Willem Buiter, former member of the Bank of England monetary policy committee, economist and FT ‘Maverecon’ blogger on Wednesday looked back through his voluminous works and commented thus (our emphasis):
Like most authors, I tend to cringe when I read something I wrote more than a few years ago. But when engaging in some authorial auto-archeology recently when preparing the index for a new paper (after all, if I don’t cite myself, who will?), I was pleasantly surprised with a few bits from a paper I wrote in 1999 and published in 2000 in the Bank of England’s Quarterly Bulletin, titled “The new economy and the old monetary economics”.
We love a little bit of self citation here on FT Alphaville, especially when it’s done like this (emphasis ours):
I argue, first, that the New Paradigm has been over-hyped. “…Unfortunately, the ‘New Paradigm’ label has been much abused by professional hype merchants and peddlers of economic snake oil.”
Second, I argue that, to the extent that we can see a New Paradigm in action, its implications for monetary policy have often been misunderstood.
I was particularly pleased that I had written following about financial innovation: “Financial globalisation and innovation are a mixed blessing
But it seems the purpose of the article is not just to blow his own trumpet, for as Buiter admits, despite having been largely brilliant in his forecasts, he did let himself down in one crucial arena: scale.
As he explained:
The purpose of this quote is not just to blow my own trumpet - although, as my father puts it, it’s OK to do so, because if you don’t who will - but also to send out a reminder as to how difficult it is to discern the scope and magnitude of a looming financial disaster, even when you pay serious attention and are naturally inclined not to believe what you are told.
By early 2006 I knew that the global financial system was on an unsustainable trajectory that would end in tears. The ludicrously low spreads on anything risky and the shockingly low long-term real interest rates convinced me we were living in financial Lalaland.
But I had no idea about the scale of the excesses, the scope of the mispricing of risk and the crazy ultimate distribution of the risks - often right at the backdoor of those who thought they had sold it.
I never anticipated, even when the crisis started in August 2007, that by late 2008, most of the crossborder banking system in the north Atlantic area would be insolvent, but for past, ongoing and anticipated future financial support of the tax payers.
And why could he not see through the mispricing of risk? Well, he appears to have been fooled by the pace of financial innovation and CDS most of all.
Related links:
Collateral damage at the ECB - FT Alphaville
Harmful financial innovation - Maverecon
