Almost a decade from the day when Lehman Brothers collapsed during the tumult of the GFC, the former UK Prime Minister has warned major problems within the financial sector that led to the crisis have still not been remedied.

By Daniel Herborn

Posted on September 13, 2018

Brown was Prime Minister of the UK during the worst stretch of the crisis and told The Guardian he has grave concerns about the financial sector.

“We are in danger of sleepwalking into a future crisis,” he said. “There is going to have to be a severe awakening to the escalation of risks, but we are in a leaderless world.”

Brown says populism and protectionism would worsen a new financial crisis

Brown outlined some fundamental concerns he has with the global financial system. Firstly, he said there was even less scope now to reduce interest rates than there was ten years ago and no evidence that financial ministries have the necessary discretion to cut taxes or increase public spending. Further, the world economy can not rely on China to provide stimulus.

He is also concerned about individual countries retreating into silos of their own making and the lack of global co-operation highlighted by Trump’s protectionist tariff policies.

“The cooperation that was seen in 2008 would not be possible in a post-2018 crisis both in terms of central banks and governments working together,” Brown said. “We would have a blame-sharing exercise rather than solving the problem,” Brown said.

Brown was instrumental in helping to establish the G20, an international forum for the governments and central bank governors from developed nations which aims to promote financial stability.

The former Labour leader lamented there was still no early warning system to monitor financial flows and give an accurate picture of total debt and the terms of major loans. “We have dealt with the small things but not the big things,” he said.

There has been some reform of financial services regulator, including bolstered requirements for banks to hold more capital but Brown said this oversight still did not go far enough and that banks will expect to be bailed out again if they fail.

Gordon Brown: “The fear that bankers will be imprisoned for bad behaviour is not there”

Brown also admitted Labour could have done more to strengthen regulation of the financial services industry and provide harsher deterrents for wrongdoing.

Only a handful of banking executives in the UK were jailed for their conduct leading up to the GFC. Similarly, figures on how many top banking executives were jailed for their role in the crisis are as low as one, though some reports state as many as 35 bankers were jailed for financial crimes leading up to the crisis.

“The penalties for wrong-doing have not been increased sufficiently,” Brown argued. “The fear that bankers will be imprisoned for bad behaviour is not there. There has not been a strong enough message sent out that government won’t rescue institutions that haven’t put their houses in order.”

Brown said that if another crash occurs it would not have its roots in the US housing market, as was the case with the 2008 crisis.

He pointed to the rise of ‘shadow banks’, financial institutions that largely exist outside the regulatory framework, as a cause of concern, particularly in Asia.

A recent report found that shadow banks now hold more than US$45 trillion in assets worldwide.