On 22nd July, Fellows of the British Academy Professors Tim Besley, FBA, and Peter Hennessy, FBA, sent this letter (pdf download) to Her Majesty the Queen (heavily edited version follows):
When Your Majesty visited the London School of Economics last November, you quite rightly asked: why had nobody noticed that the credit crunch was on its way? The British Academy convened a forum on 17 June 2009 to debate your question.
Many people did foresee the crisis. However, the exact form that it would take and the timing of its onset and ferocity were foreseen by nobody.
For example, the Bank of International Settlements expressed repeated concerns that risks did not seem to be properly reflected in financial markets. Our own Bank of England issued many warnings about this in their bi-annual Financial Stability Reports.
Risk management was considered an important part of financial markets. One of our major banks, now mainly in public ownership, reputedly had 4000 risk managers. But the difficulty was seeing the risk to the system as a whole rather than to any specific financial instrument or loan. Risk calculations were most often confined to slices of financial activity, using some of the best mathematical minds in our country and abroad. But they frequently lost sight of the bigger picture.
There were many who warned of the dangers of this. But against those who warned, most were convinced that banks knew what they were doing.
They believed that the financial wizards had found new and clever ways of managing risks. Indeed, some claimed to have so dispersed them through an array of novel financial instruments that they had virtually removed them. It is difficult to recall a greater example of wishful thinking combined with hubris.
And politicians of all types were charmed by the market. People trusted the banks whose boards and senior executives were packed with globally recruited talent and their non-executive directors included those with proven track records in public life. Nobody wanted to believe that their judgement could be faulty or that they were unable competently to scrutinise the risks in the organisations that they managed. A generation of bankers and financiers deceived themselves and those who thought that they were the pace-making engineers of advanced economies.
All this exposed the difficulties of slowing the progression of such developments in the presence of a general ‘feel-good’ factor.
Among the authorities charged with managing these risks, there were difficulties too. Some say that their job should have been ‘to take away the punch bowl when the party was in full swing’. But that assumes that they had the instruments needed to do this. General pressure was for more lax regulation – a light touch. The City of London (and the Financial Services Authority) was praised as a paragon of global financial regulation for this reason.
There was a broad consensus that it was better to deal with the aftermath of bubbles in stock markets and housing markets than to try to head them off in advance.
Inflation remained low and created no warning sign of an economy that was overheating.
So where was the problem?
Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well. The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction. This, combined with the psychology of herding and the mantra of financial and policy gurus, lead to a dangerous recipe. Individual risks may rightly have been viewed as small, but the risk to the system as a whole was vast.
So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.
On 14th August 2009, a group of senior figures including Professor Herman Daly of Maryland University, Professor Lord Anthony Giddens and Professor Peter Victor of York University, Canada, sent this letter (heavily edited) to the Queen:
We, the undersigned, noted with interest the letter to Your Majesty of 22nd July 2009 from the British Academy in which they respond to your question about how the current economic meltdown was missed. They talked of a "failure of the collective imagination of many bright people" and a "psychology of denial". The Academy wrote "It is difficult to recall a greater example of wishful thinking combined with hubris."
We are writing to you because we are concerned that the British Academy's letter focuses on one particular aspect of current insecurity, namely financial, failing to address the wider context of more serious macro issues facing mankind. We are also writing to the Academy to invite them to debate these issues with us.
We live in tumultuous times. Many developed world citizens are losing their livelihoods. The effects on the world's poorest will, as ever, be dreadful. However we are surprised that the Academy has not addressed anything outside the narrow remit their letter covered. Far greater insecurities threaten the world's poorest due to our effects on the natural world.
The letter ignores the physical constraints which are central to this bubble and indeed most bubbles. It speaks of "the bigger picture" and of "individual risks being small" and "the system as a whole being vast", yet, for us has a limited horizon.
Our premise is that our current economic malaise is symptomatic of a far more serious systemic failure to acknowledge what Archbishop Rowan Williams has identified in saying "It has been said that 'the economy is a wholly-owned subsidiary of the environment'. The earth itself is what ultimately controls economic activity because it is the source of the materials upon which economic activity works".
Energy is the lifeblood of any economy. Our exponential debt-based money system is in turn based on exponentially increasing energy supplies. It is therefore clear that the supply of that energy deserves our ve
ry highest attention. That this attention doesn't appear in the Academy's analysis is deeply worrying.
The letter refers to the "overheating economy" but gives no mention of the effect and cause of the overheating of planet Earth.
The Academy's letter mentions unprecedented global economic growth – yet it fails to mention the rapidly escalating environmental destruction caused by this insatiable growth. It also mentions the poor of the developing world who have been brought out of poverty to 'prosperity'; but not the far greater numbers condemned to an increasingly inequitable world and the ravages of peak-food and climate change.
The letter talks of a "general feel-good factor", but doesn't address the fact that, in the developed world, general wellbeing long ago ceased to be linked with GDP growth.
We envisage a society whose primary goal should be the wellbeing of society itself and of the planetary resources and environment that sustains us all, with economic objectives shaped to support that central goal rather than the other way around."
Our current form of corporate-consumer-capitalism has been shown to be what many of us knew it was: a fundamentally flawed system which badly needs updating.
It would appear from the British Academy's letter that they are not aware of the rapidly growing and vibrant debate around these issues. We agree with them about the need for "authorities with the power to act" and for appropriate levels of regulation fit for the task in hand. Their prescription is to consider how they "might develop a new, shared horizon-scanning capability". We will invite the Academy to join with us in a public dialogue about these issues and ask them to consider how this 'new capability' can make its primary horizon the issues we raise in this letter.
We will of course report findings of such debate to Your Majesty.
I wonder if the Queen could be the Chair in a nice debate entitled: this House believes that Capitalism is Killing the Planet?
Hattip to the FT for this one.