Sir John Gieve said the failure of economic policy before the crisis at the Bank and other institutions across the world was largely the result of “group think” that needs to be stamped out.
His comments at Fathom Consulting’s Monetary Policy Forum echoed those made in three reviews into the Bank’s recent performance released today.
They found that “there appears to be some tendency for [staff] to filter recommendations in such a way as to maximise the likelihood that senior staff will find the recommendation palatable” and that the Bank needed to cultivate “a more assertive and experienced staff” who would “seriously challenge” policymakers.
Sir John, who was deputy governor for financial stability until 2009, said: “The biggest errors of economic policy were before the crisis in allowing the boom to develop. They were the result of a remarkable degree of group think – not just in the UK.
“That was a problem in the Bank, as it was in the US Federal Reserve and the European Central Bank. We need to redouble efforts to challenge orthodoxy in these institutions.”
His words amounted to a call to arms for the Chancellor to ensure the right governance structures are put in place before the next Governor of the Bank takes over in June. Andrew Tyrie, chairman of the Treasury Select Committee, has called governance at the Bank “defective”.
To stamp out group think, Sir John said the Bank should adopt the reviews’ proposal that it publish more detail on its economic forecasts.
“How do you bring challenge into a hierarchical institution? One way of doing that is to publish more detail on the forecasts. Transparency on how they see the economy developing would be helpful in freeing up the discussion on what’s going right and what’s going wrong in its forecasts,” he said.
“I think the reviews are right to suggest the Bank build in challenge to avoid house views developing.”
One of the three reviews criticised the Bank’s error-ridden forecast record and suggested it publish the details of its outlook, such as the household savings rate and the output gap, to allow economists to challenge its assumptions. Eric Britton, a director at Fathom, said: “That should be out there and discussed – the way they are thinking about the world.”
Sir John welcomed the reviews’ suggestion that matters could be brought up with the Court of the Bank, a group of independent directors who oversee the institution. He the Court should play “a stewardship role ... and assess whether blinkers are coming down ... and whether the architecture is working right”.
However, Charles Goodhart, a former member of the Bank’s rate setting committee, told Fathom’s event that group think in the Bank has been no worse than other central banks and criticised the media’s mistaken tendency to focus on the person at the top.
“If you think the Governor of the Bank was a Sun King, what do you make of [former US Federal Reserve chairman] Alan Greenspan. He would be a Sun King to the power of three,” Mr Goodhart said.
“[Governor Sir] Mervyn King has been outvoted several times [on rates and money printing decisions]. You – in the media – focus so much on the man at the top. You don’t perceive how the person is influenced by those around him.”
