We were warned

It's turning into a golden autumn for <strong>Gordon Brown</strong> - but it would have been a bette

Credit where credit is due - and you have to say that a £37bn injection of cash into high-street banks is one shedload of credit - Gordon Brown has had a good autumn. There is a year between Brown's darkest night as Prime Minister when he called off "the election that never was" (Friday 5 October 2007) and the announcement of the government's part-nationalisation of the banking system (Wednesday 8 October 2008). When students of history come to study this period, which of these momentous events will define this government's legacy? Which, if either, of these decisions was wise?

The conventional wisdom may turn out to be wrong in both cases. It is by no means settled that Brown was wrong to cancel the election. What if Labour had scraped home in a snap election last November? Would a hobbled government working with a reduced majority have been better placed to deal with the present economic situation? And, there was the real prospect that David Cameron's novices might have ended up in charge during the credit crunch, an even scarier prospect.

Will the bank bailout prove to be the correct decision? It was right, morally, to protect the general public from the ravages of the credit crunch by shoring up the institutions that hold their savings. But there is no guarantee that the measures to "recapitalise" the banks, announced on 13 October, will work in the long term. At his press conference, Brown was uncompromising in his criticism of market speculators, a point he pushed home when speaking to City figures later in the day, saying there should be no "unfair incentives for irresponsibility or excessive risk-taking for which the rest of us have to pay". But there has been little talk from the Prime Minister or the Chancellor about the consequences politicians should face for the risks they have taken with our money.

To be fair, they haven't often been asked. When the question was put directly to Brown at his Thomson Reuters lecture to the City, he answered in the only way he could: ultimately he has to bear responsibility.

The Prime Minister insists we should look on the billions being spent on the banks not as debt, but as an investment in essentially robust institutions. Almost everyone, from Labour's hard left to the City, is united in their support for the measures, but it is hard to imagine being persuaded by such an investment in any other circumstances.

"It's like this," says your friendly government financial adviser. "We want you to put £37bn, that's almost three times the budget for primary schools, into these institutions. We admit they have already been extremely irresponsible with their customers' money and that the management of these banks is seriously flawed and their top-heavy bonus system is a scandal. We have been slow to introduce the necessary safeguards to stop them gambling away your hard-earned cash and we cannot guarantee a good return. But, despite what you may have heard recently, shares do go up as well as down."

Already, the Prime Minister has stated there now needs to be a "second wave" of measures to shore up the system with far-reaching reforms to ensure that nothing like this happens again. As we go to press, Brown is telling EU leaders in Brussels that there should be a thorough overhaul of the international banking system, which would include increased transparency, an end to the culture of speculative incentives and reform of the International Monetary Fund.

Gordon Brown's reinvention as a European is one of a series of ironies. Brown has always been determined to win over the Europeans to his "British model" of economic management: that is, the liberalisation of markets, an end to subsidies, an openness to globalisation, increased competition. In short, the Americanisation of the European economies. He has now found his opportunity to lord it over Europe, just as the American model has been shown to fail.

There is a notion around that Brown has been looking with disapproval for some time at the excesses of the market. But, until he became Prime Minister, Brown chaired the International Monetary and Financial Committee, an advisory body to the IMF's board of governors, which is responsible for "supervising the management and adaptation of the international monetary and financial system, reviewing developments in global liquidity . . . and dealing with disturbances that might threaten the system". Take a look at his October 2005 encomium to the global economy, Global Europe: Full Employment Europe. This was a Treasury paper written almost as the economic manifesto for Britain's presidency of the European Union. Not much sign of caution in this document, which called for the EU to adopt a "risk-based approach to regulation" by rewriting the EU's "enormous and unwieldy rule book". Brown argues for stricter regulation now, but then he was militating for something quite different. He was a crusader for the "British model" in Europe. See, too, his Mansion House speech of June 2005 "Global Britain, Global Europe: a presidency founded on pro-European realism", or his 2006 Treasury paper The Case for Open Markets: How Increased Competition Can Equip Europe for Global Change.

The Prime Minister is now keen to reform the IMF to create "a new international financial architecture for the global age". In his Thomson Reuters lecture, Brown announced: "With the same courage and foresight of [its] founders, we must now reform the international financial system around agreed principles of transparency, integrity, responsibility, good housekeeping across borders." This, he said, would act as a global early warning system, a kind of economic tsunami alert, rather than leaving the IMF to mop up after the event.

Brown has pushed the line that it gives him "no comfort" that he has been proposing such reforms for some time. Yet the international institutions he now criticises have been warning for some time about the dangers of the "British model". In fact, the IMF issued just such an "early warning" about Brown's stewardship of the British economy more than 18 months ago.

The chilling prediction can be found in a publicly available IMF document dated March 2007 with the technical title "United Kingdom 2006, Article IV Consultation, Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for United Kingdom". Such country reports are produced each year as a result of discussions between the IMF and individual nations.

Brown's assiduous biographer, Simon Lee of Hull University, noticed the warning signals contained in the report. He wrote last year, in his book Best for Britain?: the Politics and Legacy of Gordon Brown, "as the IMF has noted, by encouraging the UK economy to become even more linked to global financial markets, the British model has increased the vulnerability of the UK economy to global risks and contagion".

The report warned of the UK's high levels of household debt, not something the Prime Minister can blame on global markets, and it noted the UK housing market was overpriced and could be heading for a crash. More crucially, it contained a warning of "the gap between customer lending and customer funding through deposits" leading to a reliance on the wholesale markets - precisely what brought down Northern Rock.

When the business journalists reported the IMF's findings on 5 March last year they concentrated on the headline statement that Britain's economic performance remained "impressive". But that was a historical judgement. A far more significant part of the report concluded: "Given these growing cross-country linkages, global risks are particularly important to the UK financial system, more for their potential severity than for their likelihood of being realised."

In other words, it probably won't happen, but if it does, the British financial system will be hit very hard indeed.

Well, it did happen. And the IMF's early warning system had sounded the alarm. In bilateral discussions, the UK was warned in March 2007 that our system was particularly vulnerable to shocks in the international markets precisely because of Britain's unique links to those markets. The government simply chose not to listen.