[This book review article was published in the Summer 2011 issue of The Journal of Social, Political and Economic Studies, pp. 249-255.]
Book Review Article
A Critique of Gordon Brown’s
Beyond the Crash:
Overcoming the First Crisis of Globalization
Dwight D. Murphey
Wichita State University, retired
As Britain’s Prime Minister and leader of the Labour Party from 2007 to 2010, Gordon Brown was one of those who played a central role in confronting the world financial crisis, the high point of which occurred precisely during those years. Beyond the Crash is “a first-hand account… of how choices (and mistakes) were made,” but its main thrust, as the title suggests, looks beyond the immediate crisis to consider how best the world can rebuild. This is an important book which readers will find easily readable, since it is neither technical nor overwrought.
Although the crisis was global in impact, its origins were in the United States. Brown has no interest in pointing a finger of blame, but his narrative does mention, as so many books now have, the ingredients that produced the catastrophe: the credit expansion and consequent real estate bubble, the proliferation of subprime home mortgages, the bundling of those mortgages into complex and opaque securities that were given Triple A ratings and sold to investors throughout the world as what eventually proved to be a pool of unknowable toxicity, the extraordinary amounts of leverage leading to serious undercapitalization and extreme risk, the rise of an unregulated “shadow banking system” that kept this off the books of ordinary banks, the granting of excessive compensation that absorbed much of the institutions’ needed capital – and other derelictions too numerous to mention.
Brown doesn’t make a point of it, but the result of its American origins was that Brown’s efforts to contain the crisis were necessarily secondary to those attempted by monetary authorities in the United States. In common with Henry Paulson, the U.S. Treasury Secretary, and Ben Bernanke, the chairman of the U.S. Federal Reserve, Brown addressed the beginnings of the crisis by saving one large, “systemically vital” bank at a time, as each, in turn, came under distress. From his distance across the water, he didn’t particularly have occasion to consider the suggestions of those who wanted, instead, to strike at the origins of the crisis by refinancing the mortgages and thereby curing the securities of their toxicity; that was something that had to be done, if at all, in the United States, not by the British. Brown’s approach to the banks initially differed from Paulson’s, who at first wanted to buy up the toxic assets (an incalculably large task, as David Smick has told us, because no one could know for sure which securities were toxic). For his part, Brown moved to recapitalize the banks, semi-nationalizing them and providing them with both capital and liquidity. (Soon after the U.S. Congress approved the TARP program to purchase the toxic assets, Paulson joined Brown in this, moving from asset purchases to recapitalization.) It wasn’t long before a massive Keynesian-style stimulus program was adopted. The stimulus package was approved by Congress in February 2009, and a $1 trillion “rescue plan for the global economy” was agreed to at the London G20 meeting six weeks later. Central banks throughout the world were, in addition, “working in unison [to] increase the supply of money through quantitative easing.” Brown was engaged with all this.
As he looks to the future, Brown hopes for a worldwide revitalization by 2020 through a coordinated managing of the globalization and free trade that he so strongly supports. He shares the common opposition to “populist” efforts toward protectionism. In a series of chapters, he looks at the major economies and urges that, assisted by international cooperation, they make themselves open to more trade and an eventual mutual increase in the “global aggregate demand” that he considers essential. Theidea is essentially that a rising tide of free trade will lift all boats. His proposals include an international levy on banks, so that they “contribute to paying off the consequences of their past failings”; a “global constitution for the banking system” to provide a “codification of principles, rules, and standards… with a process of surveillance and supervision”; a “World Stability Board”for early warnings and the “management of global risk”; the outlawing of “noncompliant tax [and regulatory] havens”; and, among other things, new capital and liquidity requirements that will apply not just to banks but also to “hedge funds, insurance companies, and non-bank institutions that are a systemic risk.” Because he thinks it imperative to take the entire world economy into account, he wants to make the G20, not the G8, the “premier forum for economic cooperation.” He believes there needs to be a renewal of ethical values: “there must be a set of commonly accepted values that emphasize enterprise and competition but also elevate fairness and responsibility in charge of the financial institutions must come to see themselves as “stewards of people’s money”; and Brown joins “Alistair Darling [who] bravely demanded from the banks a 50 percent tax on their bonuses.”
What are we to think of all this? There are several points to be made by way of critique:
While many of his proposals, taken individually, seem highly constructive and are in line with much international thinking, he is almost certainly reaching for more than is attainable when he calls for a “global consensus” and says that “this project is indivisible; each element is essential to the success of the whole.” If that is to be taken seriously, which Brown wants us to, it verges on the foolish. He comes close to acknowledging this himself when he says “getting these varied groups to agree on anything beyond declarations of vaguely worded principle will be profoundly difficult.” “But,” he says, “I believe it is possible.” We’ll see.
A larger question is whether his program of going full speed ahead with free trade and globalization is even desirable, since it will conflict with essential economic reconstruction at the national level. In common with so many economic commentators today, Brown doesn’t face up realistically to (1) the hollowing-out of U.S. manufacturing by competition from the incredibly low wages in the Third World, and to (2) the displacement of labor by those same low-wage competitors and by the advancing non-labor-intensive technology (which he never takes into account). Brown makes the mistake that is so often made of calling for “more skills and education.” He says the economic future of the United States and of Europe depends on “high productivity in knowledge-intensive global industries.” This will produce “high value added goods and services sold to the rest of the world.” It’s as though Europe and America have a long-term comparative advantage in such things. But this is contradicted by what Brown himself tells us. China, he says, is “the largest computer manufacturer in the world, producing half the world’s total.” It has “a young and increasingly well-educated workforce, and… investments in new infrastructure, science education, and research.” Meanwhile, General Motors is training Chinese workers in advanced technology. India has “pools of engineering, legal, and research talent across not just banking, insurance, and commercial services but also in mechanical engineering, pharmaceuticals, and biotechnology.” Japan has enjoyed a “status as Asia’s high value added base.” We can readily see that there are several other aspirants, too, to the “high value added” market. South Korea, Malaysia and Singapore come to mind. We should note that Brown predicts that during the next twenty years, the United States will “export at least thirty million service jobs.”
It should be considered what will become of the world economic rejuvenation that Brown hopes for in a world where the United States and Europe, two erstwhile dynamos, settle mostly for financialization and paper-shuffling, having moved over time from agriculture to manufacturing to service, and now losing their service sector.
Nor does Brown see that “high skills… more education… and high value added” are geared to the further-right slope of the bell-shaped curve of intelligence, character and motivation. (It is politically incorrect, as we know, to show any awareness of differences in those human characteristics.) If the lower-skilled economic endeavors are undercut by the raging winds of global competition, and substantial manufacturing is not retained (or reestablished) as part of the mix, tens of millions (more probably, hundreds of millions) of people in the United States and Europe will have to scramble for their subsistence. This means that it will be essential to have a broad-based program of income redistribution. (The displacement of these same millions will, over time, occur in any event because of job-eliminating technology; and it is this that must be taken into account not just in the advanced economies, but throughout the world. The social-political-economic implications are staggering.) None of this is considered in Beyond the Crash.
Other points of critique are important. One is that Brown gives little attention to the problems posed by the immensity of global capital flows. He does this even though he spells out that immensity when he points to “a 6,000 percent increase in global financial flows, so that by 2008 there were flows of $130 billion per day” and that “at the time of the crisis the global stock of core financial assets reached $140 trillion, twice the size of the world economy.” His proposed reforms speak to capitalization, liquidity and unwise leverage, but the implications of the immensity are largely overlooked. The volume is so great that central banks have lost effective control, and there is an ever-present possibility of “herd effects” as world finance suffers the impact of the near-instantaneous sloshing of investment and speculation at the behest of millions of computer mice. Several economic analysts have recommended global financial transaction taxes to curtail the volume, inhibit short-term speculation, and encourage longer-term investment. The closest Brown comes to this is when he speaks tentatively and only transitorily of “perhaps a transaction levy.”
The potential for financial herd effects also casts some doubt on the efficacy of the concept of “systemically important” banks and businesses. Brown joins Paulson and Bernanke in thinking that these large firms are the key. These are no doubt highly significant in their vast interrelatedness, but what this preoccupation with them ignores is that a tsunami that sweeps over an entire economy involves much more than the large companies. The whole economy is, in such case, what is “systemically important.”
There is a serious weakness in Brown’s discussion of the various parts of the world as he surveys the possibility of global economic cooperation. He sees them, in this reviewer’s opinion, from too high an altitude, not taking into account each country’s peculiar cultural, religious, ethnic, demographic and historical imperatives, all of which loom large in the values the country’s population cherishes. It is by no means certain that global free trade will further those purposes. This is a problem with the free trade position in general (and with the efforts of the cosmopolitan international elite through NGOs, the IMF, the World Bank, and otherwise, to impose an alien set of values, such as feminism, upon all cultures), and it finds its way into Brown’s outlook and projected solution.
We should note, too, that the altitude from which he views a region such as sub-Saharan Africa brushes aside not only the factors we just mentioned, but also the grim realities such as despotism, disease, tribal conflict, multiple wars, superstition, human incapacity, and the like. These have caused various observers to take a justifiably pessimistic view of the region’s prospects. Brown follows the conventional wisdom in the international community of seeing these things sentimentally and of thinking that the problems can be overcome if only the outside world forgives more debt (for the umpteenth time) and gives more aid. None of this is a unique intellectual failing of Gordon Brown’s.
In Beyond the Crash, Brown comes through as a thoroughly decent man grappling sincerely with the problems of the world economy according to his best lights. It’s a book that deserves respect, even though readers will do well to keep in mind the points of critique we have mentioned.
Dwight D. Murphey