DISCUSSION Markets and banks need morals, says Gordon Brown in his new book on the financial crash

by Yolanda Villafuerte _______4th March 2011
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Beyond the crash, overcoming the first crisis of globalization 
by Gordon Brown, Simon and Schuster, 2010
Reviewed by Michael Smith

This is one of the best books on the global financial crash, its causes and consequences. Gordon Brown may have been perceived as a more successful chancellor of the exchequer (finance minister) than prime minister. During his 10 years as chancellor he kept UK inflation down to an historic low of three per cent. But as prime minister, he and his Chancellor, Alistair Darling, also took decisive action in October 2008 to recapitalise failing banks, taking Northern Rock, Royal Bank of Scotland, Halifax Bank of Scotland and Lloyds, into public ownership. The Bush administration in the USA had to follow suit.

It was the ‘first crisis of globalization’ and Brown emphasises that ‘I had long felt that we were dealing not only with a technical failure, but a moral failure too.’ What is fascinating about this book is not only his recommendations on the future of banking but also his robust analysis of the moral failures. Thus, for instance, Northern Rock was from 2005 onwards ‘issuing false figures for mortgage arrears’ and repossession figures were 300 per cent higher than reported. ‘If there is no criminal law and thus there are no criminal prosecutions to deal with these and other companies’ flagrant abuses… there should be.’

The collapse of Lehman Brothers, he writes, ‘reveals that right at the heart of the world’s biggest banks was a culture of unethical financial practices that were, right up to boardroom level, connived at, condoned, and rewarded. It was nothing short of chronic recklessness powered by unchecked greed. I was furious to discover that other major banks too were recklessly using their customers’ own money to speculate.’

Indeed the banks’ high leverage, often undisclosed due to a lack of transparency, was ‘doubly dangerous. Not only do you have too little capital to survive the loss, but the chances of loss rise as the leverage increases… At some stage in the top of the cycle the system is inevitably exposed to very bad lending decisions, and maybe even fraud.’

There was also the ‘moral failure’ of unjustified rewards to staff, such as the extra £600,000 paid to an HBOS employee most implicated in the bank’s failed commercial property deals, which brought the bank down.
So the human failings were all too obvious. Due to such moral deficits, the crash when it came led to a drop in world trade of 20 per cent and 100 million people were thrown into poverty.

Now there is a need for a new banking constitution: ‘a way of harnessing finance’s creative energies to allocate resources and risk so effectively that it spurs and speeds economic growth.’ After all, credit is ‘one of the keys that unlocks opportunity.’ And access to adequately secured credit is critical for companies that create decent work for people.

In its second half, Brown’s book is nothing less than a call for a new global compact between nations to lift the world out of poverty. Stimulating global growth can be achieved, he argues, through a concerted effort to increase aggregate demand in the global economy across borders.

Thus America needs to invest in education and skills to produce high value-added goods and service, such as in environmental and energy-saving technologies, in order to tackle its unemployment rate of around 10 per cent, or well over 15 million unemployed, double that of 2006-07.

China, predicted to be the world’s biggest economy by 2024, needs to expand its domestic demand through it growing middle class, ‘to become the leading driver of world growth’. China’s consumer spending by over a billion people is still only 20 per cent that of the USA’s 300 million citizens. But such a domestic expansion needs to be without the spectre of market protectionism.

India, meanwhile, has between 300 million and 400 million (nearly 40 per cent) of it population living in absolute poverty. It too needs to open up to more international trade as well as investing in education—tackling illiteracy—and infrastructure. Prime Minister Manmohan Singh himself admits to the real limits to the extent of India’s integration into the global economy. India’s tariff rates, for instance, are still twice those of China. And India still suffers from red tape—the permit license Raj. It can take over six months for businesses to obtain licenses and permits. ‘As part of a global growth pact,’ Brown writes, ‘the world could help India by ensuring that it is less vulnerable to the forces of globalization it worries about most: capital shocks and commodity shocks.’

Other chapters deal with the challenges facing the Eurozone and post-crisis Africa where growth averages a respectable five per cent and where there are more mobile phones than in North America.

In his last chapter, Brown returns to the notion that ‘markets need morals’. He condemns the idea that ‘individual gain would somehow always lead to collective gain; that selfish motives would invariable produce better results than selflessness.’ Yet the banking crisis showed that unsupervised globalisation ‘not only crossed national boundaries—it has crossed moral boundaries too.’ Market disciplines, particularly self-regulation and regulatory approaches that reinforced greed, were completely inadequate. ‘And because we are agreed that markets depend on trust, which has to be underpinned by self-discipline (which failed) or imposed discipline, we have a duty to act in the public interest.’

‘In the absence of a consistently high code of standards set by bankers for themselves,’ Brown concludes, ‘we need a shared set of moral rules that can be the basis of a constitution for our banking system.’ Who spells out those moral rules is another matter. The re-entry of the moral claim into economic policy, he writes, ‘is what makes me confident that the argument for a global growth and employment plan can be won within nations and between them.’ Let’s hope he is right.

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