Gordon the Unlucky

Paul Krugman What would have happened if hanging chads and the Supreme Court hadn’t denied Al Gore the White House in 2000? Many things would clearly have been different over the next eight years. But one thing would probably have been the same: There would have been a huge housing bubble and a financial crisis when the bubble burst. And if Democrats had been in power when the bad news arrived, they would have taken the blame, even though things would surely have been as bad or worse under Republican rule. You now understand the essentials of the current political situation in Britain. For much of the past 30 years, politics and policy here and in America have moved in tandem. We had Reagan; they had Thatcher. We had the Garn-St. Germain Act of 1982, which dismantled New Deal-era banking regulation; they had the Big Bang of 1986, which deregulated London’s financial industry. Both nations had an explosion of household debt and saw their financial systems become increasingly unsound. In both countries, the conservatives who pushed through deregulation lost power in the 1990s. In each case, however, the new leaders were as infatuated with “innovative” finance as their predecessors were. Robert Rubin, in his years as the Treasury secretary, and Gordon Brown, in his years as the chancellor of the Exchequer, preached the same gospel. But where America’s conservative movement — better organized and far more ruthless than its British counterpart — managed to claw its way back to power at the beginning of this decade, in Britain, the Labor Party continued to rule right through the bubble years. Mr. Brown eventually became prime minister. And so the Bush bust in America is the Brown bust here. Do Mr. Brown and his party really deserve blame for the crisis here? Yes and no. Mr. Brown bought fully into the dogma that the market knows best, that less regulation is more. In 2005 he called for “trust in the responsible company, the engaged employee and the educated consumer” and insisted that regulation should have “not just a light touch but a limited touch.” It might as well have been Alan Greenspan speaking. There’s no question that this zeal for deregulation set Britain up for a fall. Consider the counterexample of Canada — a mostly English-speaking country, every bit as much in the American cultural orbit as Britain, but one where Reagan/Thatcher-type financial deregulation never took hold. Sure enough, Canadian banks have been a pillar of stability in the crisis. But here’s the thing. While Mr. Brown and his party may deserve to be punished, their political opponents don’t deserve to be rewarded. After all, would a Conservative government have been any less in the thrall of free-market fundamentalism, any more willing to rein in runaway finance, over the past decade? Of course not. And Mr. Brown’s response to the crisis — a burst of activism to make up for his past passivity — makes sense, whereas that of his opponents does not. The Brown government has moved aggressively to shore up troubled banks. This has potentially put taxpayers on the hook for large future bills, but the financial situation has stabilized. Mr. Brown has backed the Bank of England, which, like the Federal Reserve, has engaged in unconventional moves to free up credit. And he has shown himself willing to run large budget deficits now, even while scheduling substantial tax increases for the future. All of this seems to be working. Leading indicators have turned (slightly) positive, suggesting that Britain, whose competitiveness has benefited from the devaluation of the pound, will begin an economic recovery well before the rest of Europe. Meanwhile, David Cameron, the Conservative leader, has had little to offer other than to raise the red flag of fiscal panic and demand that the British government tighten its belt immediately. Now, many commentators have raised the alarm about Britain’s fiscal outlook, and one rating agency has warned that the country may lose its AAA status (although the others disagree). But markets don’t seem unduly worried: the interest rate on long-term British debt is only slightly higher than that on German debt, not what you’d expect from a country doomed to bankruptcy. Still, if an election were held today, Mr. Brown and his party would lose badly. They were in power when the bad stuff happened, and the buck — or in this case, I guess, the quid — stops at No. 10 Downing Street. It’s a sobering prospect. If I were a member of the Obama administration’s economic team — a team whose top members were as enthusiastic about the wonders of modern finance as their British counterparts — I’d be looking across the Atlantic and muttering, “There but for the disgrace of Bush v. Gore go I.”