Brown's short-term memory

So Gordon Brown is warning that the “world needs to act in concert” to avoid a re-run of the 2008 collapse of the financial system that, you may recall, happened on his watch.

The former New Labour prime minister is busily trying to reinvent himself as the man who saved globalisation from itself. He has written an apparently impenetrable book called Beyond the crash: overcoming the first crisis of globalisation.

Brown is also touted as a possible successor at the International Monetary Fund to that other alleged “socialist”, Dominique Strauss-Kahn who is currently in a maximum security prison in New York (not, unfortunately, for the crimes committed by the IMF itself).

Once Brown was a cheerleader for the global financial system that grew and grew to fund and drive forward globalisation. Who can forget his memorable speech to assembled bankers in June 2007, just before he replaced Tony Blair as prime minister.

The warning signs were already evident. Mortgage defaults were mounting in America, with home loan companies filing for bankruptcy. In Britain, personal debt had more than doubled inside six years, while people were being lent six, seven or eight times earnings by mortgage companies.

At the Treasury in Whitehall, studied ignorance was bliss. Brown’s speech praised his audience for creating an era “that history will record as the beginning of a new golden age for the City of London”. It was due in part, he said, to the City’s “deep and abiding belief in open markets” and noted how Britain was “a world leader in stability”.

No praise was too high for his audience, who heard: “The financial services sector in Britain and the City of London at the centre of it, is a great example of a highly skilled, high value added, talent driven industry that shows how we can excel in a world of global competition. Britain needs more of the vigour, ingenuity and aspiration that you already demonstrate that is the hallmark of your success.”

But a global economy driven by debt had reached and passed a tipping point. Within weeks of Brown’s speech, in August 2007, the credit crunch began as overnight inter-bank lending stopped. In September, worried savers started queuing outside Northern Rock branches to get their money out. The bank was nationalised by the end of the year.

Brown is admittedly more sanguine now. Writing for the US magazine Newsweek, he warns that “if the world continues on its current path, the historians of the future will say that the great financial collapse of three years ago was simply the trailer for a succession of avoidable crises that eroded popular consent for globalisation itself”.

Rest assured, Brown is not referring to capitalism as the problem here. He is worried that there is no system in place – despite the 2007-8 crash – to chart “volatile and unsustainable wave of speculative capital flows” and no global consensus on capital and liquidity requirements for banks.

He rues the fact that despite the euphoria of the G20 summit in London in January 2009, nothing came of its declaration. The summit, says Brown, “has given way to indecision, to vested interests, and to a retreat into national shells”.

This admission of failure says as much, if not more, about the nature of capitalism than it does about world leaders. Brown, Blair, Bush, Clinton, Reagan and Thatcher encouraged the deregulated growth of the financial sector. Only if people were provided with credit could they buy the commodities the corporations were churning out.

As finance became footloose and fancy free, transcending borders and nation states on the click of a button, and developing unfathomable “products” like collaterised debt obligations, it became impossible to re-regulate. Worse still, the indebtedness that ultimately brought down the banks is still present, an albatross that no one can get rid of. Brown’s fears of another great crash are absolutely justified.

Paul Feldman

Communications editor

IMF turmoil adds to sense of crisis

At another time, the fate of the head of the International Monetary Fund would not have mattered too much. But photos of Dominque Strauss-Kahn being led away in handcuffs by New York police have unsettled global markets.

And with good reason. The IMF, along with the European Union and the European Central Bank (ECB) is centre stage in a drama that has all the makings of an unravelling of the global financial system that would put the 2008 crisis in the shade.

Strauss-Kahn was due to hold talks in Europe today over the details of financial support to Portugal, which faces state bankruptcy, and about Greece, which is heading for default on its foreign debt despite a huge bail-out last year. Instead, Strauss-Kahn is due in court to face sex allegations relating to a hotel maid.

Most economists believe that Greece will default, with some loans having to be written off and longer repayments granted for the remainder. But the implications of such a move are so serious that Strauss-Kahn and European leaders like Germany’s Chancellor Merkel were desperate to find another solution.

Earlier this month, José Manuel González-Paramo, an ECB executive board member, said a Greek debt restructuring would be a disaster for the eurozone. There would also be knock-on effects on the balance sheets of banks in France, Britain and Germany that hold Greek debt. The risk premium demanded on Greek debt by international investors has rocketed.

"A restructuring would have legal and systemic consequences that are difficult to calculate right now but would in all probability be bigger than after the collapse of Lehman Brothers," he said. Just in case anyone needs reminding, when Lehman Brothers filed for bankruptcy in September 2008, it triggered a seizure at the heart of the global financial system and led to the deepest recession since the 1930s.

Greece’s predicament is just one of the consequences. Despite massive cuts in public spending - average pensions were cut by over 20% last year and civil servants wages slashed by 15% - the government’s deficit has actually risen because the recession has reduced tax and other revenues.

The country's debt has spiralled to 142% of national income. Portugal's total has reached 93% of GDP. Britain's annual debt of 10.5% last year pushed its total to 80%, compared with Germany's 83% and France's 82%. Greece’s Socialist Party government has announced plans to cut an extra €23bn in expenditure by 2015 and privatise €50bn in public assets, leading to threats of more strikes. There have been nine general strikes in the last 12 months.

At moments of crisis, the role of individuals like Strauss-Kahn – who played a key role in brokering help for Ireland, Portugal and Greece – is critical. So the enforced absence of the head of the IMF is not exactly what global capitalism was looking forward to this week.

As a former French finance minister, Strauss-Kahn personally knew most of the key leaders and officials managing the crisis. He was also due to challenge Nicolas Sarkozy for the French presidency next year on behalf of the country’s Socialist Party. That now seems improbable, leaving Sarkozy to walk home.

And if you think the financial crisis is confined to Europe, think again. President Obama has called on Congress to raise the upper limit on the federal deficit, which is currently running at $14 trillion a year. Yesterday he warned that if investors "around the world thought the full faith and credit of the US was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system".

If you’ve got any spare cash, it might be a good time put find a suitable mattress.

Paul Feldman

Communications editor