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How roots of global crisis are obscured; Opinion.

Byline: Mark Hatton

JANUARY is traditionally a time of reflection; when ruminating over past mistakes and setting the resultant resolutions is commonplace.

The publication of the latest Ernst & Young ITEM Club winter forecast gave us plenty to ponder in the month of mulling over, as have announcements regarding UK GDP and asset purchases.

Political uncertainty in the eurozone has paralysed the UK recovery, the ITEM Club report said, before going on to suggest the UK is in a technical recession and will struggle to reach positive growth until 2013.

ITEM believes business confidence will stagnate in 2012 and export prospects have slowed.

Therefore, it was no surprise when it was confirmed last Wednesday the "dire" - as ITEM referred to it - monthly output data for the early part of Q4 2011 indicated the economy had probably contracted during that time.

The tone of January's Monetary Policy Committee (MPC) minutes - which focused on the raising in size of asset purchases - highlighted the fact the UK is in urgent need of monetary policy support and are needed to ease credit conditions.

So far, so glum, although comfort is to be found in ITEM's assertion that although we are set to experience another small contraction in Q1 2012, this is likely to be a milder recession than experienced in 2008/09.

This put me in mind of two things; a report published this time last year by the Financial Crisis Inquiry Commission (FCIC) into the causes of the recession, and the Hans Christian Andersen's The Emperor's New Clothes.

The FCIC concluded the 2008 crash was avoidable and caused by unnecessary risk-taking, corporate mismanagement and inept regulation. It blamed human action and inaction and stated warnings were ignored while questions regarding evolving risks went unasked before stating: "The greatest tragedy would be to accept the refrain that no one could have seen this coming and nothing could have been done. If we accept this notion, it will happen again."

Andersen's fable is relevant as it reveals a great deal about human nature and the pressure of being seen to be clever while not standing out from the crowd.

For those not familiar with the story, it concerns a vain emperor who is sold a set of (non-existent) clothes that, according to its creators, can only be seen by clever people. Not wishing to appear stupid, everyone in his kingdom pretends to see the clothes and compliments the emperor.

Eventually, a child exclaims the emperor is naked.

The tale, like the FCIC report, demonstrates how powerful peer pressure can lead otherwise rational people to see things that are not there, or, perhaps more pertinently, ignore or deliberately obscure the obvious.

The repercussions of doing so should not be understated. In fact, as the evidence produced by ITEM shows, they are still being experienced to this day. New regulations do not cover all risk angles and they can't be relied on to prevent future upheaval. I hope when making their new year resolutions, the stewards of the UK's financial system - be that politicians or bankers, regulators or directors, actuaries or accountants - consulted the Emperor's New Clothes and reminded themselves of the dangers of collective delusion. Mark Hatton is office managing partner at Ernst & Young in Newcastle
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Title Annotation:Features
Publication:The Journal (Newcastle, England)
Date:Jan 30, 2012
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