstripped even most economists. The British political class is befogged. Ordinary people are overwhelmed. And just as the interaction between banking and economic woes is proving poisonous, so the interplay of public and political ignorance is damaging the country’s prospects.
Start with the government, whose ministers are still oscillating between prophesying economic Armageddon and gamely predicting the best of all possible recoveries. Gordon Brown is learned in economic history—indeed, he is at his most animated and endearing when discussing it. But the prime minister’s grip on the history he is living through is less masterful. The government’s implicit strategy is to try something and, when that does not work, try something else: the approach modestly outlined by Barack Obama, but rather less honest.
The Tories are now capitalising on this flakiness; but for much of the past year, they have seemed at least as unconvincing. It was only a few months ago that David Cameron, the Conservative leader, averred that—since the economy was purring so happily—his historic mission was to mend British society. George Osborne, the shadow chancellor, clung for too long to his fair-weather formula about sharing the proceeds of non-existent growth. Mr Cameron and Mr Osborne are vague about the methods they would employ to repair the public finances in office. That sketchiness might be tactical. Or it might be because they do not know.
The truth is that hardly any MPs in any party have more than a rudimentary grasp of the crisis; indeed, their inability to track the City’s baroque excesses helped to foment it. (The intellectual background of MPs, few of whom have much training in economics or commerce, may contribute to this deficiency.) Vince Cable, the Liberal Democrats’ treasury spokesman, has the best record in Parliament of predicting and analysing the debacle—and precisely because he is so lucid, he seems increasingly to be regarded as an impartial pundit rather than a politician.
Meanwhile, the bodies and advisers appointed by the politicians to do the understanding for them have been largely discredited. The Bank of England obsessed about monetary policy and neglected financial stability. Sir James Crosby quit as deputy head of the Financial Services Authority (FSA) amid embarrassing questions about risk-taking at the bank he used to run. The involvement of Glen Moreno—chairman of Pearson, which part-owns The Economist—in UK Financial Investments, which manages the government’s new stakes in Britain’s banks, has been undermined by his association with secretive Liechtenstein.
A layman might conclude that there is almost no one in Britain capable of comprehending the financial mess, and at the same time sufficiently uncontaminated by the mistakes and ruses that caused it to be entrusted with the job of fixing it. (Lord Turner, the FSA’s new chairman—who has admitted that financial regulators, among others, missed “an increase in total system risk”—may be a happy exception.) It might help if ministers looked beyond the world of banking, of which they still seem to be in a sort of post-socialist awe, for more of their recruits. The layman, however, may be as much to blame as anyone else.
If financial acumen is limited in the governing classes, it is at least as rare outside them. In surveys, the economy has leapt to the top of voters’ concerns; anxiety is rampant, fed no doubt by the unfortunate trend whereby half the things that “experts” say can never happen come to pass within a fortnight. The public seem to appreciate that the crunch involves both foreign and domestic forces. But to most people the rest is a mystery. Along with the high anxiety, this uncertainty helps to explain the volatile political impact of the downturn: large numbers of people seem to be amenable to whatever explanation seems freshly plausible.
First thing we do, we hang all the bankers
The culprits many have now settled on are the bankers. Some of those—unable to accept the reality of their institutions’ failure—deserve the opprobrium. But the furore over their bonuses has obscured other realities. One is the fact that, now that taxpayers own some of them, they have an interest in the banks being run by clever people; another is the fundamental role banks play in the economy. And because MPs are instinctively populist, as well as bemused themselves, they too have fixated on bonuses.
It is not only banking about which general knowledge seems poor: the same is true of the concept of money. The nasty little secret of the slump is that by overborrowing and making myopic investments, lots of ordinary Britons helped to bring their difficulties on themselves. Low levels of financial literacy (knowing the difference between an ISA and an iPod, and so on) are part of this problem. But so is the cowardly reluctance of politicians to say unpalatable things.
The philosopher Bertrand Russell once remarked that he knew of only six people in the world who had followed his daunting book “Principia Mathematica” to the end. There sometimes seem to be almost as few people in Britain who truly understand the credit crunch and its recessionary consequences. The public is scared and uncertain; the politicians are panicky and confused. They are leading each other around and down a worrying spiral of ignorance.