The Wall Street Journal Sunday, February 1, 2009 As of 9:36 PM EST
Interview Transcript: Gordon Brown
By CARRICK MOLLENKAMP
British Prime Minister Gordon Brown met with The Wall Street Journal on Jan. 31 during his visit to Davos. The following is an edited transcript of the interview with Mr. Brown:.
The prime minister began the interview by discussing his concerns that banks are exiting smaller and emerging economies.
Gordon Brown: Start with the financial protectionism. I've been saying for some days now that one of the discoveries -- if you like -- of recent months is that as large international banks have come under pressure, there has been a retreat to domestic home-based banks. The combined loss of capacity in the world as a result of that is creating real dangers. Eastern Europe is one very good example. But every country is affected by this.
Because of the loss of capacity in the British banking system -- because foreign banks have moved out and nonbank investors have also moved out -- then you've lost a very significant amount of your capacity.
If you go around the world, then what you are seeing is the withdrawal of banks from a number of emerging-market countries with a pretty weak domestic banking system anyway.
What you've got then is a form of financial mercantilism. ? It's the first stage of a financial protectionism that will lead eventually to the kind of trade protectionism that we've seen in the past if we are not prepared to do anything about it.
WSJ: Why would that lead to other sorts of protectionism?
Mr. Brown: The loss of banking capacity in the emerging markets will mean the inability to invest and then to have goods...that could trade. You'll see a form of reduction in the amount of trade.
WSJ: What does it mean for the U.K. economy if Royal Bank of Scotland, Lloyds, Barclays and HSBC can't fill the lending gap caused by an exit of foreign lending?
Mr. Brown: We've got to give them the means by which they are encouraged to increase their lending into the system. ...We are in a third stage in Britain. We did the recapitalization of the banks. We then injected money into the economy through fiscal and monetary policy action. We are in the third stage, which is to make possible the expansion of lending.
WSJ: The U.S. is considering the use of a so-called bad bank. The U.K. has so far avoided that and plans to use an insurance scheme to deal with souring assets on bank balance sheets.
Mr. Brown: Hold on. Bradford & Bingley was essentially a bad bank-good bank.
WSJ: Right, but on a much smaller scale.
Mr. Brown: On a much smaller scale -- Look, America has a got a different set of issues. You've got a large number of banks. We have got a very small number of banks whose issues have got to be dealt with. But the principles underlying the American, German, Dutch, probably French schemes are the same -- that you want to isolate the bad assets.
WSJ: So you think enough has been done in the U.K. banking system -- using this third stage?
Mr. Brown: We have said that we favor looking at a number of different ways of dealing with this. The protection through insurance, but we've also said our scheme is sufficiently flexible to deal with the bad bank-good bank if necessary. We are a different banking system, but the same principles are operating in the way that we deal with ?the crisis. We have got to recapitalize first. You've got to get the expansion of lending. And you've got to recognize that when you're doing so ? you've got to recognize that you've lost capacity in banking and in lending from nonbanking institutions because of the retreat world-wide.
WSJ: Aren't you creating your own form of protectionism if Royal Bank of Scotland is told to decrease its balance sheet? RBS effectively is going to be focused on the U.K.
Mr. Brown: But that is not what we want to do. If there is a world- wide loss of capacity and we cannot find international arrangements by which good operations in another country can somehow be kept in existence, yes, that will be the difficulty and the danger.
Once you have identified that the problem is a form of financial protectionism that could potentially lead to worse forms of protectionism, then you have got to ask yourself how you can actually solve that problem. And that really is the issue that the G-20 has got to address. If you're seeing a destruction of capacity in countries that are left vulnerable as a result of it, and your only mechanism for dealing with them is a bailout by the [International Monetary Fund] at the last possible moment, than that's really not a good way of operating a system.
WSJ: German Chancellor Angela Merkel, in a speech in Davos, discussed a United Nations-style economic council. An effort like that would seem to be a reaction against the reputation of the IMF.
Mr. Brown: I'm more interested in the purpose of these institutions (the IMF and the World Bank) and what they're achieving. I've kept saying for some time that the IMF was built for the world of sheltered economies, where they dealt with their balance-of-payments problems, and essentially it was the old world of the 1940s and '50s. We are in a new world where it is the global nature of financial flows that has got to be both promoted and addressed. And to do this, you need not retreat from globalization.
I remain committed to an open, flexible free-trade globalization that is inclusive and sustainable. But for that to be workable in the future, it's clear you're going to have better mechanisms for dealing with crises and better mechanisms for preventing crisis. And that means that the Financial Stability Forum, for example, which was set up after the Asian crisis, has got to be more of an early warning system and it's got to have the regulators and supervisors from countries that are not even included in it at the moment and it's got to be in a better position to tell people that there are risks.
You've got to have cross-border colleges of supervisors because if you don't have that, then financial institutions are inevitably regulated by 20 different separate regulators with no real contact with each other. The firms that I've talked to, ? who are global, would prefer a college of supervisors as an approach so we have a greater degree of transparency...and a greater degree of contact between all the countries in which people are operating in.
So these are the sort of proposals that have to get off the ground pretty quickly.
WSJ: You've discussed reform of the IMF several times. Is Britain willing to give up its seat on the IMF executive board?
Mr. Brown: I think there is a question about the whole reorganization of the IMF. Look, when the IMF was originally formed ? there was a big debate--should it be a political committee, like an executive committee, or should it be more like an independent central bank.
I think a model for the IMF of the future is more like an international central bank. I believe its functions should be more clearly established as that of surveyance and, if you like, dealing with problems that exist in the world economy, addressing imbalances, addressing financial gaps in regulation, and these are some of the issues that it can actually deal with, with an independence.
WSJ: But it is a political institution and members don't want to give up power. How can you go from there to an independent central bank?
Mr. Brown: The whole issue about the IMF is purpose. Once you define the purpose in a global economy... then you can get to the details of who is doing what, where...and when. I don't think the issue of who is a member of the board at the moment is the central question. The issue is what is the purpose...You've got an international institution in a world that needs some form of global cooperation both to set standards, and to have early warning, and surveyance of the world economy. We want that to actually happen in a way that is effective.
Take the intervention facility at the moment. $250 billion dealing with Latvia, and Hungary and Pakistan and these countries. Clearly, that facility is insufficient to deal with the prospect of financial crisis. But if that facility is extended, why do we extend it simply to come in at the last minute to deal with problems once they have actually brought the economy down. Why can't we...create more of a preventative facility that could be dealing even now with a loss of capacity in Eastern Europe and elsewhere in the banking system.
So I think you've got to start reform of the IMF by thinking what's its purpose in a new world. You're clearly dealing with, not national flows of capital as in the 1940s, but global flows. You're clearly dealing with global competition, not just regional competition. And you're dealing with no longer sheltered economies, but open economies. And so the institution that helps deal with problems that arise in that world, like external imbalances, and like financial deficiencies and financial supervision, has to have the power and the status to be able to attack these problems.
WSJ: In the U.K., do you have any concerns that you might be creating an imbalance in the U.K. banking sector, especially if certain banks are nationalized? Banks that haven't received state support might be operating at a disadvantage.
Mr. Brown: Well, we've got Standard Chartered of course as well. We've got Santander that's very active in the British markets also. We are at the beginning of seeing the Royal Bank of Scotland re-emerge from its problems.
WSJ: It's our understanding it might take RBS three years to fully recover.
Mr. Brown: We are in the beginning of the process of seeing the Royal Bank of Scotland re-emerge. The Royal Bank of Scotland is lending more domestically to small businesses and to homeowners than it was doing.
There is a lot of water still to come under the bridge.
WSJ: In referring to your discussion of the three stages taken so far in the U.K., will there be a fourth stage? What would that be?
Mr. Brown: The logic for me was that you stop the banking system in Britain ? from potential collapse by recapitalization. I think that was an important moment because after Lehman Brothers, people had lost confidence in the system. When monetary policy is impaired, I don't think in a situation where you have low inflation and low cost of borrowing, that there is any better course than taking fiscal action, as long as you've got a plan to return to sustainability. ? So we didn't say, let's expand demand now without any thought of how we were going to move back to sustainability later. If I am right, I think we are the only country that has set out a fiscal sustainability plan over a number of years.
WSJ: One difference in governmental steps is that the U.S. is considering a bad bank while the U.K. plans to depend on the asset- insurance scheme.
Mr. Brown: How many banks do you think would be part of the American aggregator bank?
WSJ: Given how many banks signed up for capital, 20, 30, 40, 50.
Mr. Brown: We are in a different position. I just want that to be understood. I think we are applying the same principles, but in a different condition. We are talking about a very small number of banks.
WSJ: But that would seem to be the beauty of a U.K. bad bank. Because it is a small number of banks, you could get a quick clean sweep of souring bank assets.
Mr. Brown: I think you'll find that the principles that underlie all the schemes that are being discussed--we've had the Dutch scheme a few days ago, we've had the German scheme, which we don't know all the details of, floated yesterday (Jan. 30), we know the thinking that is going on in America. No doubt, in other countries, from what I have heard, there is work going on on a similar basis. But they all have something in common--they want to isolate the bad assets and they want to prevent them being in a position to thwart the extension of new lending.
WSJ: Are all these plans a step toward an end game in this crisis?
Mr. Brown: I think the extension of lending is absolutely vital, and they are designed to make that possible by removing both bad assets and the loss of confidence hatched from that.
But just remember my bigger argument: You've got a withdrawal of capacity in large numbers of countries around the world and that is a problem that is also going to be dealt with. ? We have got no desire to see a reduction in lending in Eastern Europe, for example. We haven't got much British-bank lending in Eastern Europe compared with the Austrians and the Germans and the French. But there is clearly a solution going to have to be found for Eastern Europe and for other emerging markets and developing countries. ...These were the countries that were some of the biggest engines of growth in recent years.
WSJ: Prime Minister, we know you need to leave for a meeting with Japan Prime Minister Taro Aso. Have you spoken to Italian Prime Minister Silvio Berlusconi since workers at U.K. oil refineries and power plants walked off the job Friday to protest the use of foreign labor? (Earlier in the week, French oil company Total SA awarded a GBP200 million ($286 billion) construction contract at one of its refineries in the U.K. to an Italian firm that planned to use foreign workers.)
Mr. Brown: There is some disagreement about the facts. Once, I think, the facts are cleared up, then people will be in a better position to make a judgment. In a situation like this, people are worried about their jobs. People are worried about their homes. And they are worried about whether their business can survive. And so it's hardly surprising that people are asking questions.
The issue is what is the truth of the situation. We are part of a single market. We accept a responsibility as a part of a single market. But that single market has got to operate fairly and that should be what the issue is.