In his book out today, Beyond the Crash, former prime minister Gordon Brown describes how together with the Financial Services Authority, Bank of England, HM Treasury and US counterparts he began preparing for a collapse.
Brown says it was the first joint simulation test between the two countries on financial matters.
He says: “Most who joined our financial ‘war-game’ started with the view that there would be much moral hazard if a rescue was undertaken.
“After much discussion, most ended with the view that in some circumstances rescues would have to be undertaken. No one imagined that in our modern economy there would be queues around the block with runs on banks.”
Brown says he could not involve the private sector for market-sensitivity reasons but now feels he should have included them.
He adds: “Most importantly the simulation was not set up to ask what might happen if a combination of banks might be in difficulty.
“With the exercise bound around the fate of one institution, there was no detailed discussion of the increased entanglement of the institutions with each other and the dependence of many institutions on the shadow banking system- and what would happen if an off-balance sheet entity had to be brought back on to the balance sheet.”
Brown also says Council of Mortgage Lenders’ figures on July 18 2008 showed a 32% drop in lending from June 2007 and these figures made his “blood run cold”.
He says he knew that this meant a lack of credit for individuals and businesses and could lead to a bad recession.