Monday, October 13, 2008


October 13, 2008
Op-Ed Columnist,
Gordon Does Good

Has Gordon Brown, the British prime minister, saved the world financial system?

O.K., the question is premature — we still don’t know the exact shape of the planned financial rescues in Europe or for that matter the United States, let alone whether they’ll really work. What we do know, however, is that Mr. Brown and Alistair Darling, the chancellor of the Exchequer (equivalent to our Treasury secretary), have defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up.

This is an unexpected turn of events. The British government is, after all, very much a junior partner when it comes to world economic affairs. It’s true that London is one of the world’s great financial centers, but the British economy is far smaller than the U.S. economy, and the Bank of England doesn’t have anything like the influence either of the Federal Reserve or of the European Central Bank. So you don’t expect to see Britain playing a leadership role.

But the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own.

What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.

What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was.

Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As I said, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as “private good, public bad,” which must have made it hard to face up to the need for partial government ownership of the financial sector.

I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson’s fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense.

Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.


sydbristow said...

October 15, 2008
British Prime Minister’s Stock Rises as His Bank Plan Lifts Stocks Worldwide

LONDON — With his brooding aspect and sagging poll numbers, Prime Minister Gordon Brown had seemed to personify the bleak mood of a world traumatized by collapsing house prices, lost jobs and banks that would not lend.

But that was last week.

After devising a bank rescue plan that has now been endorsed by European and American officials — and has sent global stocks soaring — he is being celebrated worldwide and has revived a political career that the “commentariat,” as Mr. Brown disdainfully refers to the chattering classes, had predicted would soon be at an end.

While Mr. Brown, 57, has moved up in the polls, he still trails his younger conservative rival, the fresh-faced David Cameron, 42, whose months of deft parliamentary jabs helped define Mr. Brown as a leaden, out of touch leader.

But for all the troubles of the British economy, and after a 10-year apprenticeship as chancellor of the Exchequer under Prime Minister Tony Blair, Mr. Brown is suddenly in his element, proudly pointing to his long experience.

“Now is not the time,” he said in a pointed jab at Mr. Cameron, “for a novice.”

Before a packed room of foreign journalists on Tuesday, the many aspects of Gordon Brown were on full display.

The son of a severe Presbyterian minister, he decried the culture of bonuses in finance and promised that high pay would be reined in at government-owned banks. As a student of international finance, he argued for the formation of a global body to oversee today’s complex capital flows.

And, forgetting for the moment his past enthusiasm for the free-wheeling global capitalism championed by Alan Greenspan, the former Federal Reserve chairman, whom Mr. Brown has called a mentor, he took full credit where he seemed to feel credit was due.

“We defined the problem as strengthening the banks so that they could deal with their bad assets,” he said of his plan of injecting money directly into banks in return for the government’s taking ownership shares. He argued that the issue was not only providing additional funds for the banking system but also getting banks themselves to lend again to their business customers and consumers alike.

Then he dropped the names of those that had fallen in line with the Brown approach: much of Europe, Australia, New Zealand and, on Tuesday, too late for him to name it, Hong Kong.

Not to mention the United States, he added, saying that he would soon speak to President Bush, who went on television Tuesday morning to endorse a remarkably similar plan from his Treasury secretary, Henry M. Paulson Jr.

“I am pleased that countries around the world have moved to these proposals,” Mr. Brown concluded.

A British head of government does not typically attract the notice of his European and American counterparts. And that is particularly true of Mr. Brown, who takes pride in his flintiness and his sharp contrast to Mr. Blair.

He sat alone at a table, dressed in a loose-fitting suit and a featureless tie, more technocrat than politician as he gave a short lesson on the roots of the mortgage crisis, touching on topics including triple-A rated mortgage securities, the Bretton Woods agreement that established the post-World War II global economic framework, and the demand for oil in China and India.

But the more than 100 journalists in his audience were in no mood for lectures.

Would you call yourself a superhero? a reporter asked. What do you think of Paul Krugman, the Princeton professor and Op-Ed page columnist for The New York Times, who was just awarded the Nobel Prize in Economics referring to you as the savior of the world? Are you planning to call a snap election?

He could not help but wallow a bit. The FTSE 100 stock index was up strongly from its recent lows, and even the British pound had reversed its downward trend.

In response to one awestruck question on Tuesday, Mr. Brown was characteristically cautious. “I’m grateful for your deep interest in my personal fate,” he said. “But politics is about ups and downs, and you need to treat them both with equanimity.”

Until the last few days, it was mostly down. Less than a year ago, during one particularly vicious round of parliamentary debate, an opposition party member said that Mr. Brown had gone from Stalin to Mr. Bean, the bumbling British comedian, creating chaos out of order instead of the reverse.

In interviews, Mr. Brown has compared his crisis management to that of Captain MacWhirr in Joseph Conrad’s “Typhoon,” who knowingly sailed his ship into the great storm before him. He was a man of “literal mind” and “dauntless temperament,” wrote Conrad, but who also had “just enough imagination to carry him through each successive day, and no more.”

Despite his powerful intellect — he entered college at 16 and has a Ph.D. in history — and his 10 years overseeing a once ascendant British economy, Mr. Brown has repeatedly suffered by comparison with Mr. Blair.

But now, in contrast to Mr. Blair’s decision to follow President Bush in the invasion of Iraq, Mr. Brown is hoping to achieve a greater stature for Britain by asserting his independence, coming up with a plan that veered from Washington’s approach but then was followed by the Bush administration almost to the letter.

Not content to stop there, however, Mr. Brown is calling for a supranational body to address the “lack of transparency, accountability and responsibility” that led to the crisis.

That may be fine talk, but regulatory specialists are not clear how it will actually happen.

“Mr. Brown has a good record on this topic,” said Sir Howard Davies, director of the London School of Economics and former chairman of Britain’s top regulator, the Financial Services Authority. “But I am not sure that you can turn the International Monetary Fund into a super regulator.”

At the moment, the combined efforts of Mr. Brown and Alistair Darling — his equally dyspeptic chancellor, who just two months ago was ridiculed for saying that Britain’s economic downturn could be the worst in 60 years — seem to be in tune with a revulsion that Britons express about their high-flying bankers.

Still, there is no doubt that Mr. Brown is more comfortable discussing reform of the International Monetary Fund than sipping tea with a middle-class couple in Birmingham who are overwhelmed by soaring electricity bills and mortgage payments.

Unlike Mr. Blair and Bill Clinton, he is not good at feeling other people’s pain, although he has had his share of suffering. A kick in the head during a rugby game when he was 16 caused him to lose sight in his left eye; he was forced to wait all those years before becoming prime minister; and most recently he lost his first child.

And no matter how much the international community may cheer him, Mr. Brown must ultimately face a deeply discontented British electorate before June 2010. But finally, things are looking up.

As the press conference came to an end, a Swedish journalist asked Mr. Brown if he was Flash Gordon. He made the quickest of smiles and his faced flushed an immediate red.

“No, just Gordon,” he said. “Just Gordon.”

hipparchia said...

fan club

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