UK press ignore Gordon Brown on the coming crash

Tony Gosling tony at
Fri Dec 27 22:01:25 GMT 2013

Stumbling Toward the Next Crash

Published: December 18, 2013 

LONDON ­ In early October 2008, three weeks after 
the Lehman Brothers collapse, I met in Paris with 
leaders of the countries in the euro zone. 
Oblivious to the global dimension of the 
financial crisis, they took the view that if 
there was fallout for Europe, America would be to 
blame ­ so it would be for America to fix. I was 
unable to convince them that half of the bundled 
subprime-mortgage securities that were about to 
blow up had landed in Europe and that euro-area 
banks were, in fact, more highly leveraged than America’s.

Despite the subsequent decision of the Group of 
20 in 2009 on the need for rules to supervise 
what is now a globally integrated financial 
system, world leaders have spent the last five 
years in retreat, resorting to unilateral actions 
that have made a mockery of global coordination. 
Already, we have forgotten the basic lesson of 
the crash: Global problems need global solutions. 
And because we failed to learn from the last 
crisis, the world’s bankers are carrying us toward the next one.

The economist David Miles, who sits on the 
monetary policy committee of the Bank of England, 
may exaggerate 
he forecasts financial crises every seven 
years,but most of the problems that caused the 
2008 crisis ­ excessive borrowing, shadow banking 
and reckless lending ­ have not gone away. 
Too-big-to-fail banks have not shrunk; they’ve 
grown bigger. Huge bonuses that encourage 
reckless risk-taking by bankers remain the norm. 
Meanwhile, shadow banking ­ investment and 
lending services by financial institutions that 
act like banks, but with less supervision ­ has 
expanded in value to $71 trillion, from $59 trillion in 2008.

Europe’s leaders aren’t the only ones with these 
blind spots. Emerging-market economies in Asia 
and Latin America have seen a 20 percent growth 
in their shadow-banking sectors. After 2009, 
Asian banks expanded their balance sheets three 
times faster than the largest global financial 
institutions, while adding only half as much capital.

In the patterns of borrowing today, we can 
already detect parallels with the pre-crisis 
credit boom. We’re seeing the same over-reliance 
on short-term capital markets that ultimately 
brought down Northern Rock, Iceland’s banks and Lehman Brothers.

While the internationalization of the renminbi is 
opening up new opportunities for global 
investment in China, it is also increasing the 
exposure of the global economy to any 
vulnerability in its banking sector. China’s 
total domestic credit has 
than doubled to $23 trillion, from $9 trillion in 
2008 ­ as big an increase as if it had added the 
entire United States commercial banking sector. 
Borrowing has risen as a share of China’s 
national income to more than 200 percent, from 
135 percent in 2008. China’s growth of credit is 
now faster than Japan’s before 1990 and America’s 
before 2008, with half that growth in the 
shadow-banking sector. According to Morgan 
Stanley, corporate debt in China is now equal to the country’s annual income.

Although sizable foreign reserves make today’s 
Asia different from the Asia that experienced the 
1997 crash in Indonesia, Thailand and South 
Korea, we are all implicated. If China’s economy 
were to slow, Asian countries would be doubly hit 
from the loss of exports and by higher prices. 
They would face downturns that would feel like depressions.

And China’s banking system may not be Asia’s most 
vulnerable. Thailand’s financial institutions, 
for example, appear overdependent on short-term 
foreign loans; and in India, where 10 percent of 
bank loans have gone bad or need restructuring, 
banks will need $19 billion in new capital by 2018.

If the emerging markets of Asia and Latin America 
are hit by financial turmoil in coming years, 
will we not turn to one another and ask why we 
did not act after the last crisis? Instead of 
retreating into our national silos, we should 
have seized the opportunity to fix global 
standards for how much capital banks must hold, 
how much they can lend against their equity, and 
how open they are about their liabilities.

The Volcker Rule, now approved by American 
regulators, illustrates the initial boldness and 
ultimate weakness of our post-2008 response. This 
element of the Dodd-Frank financial reform law of 
2010 forbids deposit-taking banks in the United 
States from engaging in short-term, proprietary 
trading. But these practices are still allowed in 
Europe. Controls are even weaker in Latin America and Asia.

International rules are needed for international 
banks. Without them, as the International 
Monetary Fund has warned, global banks will evade 
regulation “by moving operations, changing 
corporate structures, and redesigning products.”

When I was chairman of the G-20 summit meeting 
here in April 2009, our first principle was that 
future financial crises that started in one 
continent would affect all continents. That was 
why we charged the new Global Financial Stability 
Board with setting global standards and rules.

Nearly five years on, its chairman, the Bank of 
England governor Mark Carney, has spoken of 
“uneven progress” in recapitalizing banks and 
making them disclose their risks. The G-20 plan 
for oversight of shadow banking is, as yet, only 
a plan. While the world’s $600 trillion 
derivatives market is being regulated with new 
minimum capital and reporting requirements, 
global financial regulators must “find a way to 
collaborate across borders,” Mr. Carney says.

In short, precisely what world leaders sought to 
avoid ­ a global financial free-for-all, enabled 
by ad hoc, unilateral actions ­ is what has 
happened. Political expediency, a failure to 
think and act globally, and a lack of courage to 
take on vested interests are pushing us inexorably toward the next crash.

Gordon Brown, a Labour member of the British 
Parliament, is a former chancellor of the Exchequer and prime minister.
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