BrexitDon’t believe the Brexit prophecies of economic doom
The shock and horror at the Brexit vote has been loud and vociferous. Some seem to be reveling in the uncertainty that the referendum result has provoked. But there are plenty of reasons to reject the consensus that Brexit will be costly to the U.K.’s economy. Even though markets appear stormy in the immediate aftermath of the vote, the financial market reaction to date has more characteristics of a seasonal storm than of a major catastrophe. There will undoubtedly be winners and losers from the U.K.’s decision to leave the EU. But indexes for volatility are already lower than they were in February this year, suggesting that markets are not abnormally worried about the outlook, and U.K. government borrowing costs are at an all-time low. This is further reason to reject the pre-referendum consensus that Brexit would bring economic doom.
The shock and horror at the Brexit vote has been loud and vociferous. Some seem to be reveling in the uncertainty that the referendum result has provoked. The pound falling in value, a downturn in markets – it lends credence to the establishment’s claims before the referendum that a Leave vote would lead to economic Armageddon.
But there are plenty of reasons to reject the consensus that Brexit will be costly to the U.K.’s economy. Even though markets appear stormy in the immediate aftermath of the vote, the financial market reaction to date has more characteristics of a seasonal storm than of a major catastrophe.
We were told that the consensus of economic experts were overwhelmingly opposed to a Brexit. Lauded institutions – from the IMF, OECD to the Treasury and London School of Economics – produced damning forecasts that ranged from economic hardship to total disaster if the U.K. leaves the EU. Yet 52 percent of the British electorate clearly rejected their warnings.
Something that my professional experience has taught me is that when an “accepted consensus” is presented as overwhelming, it is a good time to consider the opposite. Prime examples of this are the millennium bug, the internet stock frenzy, the housing bubble, Britain exiting the European exchange rate mechanism (ERM) and Britain not joining the euro. In each of these examples, the overwhelming establishment consensus of the time turned out to be wrong. I believe Brexit is a similar situation.
Downright dangerous
The economic models used to predict the harsh consequences of a Brexit are the tools of my profession’s trade. Used properly, they help us to better understand how systems work. In the wrong hands they are also downright dangerous. The collapse of the hedge fund Long-Term Capital Management in 1998 and the mispricing of mortgage backed securities leading up to the 2008 financial crisis are just two of many examples of harmful consequences arising from the abuse of such models.
The output of these often highly sophisticated models depends entirely upon the competence and integrity of the user. With miniscule adjustment, they can be tweaked to support or contradict more or less any argument that you want.
The barrage of dire economic forecasts that were delivered before the referendum were flawed for two main reasons. First, they failed to acknowledge the risks of remaining in the EU. And second, the independence of the forecasters is open to question.
