Crash Course

Joseph Stiglitz on Gordon Brown

It’s hard to believe now, but when the global financial crisis started in spring 2007 there were many people who did not see the severity of what was to come. Even in late 2008, after the troubles at Merrill Lynch and Lehman Bros., many were still in denial (especially those who were responsible for the creation of the crisis).

Gordon Brown is not in this category. As soon as Northern Rock began to teeter, he realized there were deep structural problems with the financial sector and he tried to act on what he saw. He grasped immediately that the problem was not just one of liquidity but of a weakness in the financial sector built on years of mismanagement, lax regulation and reckless speculation. He also saw early on that unless a government recapitalisation was accompanied by requirements that banks continue lending to businesses, the crisis in the financial sector would spread to the broader economy.

“We needed to overturn 30 years of policymaking,” Brown writes. No cash without government involvement became his mantra and he tried to persuade the Americans and the Europeans to his way of thinking. In the end, the U.S. gave up on its ill-fated strategy of having the government enter the garbage-disposal business by taking all the banks’ toxic assets on to its books, and followed Brown’s strategy of equity injections. But without the constraints that Brown insisted upon, money that poured into the banks poured out in bonuses and dividends. Brown recognized that getting credit flowing would be difficult at best; but at least he gave it a try. The U.S. strategy of letting the banks continue with the same practices, including credit card abuses, was doomed economically and politically.

Typically, what makes political memoirs of interest are the tidbits of secrets that are revealed. This book is different. Brown is a politician and a thinker; his book is gripping because his matter-of-fact recounting of the early months of the crisis conveys the dilemmas and angst of policymakers as they tried to handle the biggest economic drama in decades. Readers hoping for a tell-all book filled with personality clashes or revealing Brown’s side of the story of his relationship with Tony Blair and other members of New Labour will be disappointed. This is a book about ideas and policies and Brown steers clear of the lively gossip and score-settling that makes politicians’ memoirs so entertaining.

At times, I longed for more detail. Brown describes visiting George W. Bush in the White House and telling him that recapitalizing the banks was critical. Brown also tried to persuade Bush that a meeting of G20 leaders was needed. He elides Bush’s response. We can only guess at what it was. (The White House, perhaps worried that European leaders were taking hold of the global agenda, eventually convened a meeting in Washington in November 2008 but it wasn’t until Brown’s meeting in London in 2009 that the G20 took effective action.)

Brown also shares his disappointment that more wasn’t done in the aftermath of the east Asian economic crisis in 1998. To him, that episode showed how interconnected the global economy was. He explains that he fought for a proper monitoring of risk and an early warning system. He expresses his disappointment with the Financial Stability Board. But he doesn’t reveal who was on the other side of the battles—one can only guess that it might have been some of the same people who had fought in the U.S. against derivatives regulation.

But even his recounting of the events helps place what happened, and is still happening, in context. The book makes clear the magnitude of the tremors that were facing global financial markets more than a year before Lehman Brothers’ collapse—reinforcing the evidence provided by the treasure trove of data on how banks all over the world were turning to the Fed for liquidity even before Lehman Brothers fell. All of this makes the flailing around of those responsible for America’s financial markets all the more inexplicable.

Much of Beyond the Crash  will be familiar to readers who care about economics and globalisation, but seeing the issues through a political leader who helped shape globalisation for more than a decade provides new insights. Like many of us, Brown’s thinking was shaped by the east Asian economic crisis and the clear need for financial regulation and global co-operation demonstrated by that crisis. He doesn’t dwell, however, on the mistakes of the past, either those that led to that crisis or the more recent one. What he tries to do is to learn the lessons – as different as they may be from the conventional wisdom that prevailed before the crisis. He clearly sides with those who believe that unregulated markets may be prone to excessive volatility, with booms and busts in real estate and destabilising capital flows. While many of the advocates of liberalisation found it difficult to recognise that, for instance, there may be a need for capital controls at certain times, he unabashedly expresses his support. In praise of Malaysia’s capital controls, he writes: “For a short time at least controls on capital can prevent, or at least reduce, the uncontrolled flow of short-term funds across borders.” While he supports Hong Kong’s response to the “double play” that attempted to bring down their currency, American officials who pushed unbridled globalisation have yet to recant on their criticisms.

The book conveys well Brown’s sense of history, the rapid pace of change in the global economy and the failures of unfettered markets to manage things on their own. But it also conveys his moral sensibilities. He was a finance minister who realised that finance was not an end in itself; that the true gauge of an economy was how it affected the well-being of its citizens. He was concerned about unemployment, not just inflation. He recalls his commitment to eradicating poverty and helping Africa, with the 2005 Gleneagles summit and the cancellation of debt of the poorest countries, an achievement about which he is justly proud.

Brown is outraged by the bankers’ excessive risk-taking, their pursuit of greed. I can only surmise that had he looked more carefully at America’s banks’ predatory lending practices and the abuses in the credit card systems, how the financial system preyed on the least educated and financially unsophisticated, he would be even more outraged. But he does not dwell on these issues, though he devotes his last chapter, “Markets Need Morals”, to the subject. And while his claim that markets need morals is right, I am not sanguine about their getting these morals. In their absence, government regulation will have to do.

The book’s title conveys the focus of the book. He does not reflect on the earlier parts of his career and his policies or those of New Labour, nor does he discuss light regulation, which didn’t work well for Britain any more than it did anywhere else in the world. The economic crisis was his finest hour and that is what Brown seems most comfortable discussing. Out of office, he cannot stop himself from thinking about where the world should be going. The subtitle of the book describes well the second major theme of the book. Brown would like the world to come together, as it did in those moments after the onset of the crisis, with a global growth compact. He sees (I think rightly) Europe and America mired in high unemployment for years to come, with an insufficiency of aggregate demand. Not surprisingly, he sees calls for fiscal consolidation prior to the recovery of growth a recipe for a stalled recovery.

There is still a debate about whether Brown’s policies were effective. I believe that were it not for the strong Keynesian policies that he pushed around the world, the global downturn would have been much worse. We were at risk of moving into a global depression. I believe, too, that if he had not pushed his alternative approach of equity injections rather than merely buying bad assets from the banks, our financial system would be in much worse shape. (The Irish Republic is the one European country that has tried the alternative approach—not exactly an example for others to emulate.)

Given the size of the U.K. financial sector and the extent to which it was overleveraged, the U.K.’s problems were enormous, and, in my judgment, the success of Brown’s response should have been widely acknowledged. As America’s downturn stretches into its fourth year, one can only wonder what might have happened there if policies had been decided by someone like Brown, less beholden to the banks and less influenced by them.

What is clear from this book is that Brown knew what needed to be done and tried to do it at a time when others were paralysed, captured by the financial community, or deluded by their past mistakes into trying to underestimate the severity of the crisis that their policies had helped create.

This article originally appeared in Financial Times. Click here to read more coverage from the Weekend FT.