Gordon Brown: flawed saviour of financial system

May 12, 2010

— Hugo Dixon is a Reuters Breakingviews columnist. The opinions expressed are his own —

Gordon Brown may go down in history as the flawed saviour of the global financial system. Brown had many faults including overseeing a public spending splurge in his decade as the nation’s finance minister. But he did make one big contribution. He galvanised other leaders to save the bank system during the post-Lehman <LEHMQ.PK> meltdown.

Brown, along with Tony Blair, was the main architect of New Labour — an initiative that dragged the former socialist party away from the fringes and towards the centre-left of the political spectrum. After New Labour took power in 1997, Brown devoted himself to the economy. His main achievement as finance minister was to give independence to the Bank of England. That depoliticised monetary policy.

Unfortunately, Brown didn’t have nearly as responsible an approach to fiscal policy. Despite telling the country in numerous budgets that he was pursuing “prudence with a purpose”, he actually allowed state spending to balloon — with the result that, when the credit crunch hit, Britain’s finances were not as strong as they should have been.

After Brown became prime minister, he dithered when depositors started a run on Northern Rock. That said, after Lehman went bust in September 2008 and the banking industry faced Armageddon, Brown was fast to move. Washington failed initially to provide leadership, largely because George Bush was a lame duck president who didn’t appear to on top of the issues. Meanwhile, Germany’s Angela Merkel was slow to recognise that there was a problem. Brown, by contrast, understood the issues and was able to persuade other leaders to put together well-crafted bank rescues.

Brown also helped persuade his fellow leaders in the G20 to engage in coordinated fiscal stimulus. Although this helped avoid the recession becoming as deep as it might have, it also landed governments with bigger fiscal deficits — something that has contributed to the sovereign debt crisis now roiling markets. Yet again, Brown allowed his achievements on financial and monetary policy to be neutralised by his failings on the fiscal front.

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