Friday, November 2, 2012

'group think' : filtering policies to make them palatable behind failure of economic policies prior to financial crisis

As reported in the Telegraph, Sir John Gieve sees the failure of economic policies before the crisis as the result of global regulatory group think.  Specifically, the filtering of policy analysis to make them palatable to senior members of the Bank of England and other financial regulators.

Regular readers were first presented with the idea that financial regulators are fatally flawed because they speak with one voice and suppress dissent by the Nyberg Report on the Irish Banking Crisis.

What is interesting is Sir John's solution to this fatal flaw:  transparency.

It is nice to see another distinguished individual calling for transparency.
The Bank of England needs to encourage a new culture that allows staff to “challenge” senior figures to prevent potential damaging “house views” developing, a former deputy governor has urged.
This is particularly true given the new responsibilities that the BoE is taking on including bank supervision.
Sir John Gieve said the failure of economic policy before the crisis at the Bank and other institutions across the world was largely the result of “group think” that needs to be stamped out. 
His comments at Fathom Consulting’s Monetary Policy Forum echoed those made in three reviews into the Bank’s recent performance released today. 
They found that “there appears to be some tendency for [staff] to filter recommendations in such a way as to maximise the likelihood that senior staff will find the recommendation palatable” and that the Bank needed to cultivate “a more assertive and experienced staff” who would “seriously challenge” policymakers.
These reports confirm the findings of the Nyberg Report.  Like the staff, these reports pull back on their conclusions in the hopes of maximizing the likelihood that senior staff will find the recommendations palatable.
Sir John, who was deputy governor for financial stability until 2009, said: “The biggest errors of economic policy were before the crisis in allowing the boom to develop. They were the result of a remarkable degree of group think – not just in the UK. 
“That was a problem in the Bank, as it was in the US Federal Reserve and the European Central Bank. We need to redouble efforts to challenge orthodoxy in these institutions.”...
And how do we do this?
To stamp out group think, Sir John said the Bank should adopt the reviews’ proposal that it publish more detail on its economic forecasts. 
How do you bring challenge into a hierarchical institution? One way of doing that is to publish more detail on the forecasts. Transparency on how they see the economy developing would be helpful in freeing up the discussion on what’s going right and what’s going wrong in its forecasts,” he said.
Sir John's bottom line is the way to challenge group think is through transparency.

Regular readers know that transparency is needed so that the financial system is not dependent on regulators who, because of the need to speak with one voice, are prone to group think.

With transparency, each market participant can independently assess the information and come to their own conclusion.

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