The Hindu Business Line : Gordon Brown the saviour

Having committed to the ambitious rescue programme, Mr Brown will have little choice but to put it through and pray that it works. For, after all, it is the Brown Plan and if it backfires, he will be left holding the baby. He will thus need to ensure the diligent implementation of the plan.

J. Srinivasan

Crises tend to produce a man for the hour. For the latest global financial imbroglio it is Gordon Brown. Till now nondescript, the British Prime Minister has suddenly transformed into a modern-day Messiah who would lead the Western financial world out of wilderness.

Hosannas are being sung to the manner in which he, with his Chancellor for Exchequer, Mr Alastair Darling, and the Bank of England Governor, Mr Mervyn King, put together the 500-billion-pound bank rescue plan followed by an interest rate cut.

In the absence of the usual guidance from the US, to Mr Brown’s sage advice the Eurozone flock bent their collective heads and quickly put together bailout programmes for their beleaguered banks. Rightly did Mr Brown emphasis a coordinated approach to the crisis that is crippling a hopelessly intertwined system.

Co-ordinated approach

Falling in with his assertion that in extraordinary times, with financial markets ceasing to work, “the government cannot just leave people to be buffeted about,” Germany and France unveiled plans to inject fresh capital into their banking sectors worth 470 billion euros and 340 billion euros respectively.

Italy’s bailout announcement was preceded by Spain providing guarantees up to 100 billion euros for new debt issued by commercial banks in 2008 and an unspecified amount next year. Norway offered its banks up to 50 billion euros in government bonds for mortgage debt and Portugal is to make available 20 billion euros in guarantees for its banks.

As if to prove Mr Brown right, most stock markets in the Eurozone recovered some of the lost ground. Indeed, the 1.8-billion-pound Europe effort had the effect of shoring up markets in Asia and Australia too. Now, the US is to follow up its $700-billion toxic asset rescue package with a bank re-capitalisation plan that is considered Mr Brown’s signal contribution to solving the financial crisis.

The only inconsistent act of Mr Brown in recent times was the sabre-rattling vis-À-vis Iceland, threatening to invoke the anti-terror laws to seize assets of that country’s banks which had collapsed jeopardising a large number of British savers and some local bodies even.

Tightrope walk

Abroad Mr Brown may be the new Apostle for the finance industry, but in Britain the key worry is how he will finance his bailout programme. Whether he prints money, borrows, raises taxes, or cuts public expenditure, the people will be affected.

Mr Brown will have to do some deft tightrope walking to convince people of the need for the plan and at least some of the pain that goes with it. Recession fears appear real, with the stock market slipping after the recovery that followed the European bailout announcements.

To ensure that the economy does not slip into a recession, it may be all right to take the eyes off inflation, but shutting one’s eyes to a record headline price rise of 5.2 per cent can be disastrous.

That the credit crisis is beginning to affect other sectors of the economy is clear from a Financial Times report that quoted a corporate-restructuring company as warning that the number of distressed British businesses has more than doubled since the start of the year.

As many as 4,566 companies face critical problems, such as insolvency or winding-up petitions as cash flows freeze up. According to the corporate adviser, while housing, construction and property continued to be hit worst, other sectors were emerging with problems. The hire and rental services sector saw a 643 per cent increase in “critical problems”; information technology’s were up 627 per cent; and manufacturing’s problems rose by 622 per cent.

The government’s response is classic Keynes — throwing money at it and on such programmes as building capital infrastructure, housing and energy. At the height of the Depression in the 1930, the legendary economist had suggested the complete demolishing and rebuilding of swathes of suburbs.

Discovering merit in the Keynesian approach, the Chancellor of the Exchequer wants government departments to bring forward billions of pounds of capital expenditure to invigorate the economy in an attempt to stave off the much-expected recession.

Keynesian approach

The government has announced bringing forward money from future budgets to build more social housing. It has also allowed the Ministry of Defence to sign the £4-billion aircraft carrier contracts by juggling its budget. Various ministers are exhibiting an anxiousness to borrow and spend more in the noble cause of rescuing the economy.

Government directors joining the rescued banks should be charged with keeping an eagle’s eye on their working, especially to ensure that the real-estate market is not re-inflated. They must at the same time be obliged to lend to small businesses.

It is also a god-send for Mr Brown to overhaul the bank regulatory mechanism and pull tight the many loose ends, such as unbridled remuneration to executives. He is right when he says that the global financial system is “too clouded with opacity, conflicts of interest [and] irresponsible risk taking.”

Needed are greater openness and disclosure, with an immediate adoption of the internationally agreed accounting standards. Besides reforms to ensure “sound banking practice,” a tougher regulation of credit rating agencies is crucial for and a new international financial architecture.

If he can substantially do this, and lead the wayward financial system back to the fold of conservative banking, Hail St Brown.

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