Mindworks’ Weblog

Thinking Matters

Daily Mash explains why Bank of England didn’t spot looming meltdown

Posted by Andrew Cooper on December 22, 2008

This seems entirely plausible to me.    Not so sure about the BBC’s version of the story, though.  The deputy governor of the bank says that they knew that borrowing was ‘crazy’ but they didn’t think it was ‘serious’.  

In what sense was he using the words ‘crazy’ and ‘serious’, do you think?  As I understand the situation (i.e. not very well, which means that I’m well qualified to run the BoE) a large part of the problem was that the accumlated debt was being converted into derivatives that no one really understood and which were being traded on the markets.  

This led to a vicious cycle: the investment bankers wanted more and debt to trade.  In the face of this insatiable demand,  the lenders handed out more and more money to people who would never be able to afford to repay it. Once the value of the underlying assets started to fall, the whole house of cards collapsed.   ‘Crazy’ certainly seems to be an appropriate adjective.  

As I pointed out in a previous post, psychologists have confirmed that everything – even things that didn’t actually happen – seem perfectly obvious given the benefit of hindsight.  Perhaps we should insist that the Bank of England’s board – and probably all other corporate boards – must include a fully qualified psychologist.

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