This week we were asked by the Guardian to address the Queen’s question: “Why did no one see it coming?”
I tried to answer the question by sharing some of the seriously flawed analysis and advice provided by orthodox economists – those that dominate both the economics profession, but also the economics commentariat.
I found these economists guilty of providing the Queen, prime ministers and chancellors, but also the citizenry – including millions of investors – with dangerously misleading guidance.
The accused include advisers to the Club of Rich Countries – the OECD – Professors at prestigious business schools, and writers for the Economist. The ones I cited offered very little forewarning of the catastrophe that has befallen the highly synchronised global economy – and millions of ordinary people.
A key exhibit in my case against the economics profession is a letter written by Prof. Richard Portes and Prof. Fridrik Már Baldursson to the Financial Times, as recently as July 4 2008. They were responding to an earlier article by Prof. Robert Wade, headed “Iceland pays the price for financial excess” (2 July 2008 ).
This letter is of some significance, because as Guardian readers will know Iceland experienced the deepest and most rapid financial crisis recorded in peacetime when its three major banks all collapsed in the same week in October, 2008.
Since then the Queen’s ministers have combined with ministers of the Dutch government to demand massive compensation – equalling 100% of Iceland’s GDP – from the largely innocent taxpayers of Iceland.
The victims of Iceland’s catastrophic economic failure include thousands of the Queen’s citizen investors and many of her own civil servants – including the Audit Commission, 100 local governments, police forces, charities and the universities of Oxford, Cambridge, and Manchester.
In their letter of 4 July 2008, (“Criticism of Iceland does not square with the facts”) the above-named professors cite a great deal of evidence to contradict Prof. Wade’s claim that Icelanders had borrowed as if there were no tomorrow, and that “Iceland’s external liabilities swamp the central bank’s ability to act as lender of last resort.”
The letter from Professors Baldurrson and Portes claims that while ‘gross debt of Icelandic households..was high…their assets….were over 750 per cent of disposable income.” These assets were, as we have since discovered, as solid as bubbles and burst dramatically in the week of 7th October, 2008.
The letter asserts that the Icelandic “Financial Services Authority is highly professional….with higher capital ratios than their Nordic peers.” Furthermore, they had “virtually no exposure to the toxic securities that almost all other banks did buy.”
Because the Financial Times is trusted by thousands of investors, I have no doubt that this letter comforted and reassured civil servants in the various organisations that had invested in Iceland’s banks, as well as thousands of the FT’s readers.
Today these investors are obliged to rely on the British government’s use of Part 2 Article 4 of the Anti-Terrorism, Crime and Security Act to obtain redress from Iceland’s government – if not from the FT and Professors Baldurrson and Portes.
Now, any reasonable person might argue, these professors were just two of many that shared a blind commitment to economic and financial orthodoxy. It is unfair, some might say malicious of me to single them out.
But my point is this: Professor Portes was until recently, the Queen’s economist.
As well as being a professor of economics at the London Business School, and holding many other important governmental advisory positions, he has for sixteen years acted as Secretary General of the Royal Economic Society.
The Royal Economic Society grants its imprimatur to economists, and is therefore a powerful driving force in the field of academic economics.
Under the leadership of Professor Portes, the Royal Economic Society was disdainful, even contemptuous of economists that challenged the orthodoxy he championed. This was most clearly expressed in his Valedictory Report to the Society in April, 2008 where he dismissed heterodox economists for their ‘mediocrity’. http://www.res.org.uk/society/pdfs/newsletter/apr08.pdf
I have no doubt that the Queen is consulted about the appointment of the Secretary General of the Royal Economic Society.
Which is why I blame the Queen for the catastrophe that orthodox economists have helped inflict on her citizens.