Chief Economist of the Bank of England Andy Haldane is worried that central banks have lost their influence as the common folk no longer understand or trust them. He is convinced turning to folk wisdom would help.
Haldane, TIME magazine counts as being among the 100 most influential people in the world today, is likely one of only few central bankers whose speeches do not make people doze off. He speaks simply and keenly, giving real-life examples. At the same time, Haldane seems uncommonly idealistic. He believes that bankers can pursue better monetary policy if they tour the UK and listen to the problems of simple working people.
Haldane talked about folk wisdom at a Bank of Estonia centenary event before giving an interview to Postimees in mid-September.
You’ve said that one problem banks have is uniformity: executive positions are held by similar middle-aged men talking about similar boring things. Why do you wear a suit and tie in that case?
(Laughs.) Yes, that seems to be the central banker’s uniform indeed. In truth, every public institution should work on versatility. Clothes are not the most important thing, neither is gender, nationality or race. The important thing is to have people with different economic backgrounds, experiences and points of view. That also concerns central banks. We will simply become encapsulated otherwise.
You often criticize economists and bankers in your public speeches. You exercise irony, including self-irony. What is bothering you?
The main problem is that central banks are dealing with things ordinary people cannot understand. And they do not trust what we do. It makes perfect sense as how could you trust something you do not understand. At the same time, public institutions – central banks for example – exist to serve the people. It is the sole reason for our existence.
The point of central banks is for people to have jobs, for their salaries to grow along with prosperity. Therefore, it is important people understand and trust us. Even though we talk and write more than ever, 95 percent of central bank communication remains illegible for at least 95 percent of the population.
One problem is the language we use. It is too complicated. We need to talk in a way ordinary people can understand. They are the ones our actions affect the most.
Perhaps the roots of this shortage of trust go beyond poor communication, to your poor decisions that have led us into crises? Everyone felt the previous economic crisis.
Indeed, the previous decade’s economic crisis was one of the reasons for dwindling trust. Criticism of central banks is often justified. That said, what happened ten years ago is in the past. There is nothing we can do about it now. Today, we can explain to the public what we’ve done and are doing to avoid or at least soften the next crisis. For example, banks must comply with much stricter regulation.
Working with the public is another thing. It should not be unidirectional – we talk, they listen. We, central bankers, need to learn how to listen to the people and learn from them.
You’ve said that conversations with volunteer organizations and ordinary workers have taught you more about the economy than all the analyses, graphs and expert assessments you use at the central bank put together. How is that possible?
The bigger part of a country’s economy is made up of how ordinary people spend their money, what motivates them and what holds them back. Central banks do not have a clear picture of that.
Allow me to give an example: new jobs were created, interest rates were low and loans cheap in the UK after the previous economic crisis. And yet, people were not consuming. It was a mystery for central bankers. It made perfect sense to ordinary people though. They said they were held back by uncertainty. They did not know whether their job would be there tomorrow. You do not buy a new car or house, invest if you’re worried about your job. That is how talking to ordinary people can teach you a lot more.
These are obvious and logical fears. How can they come as a surprise to you?
Yes, it is not new information per se. It’s just that ordinary people often prioritize things that are not as important for economists.
People make decisions based on what they tell each other: whether times are good or bad, whether life is going up or down. They often base these decisions on a single emotional argument, like uncertainty in terms of the future for example. There are no complex equations or models of economists involved.
We put together study groups and organize polls but the only thing we learn is what the people in those groups think. It is even worse when people like me, experts, come up with the questions.
We might not even know the right questions to ask. We often put people in a box with our questions – instead of listening to what they really have to tell us.
I’ve been practicing this approach for two-three years now and found myself in different parts of Britain.
What is the most surprising or shocking thing you’ve heard?
For example, I visited a small town in Wales. It was right after Brexit and the pound was in freefall. This meant that exported goods were more expensive for the locals. I thought I knew a lot about inflation as I had spent 30 years studying it, but I did not believe its price could be that high: locals’ purchasing power had fallen so drastically they had to choose between paying for food or utilities. They could not afford both.
No central bank graph or analysis shows you that people are forced to choose between food and heating.
How did you change things when you took that experience back to your offices in London?
That is a very good question. It is often difficult to say which piece of information made us do certain things. Still. While it might be a coincidence, until that point, I was largely seen as a central banker who supports prolonged low interest rates, laxer monetary policy so to speak (known as a dove in central banking – ed.).
Low interest rates lead to price advance that has dire consequences for those same people in Wales for example. I realized that inflation is not some abstract indicator but has a very real effect on people’s lives. After that, I tend to support tighter monetary policy, higher interest rates and lower inflation (known as a hawk in central banking – ed.).
Seeing the consequences of your actions makes you think twice; you no longer make decisions lightly. It is important not to look at people’s problems from the height of ten kilometers but to see them in the real world. We need to understand the effects of what we do. And then we need to explain ourselves better.
Are your colleagues, fellow central bankers interested in listening to and involving people?
As far as I’ve traveled and visited central banks, everyone admits communication is a problem and reaching ordinary people is difficult. They want to be better.
People were happy to believe and trust institutions that were centralized, closed and anonymous in the past. No longer. Trust is no longer spontaneous for the modern person. It needs to be earned. And it can be achieved by talking to people directly. Additionally, it is necessary to make use of new tools, especially digital mediums.
Let us try our hands at fortune telling before we wrap up. The good times have been rolling for a few years now which is why it is only fitting to ask about the next crisis. Do you fear it? Where might it come from?
Worrying about the next crisis is what central bankers do. The crisis of the previous decade was a wake-up call that showed that the bottlenecks of banking cannot be overlooked.
We have learned a lot. We know very little about the next crisis. The only thing we know for sure is that it will come. It is also certain it will come from somewhere else and in a different way from the previous one. If major and unexpected events are referred to as the black swan, I’m not sure the next crisis will even be a swan.
More specifically, I would not be surprised if the next crisis came from the world of information technology, following a cyberattack for example. Our banks are gigantic interconnected IT-machines that have masses of data on people. That chain is only as strong as its weakest link.
Banks are increasingly targets of cybercrime. Those risks are far greater today than they were five or ten years ago. That is why financial institutions must make persistent efforts to be better able to defend themselves. We need to be one step ahead. It is very difficult and expensive, but it is possible.