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Gordon Brown's About-Face

There is a supreme sense of irony in Gordon Brown turning up to the meeting of Eurozone leaders on Sunday to convince them to intervene in their banking systems and save the world from financial collapse. Britain's prime minister has spent almost 10 years lecturing the Europeans on the benefits of markets and the need to de-regulate their economies. He has constantly harangued skeptical politicians from continental Europe that the U.S. Anglo-Saxon model of liberalized markets was the right one to follow.

But no more. The U.S. sub-prime crisis has discredited those arguments. There is a certain feeling of "I-told-you so" among many Europeans, and even Brown has come around to the view that only the state can avert financial catastrophe. John Maynard Keynes, the 20th-century British economist, is back in fashion. He believed that the government should intervene to mitigate the effects of economic recession.

Brown has emerged triumphant from the current crisis. His three-pronged plan for a big state recapitalization of leading banks, an injection of funds into the money markets and a guarantee of banks' debts, is being used as a blueprint across Europe and even in the U.S. He has won plaudits from policymakers and economists for swift action to prop up the British system.

But the British government was forced to act speedily to prevent a catastrophic collapse in bank shares after markets crashed last week. Ministers had tried to stave off financial disaster by flooding the money markets with funds and brokering a deal to merge two banks. But that was not enough. When it became clear that banks seriously ran the risk of going bust, Brown and his ministers were forced to come up with a bold and dramatic plan.

Europe is now following in Brown's footsteps, albeit with some Schadenfreude. Peer Steinbruck, Germany's finance minister, declared somewhat prematurely a month ago that the crisis was made in America and would not spread to Europe. However, the meltdown has shown just how interconnected the international financial services industry has become. Governance has not kept up with the globalization of financial firms, leaving regulators and governments struggling to react quickly enough to the credit crisis.

I think a lasting result of the current crisis will be increasing government intervention in companies and markets along with tougher regulation. The public is calling for the government to rein in risk-taking bankers, shrink their pay packets, and curb banks'
expansion into exotic areas. Financial innovation that we were told had made the system safer has been discredited. Banks in which the government owns stakes will be forced to behave more like steady utilities and less like masters of the universe. This means profits will be subdued for some time to come.

Another side effect, in my view, is a shift away from the Anglo-Saxon model. The U.S. free market orthodoxy has taken a severe blow. How will the U.S. be able to lecture developing countries on the need to free up markets when it is cracking down on its own? I wonder whether the moral authority is shifting to China and it is the end of the U.S. century.

The Chinese already own $1.9 trillion of foreign exchange reserves, including a large chunk of the U.S. national debt. China's economy is bound up with success in the U.S. where consumers buy its goods. But if the Chinese authorities wanted to, they could hold the U.S. to ransom by threatening to switch off the funding tap. The current convulsions in markets could lead to a re-drawing of the economic world order.

Deborah Hargreaves is business editor at the Guardian. Read more at The Guardian business blog.

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Comments (11)

golfer1 Author Profile Page:

Brown is very much looked down on in the UK as 'unelected' to the Premiership by the British people as he failed to hold a general election and has no mandate. It is undemocratic.

The economic crisis in the UK is to a very large degree caused by Browns own economic policies. The rescue plan put together was drawn up by Executives from Standard Chartered, Deutche & other Banks & Brown should not be given the credit.

The UK is praying for an election as soon as possible so that we can have fresh start & joined up thinking from our political leaders. This is to replace the mayhem & discontent that has transpired from the 11 years of the New Labour Party being in power.

Peter34 Author Profile Page:

E.U is working on making a new worldwide financial system.French and German are able to map a system with the help of emerging countries. China still needs more experience to grow up.Japan is a export-oriented country and will not have much influence unless U.S allow Japanese bought its assets cheaply.

anakin1992 Author Profile Page:

SIMPLESIMON33

japan is an economical giant and its wealth and its industrial experiences are much better than china. but one thing japan lacks of is the vast domestic market. 1.3 billion of people is the market regardless what is happening.

edible11 Author Profile Page:

Brown is now taking Chamberlain's place who was known for a polly anna view of Hitler, until Hitler proved him to be a misguided liberal fool.

DwightHCollins Author Profile Page:

maybe it's time to have one world currency...regardless of it's implications, a one world currency would even everything up...
think about it...it makes sense...forces everyone to pay the same for the same goods under the same rules...

simplesimon33 Author Profile Page:

Will the current convulsions in markets lead to re-drawing of the world economic order as Ms. Hargreaves surmises near the end of her article? Does China have the capability, desire and acceptance to replace US as the anchor of new economic order in the world? What will happen if China holds US to ransom by threatening to switch off the funding tap? Did Ms. Hargreaves note what happened to interest rates on treasury bill after the onslaught of market meltdown?

If China was to stop the funding tap, US will probably retaliate by shutting off China’s access to lucrative US markets with their European brothers following the US lead. Are Europeans ready to accept new world economic order with ‘China replacing US’? How about Latin America? How about Japan? China is not yet ready to to be able to replace US, economically or politically, especially with Chinese economy so dependent on exports to US and Europe.

jheubusch Author Profile Page:

Brown too is just now catching wind of the movement toward the "Europeanization of America." For more on this, see Writing Frontier's piece at

http://writingfrontier.com/2008/07/27/the-europeanization-of-america/

kengelhart Author Profile Page:

"The U.S. free market orthodoxy has taken a severe blow."

And deservedly so, since the term has been a complete lie. The "free market" has been controlled for the benefit of insiders to the extent that the failure of the few has brought down the many. How long will it take to develop the widely practiced skills it takes to operate a really free market. Not in my lifetime.

billx2001 Author Profile Page:

There are two pieces of regulation that would have prevented the current financial meltdown:
1) mandating that banks trade complex financial derivatives on an exchange (and not between themselves)
2) mandating that large organizations do not leverage at 30-1.

AdrianUK Author Profile Page:

It seems wrong to blame the crash on intervention into free markets. Do these traditional non-interventionists suggest that governments should not have intervened but allowed the crisis to follow its course?

I take Gordon Brown's volte-face as meaning that he is able to read a changed situation and to react appropriately. He can learn. This is a prerequisite for leadership.

The problem lies is assessing just how governments should intervene, just how much and which kind of control should pass to government. Even the tentative acquisition of high-return preference shares appears to have frightened off ordinary investors from the troubled banks. I recall that it took many years to privatize state-owned companies in the UK. We are now trying to nationalize them in five days!

There is a whole lot of risk for which someone has to take responsibility. Much of this risk is still unquantified, so there are no takers. If the risks are so great that they will bust individual companies, then it makes sense for governments to intervene. But at the end of this process, where the state is made the catch-all for risk, lies full nationalization by default.

sherms Author Profile Page:

I can't disagree more!

The fallacy in this argument (pointed out in the journal editorial today by Peter Wallison) is that it is not "free markets" or deregulation that failed here. Not one politician or pundit has referred to any specific deregulation that can be directly linked to this collapse. In fact, one can argue that it is to a large extent the direct result of government intervention into the markets. Fannie and Freddie were GSE's (Government Sponsored Enterprises). As such they were subject to Federal control. Unfortunately, and not surprisingly, they were not controlled. They were provided with a government subsidy (in the form of being able to borrow at lower rates) and in turn ran a highly leveraged hedge fund with the proceeds. In exchange for this preferential treatment they were encouraged (actually forced) to buy uneconomic mortgage securities from banks who would loan to unqualified borrowers; this all in the name of promoting housing for all!

While there is plenty of blame to go around, particularly on the Wall Street "geniuses" who structured these CDO's, this collapse is not an indictment of free markets.

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