Governments have at last thrown the world a lifeline

In the last week the world has seen the UK’s “good Gordon” in action. Confronted by the implosion of the country’s financial system, Gordon Brown, the British prime minister, acted. The plan his government came up with is comprehensive and bold. It will also be expensive. But the cost will be much less than the alternative – a depression – would have been.

More important, others now agree. The meetings of financial policymakers in Washington over the weekend bore fruit, first in a general communiqué and then in detailed programmes of action. The European agreement is particularly impressive. Mr Brown can rightly claim to have been the leader. The world has, as a result, stepped away from an abyss, though the road ahead remains strewn with obstacles.

Policymakers finally realised that a plan for dealing with such a severe financial crisis must contain those elements that are individually necessary and collectively sufficient. Two elements are necessary: massive provision of liquidity and recapitalisation of financially weak institutions. Two other elements will help, dependent on the circumstances: guarantees to lenders and purchases of defective assets. The US, with its complex financial system and bad mortgage assets, will find blanket guarantees hard to manage but may benefit from purchases. Europeans seem to be in the opposite situation.

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