Chris Giles Who saved the world? Brown or King?

Gordon Brown has staked his claim to be the saviour of advanced economies in the crisis, by claiming in his new book that he pressed the case for recapitalising banks around the world. For this foresight, the former British prime minister has received adulatory reviews by nobel prize-winning economists.

“Hang on a second,” Mervyn King, governor of the Bank of England, has a right to say. One of the latest Wikileaks US embassy cables shows King was pressing in March 2008 for significant bank recapitalisations and a stigma-free method to allow banks to get rid of their unwanted toxic assets without resorting to central banks. That is well before Brown’s actions that Autumn.

Here is the summary from the 17 March cable:

“King said there are two imperatives. First to find ways for banks to avoid the stigma of selling unwanted paper at distressed prices or going to a central bank for assistance. Second to ensure there’s a coordinated effort to possibly recapitalize the global banking system. For the first imperative, King suggested developing a pooling and auction process to unblock the large volume of financial investments for which there is currently no market. For the second imperative, King suggested that the US, UK, Switzerland, and perhaps Japan might form a temporary new group to jointly develop an effort to bring together sources of capital to recapitalize all major banks.”

In terms of evidence, there is much more substance in a contemporary US Embassy cable than in Mr Brown’s recollections. Rather than get into a useless spat about who saved the world, the underlying truth seems more prosaic than either man might wish to recall.

1) The things Mr King said in private to US officials, revealed by the cable, were exactly what the Bank said in public in the April 2008 Financial Stability Report. The report echoed the governor in saying that the market prices of toxic assets were too low. “Using a mark-to-market approach to value illiquid securities could significantly exaggerate the scale of losses that financial institutions might ultimately incur”. The only problem was that within a month of his meeting with US officials, the Bank had given up on a private sector means of supplying liquidity and had, instead, introduced the Bank’s own Special Liquidity Scheme. This shows how fast-moving the scene was in 2008.

2) Mr King was clear in public about the need for British banks to raise more capital. A call for “higher capital buffers” was included in the April 2008 FSR and Mr King told MPs on 28 March 2008, that everyone needs to “think very, very deeply about the causes of this crisis and whether levels of bank capital and the sort of financial system that generated this crisis does not require some action”.

3) His plan for a joint US, UK, Swiss and Japanese grouping to replace a “dysfunctional G7″ is entirely consistent with Mr King’s long-standing and public dismissal of the G7 as a useful body. That is until autumn 2008 when he praised it for taking the decisive action to stem the crisis.

4) The piecemeal plans for recapitalisations progressed slowly in 2008 and the need for government recapitalisations only became clear after the collapse of Lehman Brothers in September 2008, even though British officials including Mr King and Mr Brown had discussed such a plan earlier.

5) The UK was first in the enforced recapitalisation game, not because Mr Brown or Mr King were particularly full of insight, but because of circumstance. In the global contagion, the Irish decision to guarantee the liabilities of all its banks had its greatest effect relatively locally –  on UK banks. Without the recapitalisation and UK guarantees first, they would have failed.