News

Social networking

Gordon Brown

TED Talks

My videos on YouTube

Gordon Brown’s speech on the global economy

On the 14th October 2008 Gordon Brown visited Reuters in the heart of London to talk about the current financial situation. This is a précis of his speech by Brian Smith. Bear in mind that it’s my interpretation of what he said but I believe it is completely true to the original. This summary should give you quick access to the speech but for total accuracy see the original at http://www.labour.org.uk/prime_ministers_speech_on_the_global_economy (opens in new window)

“Traditions
Britain has two great financial traditions. From the earliest days in the coffee houses of London, Britain’s banking system has been built on trust. It was always said of the City, ‘my word is my bond’, and that is the trust that must underpin everything that we do in the future.

Britain has also always been international. Openness, not restriction is the key to success and is now more important than ever.

Families
Britain’s banks are central to everything we do as a nation. They aren’t just economic entities; they are woven into the fabric of all our lives, vital to savers, mortgage holders, businesses and ordinary families everywhere.

This isn’t abstract; it’s about the conversations mothers and fathers will be having on their sofas tonight when the kids are in bed.

When problems in America leave people in Britain wondering if they can get a mortgage, we know we are in extraordinary times.

When normal markets have ceased to work, we cannot just leave people defenceless and on their own. To leave everything to chance would be an abdication of responsibility.

The government has no interest in running British banks, just strengthening their position.

This crisis has proved beyond doubt the importance of rewarding responsible risk taking, not irresponsibility.

Businesses that value rewarding hard work, enterprise, merit and responsible risk-taking will have the greatest long term success.

Not just an American problem
At first, this seemed to be a problem that started in America and was primarily focused on America. That is far from the case now. The markets are telling us that one country alone cannot resolve what is truly a global problem.

The global financial system is clouded with opacity. Conflicts of interest and irresponsible risk-taking are endemic. In recent years Two Trillions of US Loans were bought by European Union Banks. Yet when problems occurred countries began to deal with them in isolation.

In this globalised 24/7 world when billions of pounds can be switched at the click of a mouse there is no future in countries going their own way, or pursuing a “beggar-my-neighbour” approach. Such actions may give one country a temporary breathing space, but they will not halt decline, rather they will accelerate it.

And we can’t just stop at just stabilising the system. We have to make the global financial system fit for purpose for the future. At the moment, capital flow is global but supervision is national. We need global coordination to deal with this new global age - finance, energy supply, climate change, all are interwoven.

Short term rewards and conflicts of interest
A focus on short term rewards created risks for us all as money was lent that had almost no chance of being repaid. Worse, it was then repackaged and sold on. Depositors and shareholders thought the risks were safely spread across global capital markets. They weren’t. In the end financial engineering will not work if people cannot see or do not understand the nature of the assets and the risks they are taking on.

This was exacerbated by deep conflicts of interest:
• Credit rating agencies were paid by those they rated
• Bonuses and remuneration rewarded excess risk-taking
• Those who created complicated financial instruments often did so for the transaction fees that they could charge rather than the value created for those they were supposed to benefit - ordinary borrowers and savers.

It is no longer possible to paper over the cracks. We must get to the root of the problem so these difficulties do not return. And we have to recognise that the action we need is not just national, but global.

Global Approach
Ten years ago, at Harvard University, I pointed out that the institutions and initiatives of the post-war era had been shaped to the conditions of their time. It was a world economy of protected national markets, limited capital flows and fixed exchange rates.

I said that as the world changed, we would have to change to an international financial system for the 21st century. At the time it was difficult to persuade others of this need. The situation today suggests that the change is now urgent.
• We must have open, not sheltered economies.
• We must have international, not national capital markets.
• We must have global, not local competition.
• And we need an international financial system.

A New Financial System
At Bretton Woods in the 1940s rules were devised for a world of limited capital flows. GATT, the UN, the World Bank and the IMF are institutions profoundly of their time and were designed to help people make the most of post-war period.

We need the same courage and foresight now. It is essential that we reform the international financial system around agreed principles of transparency, integrity, responsibility, good housekeeping and cooperation across borders.

• Transparency – we need openness and disclosure, for example in the valuation of assets and credit insurance.
• Integrity – we must tackle conflicts of interest such as the credit agencies and the system of remuneration. These have distorted behaviour and undermined trust. We must provide the right incentives for long term success, not short term gain.
• Responsibility – we must ensure that board members understand the risks and effectively supervise their own institutions.
• Sound banking practice – we must have supervision that prevents speculative bubbles when markets are rising and cushions the impact when markets are falling.
• A new Bretton Woods – and finally, we need a new financial architecture for the years ahead.

Sometimes it takes a crisis before people see that change can no longer be postponed. This crisis demonstrates beyond doubt that change is now overdue.

High Stakes
I think the stakes are now higher than ever before. It is a time for the right decisions, not just for good discussions. And the resolve of leaders and nations across the world will be put to the test over the coming weeks.

If we can get it right, the world will be a safer and stronger place and London and Britain will remain home to global finance.”