Gordon Brown rescuing the world?

The jury will be out but it is reassuring to see that politicians who remain calm, think ahead, have a clear grip on the situation and it’s possible consequences, and come up with a well thought out multifaceted plan that, according to many academic economist is the right answer to the present circumstances, actually manages to convince enough of his colleagues in order that things might actually start to improve. There is at least one such a man..

The UK approach is the right one. It has the three necessary steps set out in detail here:

  1. Provide liquidity
  2. Recapitalize the banks
  3. Guarantee inter-bank lending to get that going again.

What’s more, the UK plan is almost as big as the US plan, and that with the UK economy being much smaller. He has managed to get a common approach in Europe:

  • The key measures announced were: a pledge to guarantee until the end of 2009 bank debt issues with maturities up to five years; permission for governments to buy bank stakes; and a commitment to recapitalize what the statement called “systemically” critical banks in distress.
  • “They pushed the boat out as far as they could,” said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. “It should start bringing down market rates over the course of the week. If that package doesn’t help, things could really go pear-shaped for the euro area.”
  • The statement gave no indication of how much governments were willing to spend or the size of bank assets deemed at risk, leaving unclear the ultimate cost to the taxpayer. Those numbers will start to emerge today, when France, Germany, Italy and other countries announce national measures. [Bloomberg]

Unfortunately, some problems cannot yet be addressed:

  • The ECB doesn’t have the legal power at the moment to follow the Federal Reserve and buy commercial paper to unblock a financing tool that drives everyday commerce for many businesses, said President Jean-Claude Trichet, a participant in yesterday’s Paris meeting. “We are looking at our entire system of guarantees and we can imagine new measures to enlarge access to our system of guarantees,” Trichet said. [Bloomberg]

Europe’s response, despite having different problems, different regulatory environments and different views, actually looks more coherent than the haphazard US approach. That doesn’t happen often.

Witnessing the US presidential race is a bit of a turn-off. Rationality has gotten out of the window, just like on the markets. How refreshing it is to see that this doesn’t necessarily happen everywhere. Gordon Brown, the UK’s prime minister, has responded with a bold, well thought out plan (agreed, after considerable dithering earlier). He is reaping the rewards. That should show other politicians the way.

Man in the News: Gordon Brown
By George Parker
Published: October 10 2008 19:03 | Last updated: October 10 2008 19:03

  • Stock markets crumble and banks are brought to their knees, but as confidence leaches from the financial markets the crisis appears to be having a galvanising effect on at least one person: Gordon Brown.
  • The British prime minister’s poll ratings in recent weeks have risen almost as sharply as the FTSE 100 has fallen, halving the lead of the opposition Conservatives. The greater the anguish on the faces in City wine bars, the more serene Mr Brown appears to be. Something strange is happening in British politics.
  • Until the latest trauma hit the markets, the country appeared to have made up its mind about Mr Brown. Just over a year into the job, the 57-year-old leader was deemed to be uncharismatic, hapless and indecisive. He was taking Labour to certain electoral defeat in 2010 – unless he was toppled in a party coup first.
  • After a solid start, Mr Brown had transformed himself – in the wounding words of the Liberal Democrat politician Vince Cable – “from Stalin to Mr Bean“. After a week in the eye of the economic crisis, the time has come to ask: is the man of steel back?
  • This month Mr Brown has taken two decisions so extraordinarily bold they have forced the country to look at him with fresh eyes. The prime minister is trying to reinvent himself as the leader Britain turns to in a national emergency. Or as he puts it: “Serious people for serious times.”
  • The first act was to reshuffle his cabinet to strengthen its economic clout, including the jaw-dropping decision to bring back from Brussels the European Union trade commissioner, Peter Mandelson. Mr Brown despised Mr Mandelson – a close ally of Tony Blair – for the best part of a decade and the feeling was mutual. Mr Mandelson seemed as surprised as anyone to be invited to become Mr Brown’s business secretary. But the prime minister’s intent was clear: in a crisis, forget personal animosity and bring in the best people. Mr Mandelson’s appointment was in “the national interest”.
  • In case anyone missed the message, the prime minister simultaneously set up a National Economic Council – an echo of the body set up by Bill Clinton in the downturn of the early 1990s – to manage the worsening crisis. Mr Brown seems happy for this to be described as “a war cabinet”.
  • Then on Wednesday, Mr Brown and Alistair Darling, chancellor of the exchequer, met at 5am in Downing Street to put the finishing touches to perhaps the most ambitious and comprehensive plan yet by a government to rescue its banks. As Mr Brown announced this £400bn package at a Number 10 press conference, it was clear he was enjoying himself. So often a strained figure at these events, the prime minister was relaxed and authoritative, shooting sly smiles at journalists. Mr Brown claimed his plan “led the world” and would be copied by others.
  • A few hours later he was doing battle with David Cameron, the 42-year-old Conservative leader, who has spent a year taunting a tired prime minister in the House of Commons. Cheered on by baying Labour MPs, Mr Brown came off the ropes and demolished the rival he calls “a novice”.
  • Tony Blair, who ceded power to Mr Brown in June 2007, warned Mr Cameron this moment would come. Speaking two years ago, Mr Blair said: “However much you may dance around the ring, at some point you will come within the reach of a big clunking fist. And you know what? You will be out on your feet, carried from the ring.”
  • This was an almost surreal moment. Here was a Labour prime minister presiding over a country in a state of economic turmoil, forced to announce a government rescue of the country’s banks. In another era he would have been slaughtered, but Mr Brown somehow emerged from the chamber cheered by his own side, the Tories cowed.
  • Mr Brown has been the beneficiary of a hitherto untested procedure: the transfusion of confidence from the City into the body of a politician. How does it work and are the benefits lasting?
  • The financial crisis has helped Mr Brown in a number of ways. First, it gave him a convincing excuse for Labour’s unpopularity – during the summer the party was 20 points behind in the polls – deflecting attention away from his own lacklustre performance and policy own-goals.
  • Second, it bought him time. Labour MPs who were plotting to oust him realised that changing their leader for the second time in two years would look reckless and self-indulgent at a time of crisis. Mr Brown’s peace offering to former supporters of Mr Blair – the return of Mr Mandelson – doused the last members of the rebellion. “Hostilities are over,” George Howarth, a leading Labour rebel, declared this week.
  • Third, the crisis has given Labour a new sense of purpose. In spite of its “modernisation” under Mr Blair, the party’s gut instincts remain. Regulating the markets, curbing executive bonuses and mounting a state-led rescue of banks feeds the party’s base appetites. When Mr Darling spoke at Labour’s conference last month about the US government nationalising Freddie Mac and Fannie Mae, delegates clapped. It was not intended as an applause line.
  • Fourth, Mr Brown’s claim to economic competence – acquired over a decade as chancellor of the exchequer – is beginning to look more credible, after sure handling of the banking crisis. Only last month, Mr Brown’s boasts about tackling the downturn seemed to turn on little more than half-baked or modest schemes to boost the housing market or to insulate lofts.
  • Finally, Mr Brown has been able to portray himself as a leader in a crisis. The only other time in his premiership when he held the public’s attention was in the summer of 2007, with its floods and animal health scares.
  • “We needed a bloody good crisis and now we’ve got one,” says one senior Labour MP. “It’s manna from heaven for him.” John Hutton, the defence secretary who once predicted Mr Brown would be “an effing awful prime minister” is now heard telling businessmen: “Cometh the hour, cometh the man.”
  • In spite of the euphoria shown by Labour MPs in the Commons this week, will they still be smiling in six months time if the British economy is mired in recession, homes are being repossessed, job losses mounting? The public finances are overstretched and the future holds the prospect of austerity and tax rises.
  • Mr Brown this week looked like a commanding figure on the bridge of the ship. But whether voters will be grateful to the steely-faced captain in the election of 2010 if the ship slips under the waves is another question.

Just put that in perspective, the 400M pound sterling plan is almost as big as the $700M Paulson TAPR plan, and the UK’s economy is a fraction of the size of the US. Crucially, Brown’s plan is much better designed, with capital injections in exchange of ownership stakes and the guaranteeing of inter-bank loan is a very smart step.

It’s a bit unfortunate it’s not the other way around. If such a plan would have been implemented in the US, especially on the scale it is now being proposed in the UK, we think that the world markets would have taken notice.

It is still not too late, but with every downward gyration, more institutions and individuals will be thrown into trouble, leading to more forced sales, creating more downward momentum.

It’s also unfortunate because the UK won’t be spared this, as its destiny is more decided in Washington than in London, perhaps. We still haven’t lost hope that his plan will indeed show the world and will be copied.

Here is an article on the latest on the British plan.

If the direct capital injections and the guaranteeing of inter-bank lending will not be widely copied in the rest of Europe, the market might actually force that, and here is why.

If the UK manages to dislodge the gridlock on its money market (the inter-bank market where banks and other financial institutions lend one another very short-term), other European banks will flock to the British inter-bank market, forcing the authorities hands in these other countries to follow the British example.