The critics wade in: The Bank of England has admitted it will not be able to predict the next financial crisis. But drill down, and what the Bank actually said, was entirely reasonable.
It happened in front of the Treasury select committee. Gertjan Vlieghe, a member of the Bank of England’s Monetary Policy Committee, which is responsible for setting interest rates, said: “We are probably not going to forecast the next financial crisis, nor are we going to forecast the next recession. Models are just not that good.”
He was being over critical of his own work. If you could predict the next crisis, you could put in place procedures to make sure it does not happen. If you could predict the next recession, you could make sure it never makes it into the history books. How can you predict something, if your predictive powers mean it won’t happen?
You can of course predict a general pattern. You can say that protectionism will have a detrimental effect on the global economy, but saying when and precisely how is not possible.
You can say that if global debt levels are at an historically high level, and that if interest rates return to normal levels, there will be major problems ahead. But saying precisely what these problems are, or when they will manifest themselves is not so easy.
It is a bit like the difference between climate science and the weather forecast. You can say that if the ratio of carbon dioxide in the atmosphere rises then over time average temperatures will rise. But this does not mean you can forecast what the weather will be like next month.
Or, you can say that if we all eat a more-healthy diet, we will on average live longer. But that does not make you an expert on how old Fred, who lives next door, will be when he finally goes to meet his maker.
In fact, it is a myth that many economists did not believe that the conditions which prevailed in the run up to 2008 would not cause a major problem. It is just that very few, Nouriel Roubini being the obvious exception, got it right to any degree of accuracy.
Unfortunately, the failure to be able to predict timing, or with accuracy, leads to cynicism. So, one cold winter, and people say this disproves climate change. One man who smokes all his life lives to 90, leads people to question whether smoking is bad for you. Despite warnings of doom, the economy does not crash, and so the debt bubble gets bigger.
Nassim Taleb was big on this idea in his books Fooled by Randomness and the Black Swan. The future is unpredictable, but we underestimate the odds of some kind of crisis, so bet on a crisis, and eventually we will be right, and make a handsome profit.
Returning to Gertjan Vlieghe, he also said “I am never confident of any forecast.”
That may seem like quite an admission, but we live in a world in which people try to create the veneer of certainty when in fact we are surrounded by uncertainty.
No doubt, Mr Vlieghe’s forecast are better than most, no doubt he has a pretty good handle on the direction things are moving in, but he has admitted he doesn’t know what will happen tomorrow, next week or next year.
Maybe the real problem is not that the Bank of England’s forecasts are not always right, it is that we expect them to be, and it makes headlines when it says something that we should all intuitively know.
We live in an age of echo chambers and internet facilitated bias bubbles, the truly unbiased individual is one who starts with the premise: “I am probably wrong.”