The point is that, when a financial institution buys equity or bonds recently issued by a bank, it pays for the new assets from its bank balance. So bank deposits and the quantity of money go down.In normal conditions, bank capital-raising proceeds steadily and inconspicuously, and does not figure in political memoirs. But Brown was intent on such a vast programme of bank recapitalization that in 2009 it was to prove a major contractive influence on the quantity of money. True enough, if banks maintain a given ratio of capital to assets, they ought to decide after a large capital-raising exercise to expand their balance sheets at a faster pace. They have more capital and so ought to make more loans. But the requirement that banks operate with a relatively stable capital-to-asset ratio is essential. 

It is here that we come to perhaps the most shocking blunder of the Brown premiership. In a crisis, banks are likely to have losses, which cut into capital. But they dislike having to upset customers by closing credit lines and shrinking assets, and try to manage the cyclical fluctuation by temporarily operating on a lower capital-to-asset ratio than normal. All being well, credit lines are kept open, no loans are repaid and the quantity of money is at worst unchanged. Once the recovery is under way, part of the operating profits can be retained and the usual capital-to-assets ratio is restored. A plunge in the quantity of money, and an associated large downturn in demand and output, is avoided.

But in late 2008, British officialdom determined that banks had to operate on much higher capital-to-asset ratios than before. Given the context, this was crazy. Despite the capital raising into which they had been bullied, the banks were therefore deemed still to have too little capital relative to newly-imposed regulatory rules. As a result, they had no option but to withdraw credit lines and to shrink their balance sheets. This was part of the ritual cleansing mandated by the conventional wisdom, but the macroeconomic consequences were disastrous. With banks selling off loan portfolios to insurance companies and pension funds, and with their customers repaying loans, the quantity of money stopped growing. Far from the bank recapitalization exercises of October 2008 halting the slide in the economy, they were followed by a drastic deterioration in demand and output. 

During the crisis Brown and Alistair Darling, his Chancellor of the Exchequer, claimed that the bankers "didn't get it". In other words, the bankers did not understand why officialdom was in such a tizzy about their alleged iniquities and the supposed imperative to recapitalize. One message of Beyond the Crash is that Brown now does not "get it". Although the six months from October 2008 saw the steepest falls in output and employment for over a generation, he has not understood that the bank recapitalizations and increases in banks' capital ratios caused the quantity of money to go down, and hence were responsible for the macroeconomic trauma. 

Brown claims that in mid-2008 he sensed that "with the major industrial economies hurtling towards depression", policy-makers were "facing a perfect storm" and "economic orthodoxy was proving irrelevant". Well, that depends on what is to be understood by the notion of "economic orthodoxy". Contrary to the impression given by Beyond the Crash, the official focus on bank lending and banking system capital in the crisis of 2008 and 2009 was new. In previous downturns policy-makers had paid relatively little attention to these matters, which were regarded as a technical sideshow to be sorted out by the banks in private discussions with their regulators and auditors. Economic orthodoxy had instead been concerned with money, the quantity of deposits, rather than credit, the quantity of loans.