Why Britain is leading the world out of the banking crisis
On Tuesday, the US was the latest nation to follow Gordon Brown's blueprint for rescuing banks.
One by one his European counterparts have closely modeled their own financial rescue plans on a British blueprint that calls for capital injections into banks and guarantees for interbank lending.
On Tuesday, the United States moved to buy stakes worth up to $250 billion in the nation's nine leading banks, an operation that closely mirrored Mr. Brown's own decision Monday to partly nationalize three struggling banks.
Brown's leading role has drawn praise from friends and enemies, at home and overseas. Labour Party rebels, once determined to unseat him, have called a truce. British opposition parties grudgingly acknowledge the merit in his plan. The French media, never too kind to leaders across the Channel, declared him a "magician," as President Nicolas Sarkozy followed Brown's lead.
The newly crowned Nobel economics laureate Paul Krugman wondered semi-seriously whether Brown had saved the world financial system. Brown and his treasury team had, Mr. Krugman wrote, shown clarity of thought, speed of action and a "decisiveness [that] hasn't been matched by any other Western government."
Why? Why is it that the British – with their steady, unspectacular midsize economy and politically troubled prime minister – are leading the way?
Economists point to a host of factors. First, as someone with 10 years' experience as a finance minister (under Prime Minister Tony Blair), Brown is uniquely placed. He understands the complexities of the crisis and knows the key players in the Treasury and London's financial circles who can help.
"It's a subject area where he clearly has experience," says John Curtice, professor of politics at Strathclyde University, Scotland. "The nature of the crisis plays to his strengths, though it's impossible to tell how much [of the plan] came from the political level and how much from the official level."
Either way, by the middle of last week, Team Brown had not only unveiled the plan to make hundreds of billions of pounds available for partly nationalizing banks, supplying liquidity, and underwriting interbank loans, but also began urging partners in Europe and the US to do the same.
Those partners were more flat-footed, principally for political reasons, says Philippe Martin, professor of economics at the Sorbonne in Paris. "In continental Europe, you have the stability pact [which sets strict budget limits] and the Germans didn't want to put their public money into others' banks," he says. Not being part of the euro zone, with its strict financial rules, meant "the British were more politically free."
Brown was welcomed to a euro-zone summit in Paris this past weekend – an exceptional invitation in itself – where he propounded his views. By Monday, France, Germany, Austria, and Spain had followed suit. "It's a bit ironic that the country which is not in the euro zone has actually led the debate on what should be done," says professor Martin. "What it shows is that what we needed and didn't have two or three weeks ago was a good diagnostic of the problem: It was not a liquidity problem; it was a solvency problem. And once you start from that position, the British solution is the only way forward."
Alistair Darling, Brown's treasury chief, was telling US counterparts exactly this during the G-7 meetings in Washington over the weekend. The plan was a hard sell there too. US Treasury Secretary Henry Paulson had already dismissed partial nationalization as a mark of failure. But by Monday, he was selling it to US bank executives.
"About two weeks ago, Paulson was very reluctant to inject capital into the banking system in the way the UK has done," says Richard Harris, a former consultant to major US investment banks and now professor of finance at Exeter University, England.
"It might be his belief that it wouldn't solve the problem – and he might yet be right; it might be more ideological, the sense that it is not right for a government that supports the free market to be investing heavily in the large section of banking sector," Professor Harris adds.
While the ideology is awkward for the Bush administration, it suits Brown. For as long as Brown has been in government, his left-of-center Labour colleagues have bemoaned the huge salaries and corporate greed that drips out of the City of London. In taking bank stakes this week, Brown has made it clear that the "era of irresponsibility" is over.
The bank rescue operation – if successful – could mark a major transformation in Brown's political fortunes. Financial crises are supposed to topple governments. (In 2001, Argentina went through four presidents in a few short weeks.)
But this crisis could be the making of Brown, who was written off by party and public after a wretched summer of electoral defeats and muddled policies. Labour has clawed back lost ground in the polls to be within sight of the Conservative opposition once again. A weekend survey found a slender majority felt that Brown and Mr. Darling were a safer pair of hands than the untested Tory pairing of David Cameron and George Osborne.
Even adversaries are admitting Brown's found his feet. "Over the last two weeks, they have done the right thing. The intervention has been broadly right," admits Vince Cable, a member of Parliament in the opposition Liberal Democrats. But he adds that Brown is still leading Britain into a near-certain recession.
Significantly, rebels in Brown's own party, who were spoiling to oust him four weeks ago, have been silenced in admiration. Suddenly the stiff, dour man who has such a hard time appealing to his electorate appears relaxed and confident, if a little tired.
"The whole situation has turned around," says Lindsay Hoyle, a Labour MP previously critical of the government. "There's nobody more able to deal with the situation than Gordon Brown. He is on home ground. The party feel he is getting to grips with the issues facing us and facing the world."