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Wishful thinking and hubris - why the global financial crisis was not foreseen

When The Queen visited LSE last year she asked why no one had spotted the recession. Following a roundtable discussion at the British Academy in June, leading academics have written to The Queen addressing her question.

Although many people did foresee the crisis, write Tim Besley|, a professor at LSE and a member of the Bank of England's monetary policy committee, and Professor Peter Hennessy, a political historian, 'most were convinced that banks knew what they were doing and believed that the financial wizards had found new and clever ways of managing risks...It is difficult to recall a greater example of wishful thinking combined with hubris.'

HRH The Queen at the opening of the NABThe Queen and the Duke of Edinburgh visited LSE to officially open its New Academic Building on Wednesday 5 November 2008. It was during this visit that she asked: if these things were so large, how come everyone missed them?

On 17 June, the British Academy convened a group of leading academics, economics journalists, politicians, past and present civil servants, and other practitioners for a roundtable discussion to address this question. Professor Charles Goodhart| CBE FBA opened the discussion. The chairman, Professor Peter Hennessy FBA, explained that a purpose of the Forum was to provide the basis of an 'unofficial command paper' that attempted to answer The Queen's question. Tim Besley and Peter Hennessy's letter summarises the views raised through this discussion.

Photograph of Tim Besley'There were many warnings about imbalances in financial markets and in the global economy... 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... But the difficulty was seeing the risk to the system as a whole rather than to any specific financial instrument or loan.' write Professors Besley and Hennessy. '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.'

Visit the British Academy| website to read more and download a PDF of the letter.

27 July 2009

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