As mystery continues to surround the identity of the person in the charge of the UK economy since 1997, the IMF has come up with a carefully phrased admission that it got the UK and US economies wrong in its assessments over the last few years.Â What they politely don’t say is that, had they come up with any assessments less positive than they did, the respective Treasuries would have talked them out of it.Â
But anyway.Â It comes in one of a batch of papers issued by the Fund today which focus on various aspects of crisis prevention but inevitably get a little into diagnosis.Â Â The paper looks at why the IMF surveillance (and indeed that of other international organizations) missed the financial crisis in its build up phase.Â Â Among the key points is that surveillance failed to see the extent to which housing sector risk had returned to commercial banks despite its apparent securitization via the special purpose vehicles sponsored by the banks which were holding these securities.Â More broadly, the Fund says, surveillance suffered from —
Rosy bottom line. The result was a generally optimistic view on advanced countries and financial innovation. This was especially noticeable at their intersection, the seemingly successful US and UK economies at the center of the global financial system. Fund surveillance echoed the conventional view that advanced countries with relatively low and stable inflation together with highly profitable and well capitalized banking sectors could withstand the unwinding of any froth in housing and capital markets. While this is understandable, more time should have been spent on â€œtail risksâ€ from these domestic vulnerabilities.
Indeed, Gordon Brown boasted in 2005 that house prices are adjusting free of recession but it would be tad awkward to cite that.Â Â This provides another perspective on an interesting New York Times article about the seeming lack of response of macroeconomics as taught in colleges to the crisis.Â Â Arguably, the issue is not so much what people were learning about economics in college, but the extent to which a London-New York conventional wisdom had co-opted key institutions.Â Maybe that’s related to the teaching of economics, since some of those students go on to work on these institutions.Â Â But perhaps also one can see a complacency coming from a political instinct to take credit when things seem to be going well and therefore be resistant to criticism.Â If even now, Gordon can’t acknowledge what might have gone wrong, imagine what it would have been like to try to argue the case with him 4 years ago?