It is worth asking why central bankers so misread the credit boom. Unlike the bankers and the rating agencies, which stood to make millions from their error, the guardians of the credit system had no evident conflict of interest. And it simply isn’t good enough to suggest the bubble was hard to spot. Many more humble analysts and economists managed it.
No, argues Edward Chancellor in his essay for the latest issue of Prospect, the reason the central bankers failed was not that they were blind, conflicted or stupid. It was because they were, to quote John Maynard Keynes, the “slaves of some defunct economist”—in this case Milton Friedman. Our central bankers were drawn from a generation of economists who have been taught that financial markets tend towards equilibrium, that credit and asset price bubbles can be safely ignored, that international capital flows produce an optimal distribution of capital and that financial innovations are always to be welcomed. It is this intellectual enslavement that has taken us to the brink of the severest debt deflation since the 1930s.