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.
Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. The paperback version of his latest book, Freefall: Free Markets and the Sinking of the Global Economy,with a new afterword, was published in October.