STAFF NEWS & ANALYSIS
Queen Elizabeth Told How Economists Missed Financial Crisis
By Staff News & Analysis - July 28, 2009

The Queen has been sent a letter by a group of eminent economists explaining how "financial wizards" failed to "foresee the timing, extent and severity" of the economic crisis, it was reported. The three-page letter, signed by London School of Economics professor Tim Besley, an external member of the Bank of England's monetary policy committee, and political historian Peter Hennessy, was sent after the Queen asked on a visit to the LSE why nobody had predicted the credit crunch, according to the Observer newspaper. The letter ends: "In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole." – Telegraph

Dominant Social Theme: It's regrettable but understandable.

Free-Market Analysis: So one of the most prestigious economic schools in the world, the London School of Economics, has provided a letter to Queen Elizabeth II explaining why none of the eminent economists at the school remotely anticipated the terrible financial crisis of the later 2000s. The letter, as can be seen from the above excerpt, blames a failure of the "collective imagination." Wow. Try that with an officer of the law next time you are speeding down the street. "Officer, I was breaking the speed limit due to a failure of my imagination." But there is more to the explanation than this according to the article.

The letter talks of the "psychology of denial" that gripped the financial and political world and says "financial wizards" convinced themselves they had found ways to spread risk throughout the financial markets – a great example of "wishful thinking combined with hubris". The content was discussed during a seminar at the British Academy in June, attended by Treasury permanent secretary Nick MacPherson, Goldman Sachs chief economist Jim O'Neill and Observer economics columnist William Keegan, the newspaper said. … In March, Mervyn King became the first Bank of England governor to be invited for private talks with the Queen. When she visited the LSE in November last year she asked Professor Luis Garicano, of the economics' management department, about the origins of the credit crisis, saying: "Why did nobody notice it?

So we have two factors that have been pointed out. The first is a failure of imagination and the second is an overabundance of wishful thinking and hubris. This is an interesting explanation in so many ways, but just on the surface it is a bit confusing. Here is the short missive we would write to the Queen:

Dear Queen,

We received a copy of your correspondence and because we think the LSE has confused the issue, we wish to try to sort it out for you. First of all, you must realize that the LSE has a socialist and collectivist bent and is well known for its specialization in a form of economics called econometrics. Econometrics and socialism go hand-in-hand. Collectivism mandates government control. And if government is going to control something, it will need forecasts and modeling on which to base budgets. Econometrics provides what is necessary. The math is impressive and the individuals involved have a good deal of skill when it comes to numbers.

But a facility with mathematics does not necessarily create a logical or realistic model. In fact, modeling does not work. Free-market economists have pointed out that through human action individuals change their behavior based on their conditions. A model may show a lack of food and upcoming mass starvation, but people faced with starvation will try to plant gardens and raise animals to ward off hunger. Thus, no matter how good the models are, they will never correspond to reality as they are based on trends that will always readjust, throwing the model out of whack.

So, what really did happen? It is the same thing that happens every time. Western central banks inflated, causing a build up of mal-investments that eventually caused a very bad bust. There is not much to do about it at this point except let the ruin run its course. But instead governments in the West are propping up the financial industry and refusing to let large companies fail.

Why didn't the LSE warn you and your citizens? Because those involved would have had to use a free-market business model to do so. And that puts most of the blame on central banks, which are central to the control that Western governments wish to exercise over their economies. Governments, including yours, wish to continue to print as much paper money as they please. If you blame central banks for the crisis then you will not have them for long. For this reason, the LSE has substituted rhetoric for facts and speaks of "imagination" and "hubris" when it should be speaking of business cycles and the destructive effects of monetary and price inflation.

After Thoughts

We wonder if the Queen really does not understand money or was merely trying to make a point by asking the LSE for an explanation. We tend to think the latter. We believe the Queen to be a fairly savvy person and even though she may not understand everything about money she surely understands a lot about power. Ideally, from her perspective, the current monetary system is likely fine as it is, but should probably have been a bit more predicative. We think larger changes are in order. Perhaps Britain should try a gold standard once more. The Queen should ask the LSE about it.

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