Duncan’s Economic Blog

Krugman on Brown

Posted in Uncategorized by duncanseconomicblog on June 8, 2009

Good article from Paul Krugman on Brown.

Very fair and covers both the good and the bad.

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.


16 Responses

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  1. Will M said, on June 8, 2009 at 12:20 pm

    spot on.

  2. newmania said, on June 8, 2009 at 12:33 pm

    Markets are not yet worried because this country has never defaulted and we are about to have a Conservative Government with a mandate to put the books straight.
    Incidentally it is not right to say the bank bail outs have raised the problem of fiscal continence this is regarded as a separate issue . It is also not right that Brown has put much into Keynsian demand or even that ordinary stabilisers account for the scale of debt we face .

    In fact it is chiefly the continuation of a steep increase in Public Spending in the main departments I am at a loss to know why Brown should be going to such lengths to make a bad situation worse ….unless it is Union pressure on a weak PM
    If an election were held today Brown would lose badly .If it were held a year from now with the tax rises looming and unemployment at 3,000,0000 plus and the footling bits and bobs of a new dawn forgotten it will be far worse.

    • duncanseconomicblog said, on June 8, 2009 at 2:18 pm


      I’s more of a falling away in taxr venuethn an increase in spending.

      But yes there is a hefty structural imbalance that will have to be closed post-recession.

  3. John said, on June 8, 2009 at 12:37 pm

    “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”

    In fairness, it probably isn’t a very good comparison when one country is borrowing from the international markets, and the other is borrowing from its own printing presses. What might happen to gilt prices if the Bank of England wasn’t buying them?

    • duncanseconomicblog said, on June 8, 2009 at 2:18 pm

      The spread was narrow pre-QE too.

  4. […] the meantime, the best I can do is link straight to Duncan, who in turn links to Paul […]

  5. Jane Pir said, on June 8, 2009 at 3:16 pm

    This makes it sound like it’s all bad luck for Gordon Brown rather than Gordon Browns bad management.

    Balanced article? Looks more like the authors judgement has been impaired by his political bias.

    OK I do see a global downturn but who changed the way the UK banks were regulated resulting in the first UK bank collapse in a century? Who overspent in the good times arrogantly predicting that the bad times had gone forever? Who persists in following the same path that brought us to this disaster.
    Seems to me that he brought his bad luck on himself. Unfortunately he also brought the back luck onto everyone else who shares his landmass.

    • duncanseconomicblog said, on June 8, 2009 at 3:23 pm


      The point Krugam is making is that Brown is dealing with the fallout very well. I agree.

      Krugman also attacks Brown for his praise on light touch regulation. Again, I agree.

      I don’t understand this now common fetishism for the Bank of England as regulator – BCCI and Barings? Johnson Mathey Bank? The Secondary Banking crisis of the 1970s?

      Equally I don’t think he overspent in the good times. I think he under taxed.

  6. CS Clark said, on June 8, 2009 at 8:17 pm

    ‘who changed the way the UK banks were regulated resulting in the first UK bank collapse in a century? ‘

    There is, of course, the theory that, regardless of how much worse light-touch regulation has made it, if it started anywhere it started when people who had thought George Bailey a fool for not selling to Old Man Potter started the building societies on the road to shareholder-appeasing demutualisation in 1986.

  7. newmania said, on June 8, 2009 at 8:22 pm

    It is a fall off in recenue in the context of steep Puboic Spending increases little of which help the economy


  8. Jane Pir said, on June 8, 2009 at 9:20 pm

    CS Clark: This is why the left is amusing. Everything that Labour did wrong, you always take a step back and say ‘we didn’t start it’. Well, the rest of us can see that you certainly didn’t sort it out.

    • CS Clark said, on June 8, 2009 at 10:28 pm

      Jane Pir: Neither Duncan Of This Blog, Krugman <a href="http://www.ft.com/cms/s/0/723916c6-8982-11dd-8371-0000779fd18c.html&quot;.John Kay of the FT* where I first came across the link, nor (for what it’s worth) myself are full of praise for any attempts, or lack thereof, at sorting out. So it’s not the case that everything the Labour government did wrong is being ignored (aside: it’s hardly a feature of the left, is it? How long did the Conservatives blame 70s Labour through the 80s and 90s?). But any attempts at avoiding the mistakes of the past have to be based on honest appraisal. Pretending that nothing went wrong before 1997 doesn’t help. If you want to both do that and bash the left, find further pre-Thatcher mistakes.

      *link leads to registration, sorry – here’s a taste

      ‘The road to nemesis began, not at conversion, but earlier – on the day it was decided that treasury should be a profit centre in its own right rather than an ancillary activity Legal restrictions on UK mortgage lenders were relaxed in 1986. Halifax’s main rival, Abbey, converted to a public company and leveraged its deposit base to build a large balance sheet. Most bankers were incredulous that the Halifax had been so slow to take advantage of this opportunity.

      Some businessmen on the board, accustomed to a world in which profit is earned only by meeting customer needs, saw the same difficulty. Trading in short-term money market instruments is essentially a zero-sum game – one party’s gain is another’s loss. So what was the source of the trading profits that not just our company, but every company in this business, claimed to make? The experienced bankers would shake their heads at this naivety.’

  9. charliemarks said, on June 9, 2009 at 2:49 am

    Jane, it’s not so amusing. Labour has never been in power – it’s only been in office. But you are right – they made no effort to clear up the mess of deregulation, they let it be.

    • (Layman) Mike said, on June 9, 2009 at 2:21 pm

      Asking as a layman. Assuming that City deregulation, the merging of investment & retail banking and the removal of exchange controls are the underlying cause of the economic crisis. Was it ever possible to undo these changes? Would there have been any justification, or political support? Prior to the crash, the extent of the financial system’s instability was unknown, or at least hidden from the public. With 20-20 hindsight, there’s still little appetite to increase regulation, much less undo these changes. And would a Party that wished to limit the Financial Services industry have been electable?

      • duncanseconomicblog said, on June 9, 2009 at 2:40 pm


        Economists like Minsky recently, and indeed Keynes before him, have argued for decades that the financial system is inherently unstable.

        Sadly most policy making economists long ago accepted the ‘efficient market hypothesis’, which is waht it says on the tin. Based on this, there has been a long standing, and I believe incorrect, notion that financial markets are efficient and self correcting.

        Academic economists have been challenging this notion, mainly in the form of behaviourial economics, for a while to.

        What confused me was why this instability was seen as unusal – Dotcom bust, LTCM, Asian crisis, Russia in 1998, LatAm in the 1980s, Japan – these sort of things do happen.

        So while there was an intellectual and empirical case for increased regulation, it was mainly a lack of political will. But of course the city was a great source of tax revenue – I guess people where scared of killing the golden goose.

  10. Jane Pir said, on June 9, 2009 at 8:37 pm

    “What confused me was why this instability was seen as unusal”

    I must agree.

    When Gordon Brown stood up and told us it was the end of boom and bust I did think he was wide of the mark.

    We don’t say that there in not instability in a market economy. We just say that it is the best way to create wealth FOR ALL in the long term and therefore the best model for all sectors of society. Wealth must come before a welfare state can be achieved. The other way round is simply not possible even if it would be nice to imagine it is.

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