How and why Gordon Brown left Britain particularly badly exposed to the crash

It’s that time again. An anniversary of the financial crisis in which former Prime Minister Gordon Brown pops up to explain how the financial crisis was everyone else’s fault and he rescued the world. Brown was interviewed today by the Beeb and repeated his mantra.

Okay, I’m being unfair in one respect. This time, at least, Brown is in addition to the usual story saying something interesting about the risks of the next crisis and the inability of weakened global institutions to handle it. Would a protectionist US President such as Donald Trump sanction the necessary action in an emergency? It is doubtful. The structures of cooperation globally – between international institutions – are weaker than they were a decade ago. That should concern us and Brown is absolutely right to advocate, as he long has, reform.

But as ever with Brown, even when he makes a good point he has to go and spoil it.

Included in his latest intervention was the inevitable chuntering about what the bankers got wrong (fine) and the alleged brilliance (only up to a point) of the action he coordinated to clear up their mess.

Brown’s interview today sparked off the inevitable fight between his remaining supporters and long-term critics, of which I am one. He saved the system – sure, with other people’s money. He didn’t cause the financial crisis – no but he was a central figure in the hubristic group giving false comfort by claiming before the disaster that they had ended the economic and business cycles. Go and read Alan Greenspan’s remarks in 2005, when the then chair of the US Federal Reserve delivered the Adam Smith lecture from Brown’s father’s pulpit praising Brown. I was there that night. The next day, Greenspan, Brown and Bank of England Governor Mervyn King were awarded honourary degrees at the University of Edinburgh in recognition of their “end of boom and bust” mastery.

This stuff clearly torments Brown, a man with a fascinating psychological profile, someone who clearly wants vindication, who thinks that there can be a day of justice when everyone sees that what he did was right and good. That’s Scottish Presbyterianism at work, I suspect.

As the author of a book on the crisis – Making it Happen: RBS, Fred Goodwin and the men who blew up the British economy (buy a copy, buy two) – I wrestled with this theme and I’m well used to the criticism that it is unfair to blame him for the crisis.

Brown didn’t cause the crisis. Of course, he didn’t.

The truth is more interesting than the caricature. Brown’s failure rests in the way in which his deficient conduct left the UK particularly badly exposed to the financial crisis. Other economies – minor economies such as Iceland and Ireland – expanded their banking systems, but no major economy did it like the Brits under Brown. By the crisis, the clearing banks had balance sheets that ballooned to the equivalent of 450% of UK GDP.

That’s why the crisis hurt Britain so much. The come down was brutal. RBS at its peak had a balance sheet (total assets) of £2.2 trillion, a sum alone bigger than UK GDP at that point.

The failure to spot that this was a problem – a giant exposure when conditions changed as they always do – lay in the tripartite system of regulation designed by Brown after 1997. There was masses of regulation – of the wrong stuff. But the Bank of England had been stripped of its supervisory power and its grumpy Governor King, obsessed with inflation, paid too little attention to considering the health of the financial system, oversight of which still rested with the Bank. Supervision of the individual banks had gone to the FSA, that was more worried about fraud and retail consumer protection. A recipe for confusion. The central question – is the system safe, what is the big picture on what the banks are up to? – fell into a black hole, and then reemerged and exploded in 2008.

And yes, plenty of people warned about the risks of the creation of a confusing system. Ken Clarke did in the Commons in the debates at the time. So did Michael Howard and Peter Lilley. It’s there in Hansard.

Why did Brown persist? He thought his system had worked, and it seemed to, until it didn’t.

He also had no incentive to slow the banks and their mad lending. It was driving growth and tax receipts and he could not admit or conceive that there was a problem. To do so would have risked his chances of taking the top job from Tony Blair. There, the insight of his former cabinet colleagues and advisers is most telling. After Blair’s failure in Iraq, they point out that Brown’s schtick was that Blair had failed in his area – foreign affairs – and Brown was a brilliant success in his specialist area – on the economy with booming banks a central part of the sales pitch. Remember how fixated he was on becoming Prime Minister.

On that basis, Britain went full steam ahead straight into the storm when we should have slowed. Remember that, next time Brown appears with one of his lectures.