“There is a striking similarity between the questions we ask about 1914 and 2008,” writes Adam Tooze. “How does a great moderation end? How do huge risks build up that are little understood and barely controllable? . . . How do the passions of popular politics shape elite decision-making? Is there any route to international and domestic order? Can we achieve perpetual stability and peace? Does law offer the answer? Or must we rely on the balance of terror and the judgment of technicians and generals?”
With these questions, Tooze, a distinguished British historian, now teaching at Columbia University, finishes his monumental narrative history of 10 years that have reshaped our world. These are, he adds, also questions “that haunt the great crises of modernity”.
Yet the fact that the book closes, rather than opens, with these questions indicates that it does not provide the answers. Instead, Crashed gives readers a detailed and superbly researched account of the origins and consequences of the wave of financial crises that emanated from the core of the global financial system from 2007. The prose is clear. The scholarship remarkable. Even people who have followed this story closely will learn a great deal.
As Tooze explains, the book examines “the struggle to contain the crisis in three interlocking zones of deep private financial integration: the transatlantic dollar-based financial system, the eurozone and the post-Soviet sphere of eastern Europe”. This implosion “entangled both public and private finances in a doom loop”. The failures of banks forced “scandalous government intervention to rescue private oligopolists”. The Federal Reserve even acted to provide liquidity to banks in other countries.
Such a huge crisis, Tooze points out, has inevitably deeply affected international affairs: relations between Germany and Greece, the UK and the eurozone, the US and the EU and the west and Russia were all affected. In all, he adds, the challenges were “mind-bogglingly technical and complex. They were vast in scale. They were fast moving. Between 2007 and 2012, the pressure was relentless.”
Tooze concludes this description of events with the judgment that “In its own terms, . . . the response patched together by the US Treasury and the Fed was remarkably successful.” Yet the success of these technocrats, first with support from the Democratic Congress at the end of the administration of George W Bush, and then under a Democratic president, brought the Democrats no political benefits.
The adamantine opposition of the Republican party to all efforts to deal sensibly with the aftermath of (or learn from) the crisis reaped the political rewards. Ultimately, their deliberate fomenting of rage led to the election in 2016 of Donald Trump, described here as an “erratic, narcissistic nationalist”.
This, then, is a complex story, financially, economically and also politically. Yet some things are now clear. The crisis marked the end of the dominant consensus in favour of economic and financial liberalisation. It shifted political energy towards populist extremes, particularly towards the xenophobic right. It weakened the legitimacy of European integration. The world of the established high-income countries fell into flux. Anything now seems possible.
If these are the book’s broad conclusions, what are some of the more detailed ones?
One is that this was a crisis of the north Atlantic region, which emanated from an irresponsible and poorly regulated financial sector. Tooze details how deeply engaged European banks were in the pre-crisis madness. “The central axis of world finance was not Asian-American, but Euro-American.”
This was not just a crisis of north Atlantic finance, but also of dollar-based finance. European banks had built up huge dollar liabilities and assets, with nearly all of those liabilities consisting of short-term market borrowing. When this lending froze, these foreign banks were in grave danger. It was the Federal Reserve, directly and via swap lines — dollar loans to other central banks, especially the European Central Bank and the Bank of England — that saved the day.
Furthermore, because the banking systems had become so huge and intertwined, this became, in the words of Ben Bernanke — Fed chairman throughout the worst days of the crisis and a noted academic expert — the “worst financial crisis in global history, including the Great Depression”. The fact that the people who had been running the system had so little notion of these risks inevitably destroyed their claim to competence and, for some, even probity.
Given the scale of the crisis, no alternative to a comprehensive state-backed rescue existed. And, given that this was a dollar-based financial system, it had to be led by the Americans. Moreover, because political pressure had already mobilised against fiscal policy action by as early as 2010, central banks, not elected representatives, had to take most of the needed action. But their policy actions, particularly “quantitative easing” — the buying of assets held by the private sector, especially government bonds — became noxious to those who viewed these actions as an unnatural distortion of markets, an unwarranted reduction in returns to savers, or an unjustified boost to the wealth of the already wealthy. Nevertheless, these actions were both appropriate and successful.
The scale and nature of the required response had significant political consequences. The public was enraged by the size of support for the banks and, even worse, by the payment of the bonuses apparently due to the bankers. This was made more infuriating by the fact that hundreds of millions of ordinary people suffered by losing their homes and jobs, or by being the victims of post-crisis fiscal austerity. Many were also enraged that so few senior individuals were charged. The trust that must exist in any democracy between elites and everybody else collapsed. With trust gone, conspiracy-mongers and political mountebanks had their day.
Perhaps most startlingly, conservative politicians in the US, the UK and Germany successfully reframed the crisis as the result of out-of-control fiscal policy rather than the product of an out-of-control financial sector. Thus, George Osborne, chancellor of the exchequer in the UK’s coalition government, shifted the blame for austerity on to alleged Labour profligacy. German politicians shifted the blame for the Greek mess from their banks on to Greek politicians. Transforming a financial crisis into a fiscal crisis confused cause with effect. Yet this political prestidigitation proved a brilliant coup. It diverted attention from the failure of the free-market finance they believed in to the costs of welfare states they disliked.
At the same time, the financial crisis really had left most countries permanently poorer than had been expected. People were in aggregate worse off. That misery did need to be shared out. The question always was: how.
The crisis also revealed the lack of preparedness of the eurozone. Tooze details the long and painful history of the crisis in the single currency and the intellectual, political, economic and institutional failings that made it unnecessarily drawn-out and deep.
Conservative politicians reframed the crisis not as the product of an out-of-control financial sector, but as the result of out-of-control fiscal policy
Resistance to necessary and just debt restructuring, particularly in Greece and Ireland, notably by the ECB, under Jean-Claude Trichet, is just one, albeit crucial, part of this story. Still more important was the failure to force the recapitalisation of the European banking system, in the way that the Americans did so successfully.
Yet another part of this story is the divergence between an increasingly exasperated US and a recalcitrant Germany over how to handle the crisis. Radoslaw Sikorski, Poland’s foreign minister, said in 2011, “I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity. You have become Europe’s indispensable nation. You may not fail to lead.” Action did come, but it was always too little and too late.
Yet, with judgment and some luck — above all, the luck to have the pragmatic Angela Merkel as chancellor of Germany and the competent Mario Draghi as president of the ECB — the eurozone struggled through. But it was a close-run thing. Tooze explains, for example, that Draghi’s crucial “whatever it takes” remark in London in July 2012 was spontaneous, not planned. Above all, the tensions between domestic political accountability on the one hand, and a supra-national currency on the other, remain. The drama of the euro is most definitely not over.
The book also analyses the consequences for eastern Europe and Russia. It explains how the crisis led directly to the election of the Fidesz party in 2010 and so put Hungary on the path to Viktor Orban’s “illiberal democracy”. The impact of the shattering financial crisis transformed the relationship between the Russian government and the oligarchs. As the economy continued to struggle, it also promoted Russia’s dangerously nationalist turn.
Much more still is here: the extraordinary response of China to the shock of the crisis, with a stimulus programme amounting to 12.5 per cent of gross domestic product, probably the biggest such programme in peacetime ever; and the vulnerability of emerging economies to the tides of dollar-based finance, as money poured into the US, then out.
Also present are some huge political stories: the meddling of the EU in Ukraine and the consequent bitter clashes with Russia, the Brexit referendum and the rise of Trump. All these changes, too, reflect in part the political pressures created, or exacerbated, by the crisis. The ripples caused by this shock move onwards into the future.
Even a story this complete has omissions. Tooze focuses on the idea that the growth of the financial sector’s balance sheets was ultimately the cause of the crisis. He does not pay enough attention to why policymakers needed this to happen. The explanation, as I have argued in my own book, The Shifts and the Shocks, was the global savings glut and associated global macroeconomic imbalances. Huge external surpluses in some countries necessitated huge deficits in others. Central banks needed the credit growth if they were to hit the macroeoconomic targets.
Another underplayed question is whether the financial sector has been made sufficiently robust. It is arguable, alas, that balance sheets remain too large, that many of the underlying weaknesses of the financial sector survive, that pressures for deregulation are now growing and, not least, that some of the unconventional actions taken during the crisis by the Fed would now be impossible. That is worrying.
What, finally, are the biggest results? One comes from Tooze’s remark that “the optimistic dogma under which democracy and markets were seen as necessary complements — the mantra of the aftermath of the cold war — was dead. In its place the crisis had put a more realistic awareness of the potential tensions between the two.” This is surely right.
Yet another of these big results is that power and politics are back. US power dealt with the crisis. German power shaped the eurozone’s response. Rightwing politics reimagined a financial crisis as a fiscal one. A similar politics also shifted the emphasis from the dangers of economic insecurity and inequality to the threat from immigration. The crisis has, alas, awoken the sleeping ogres of fear and hatred.
How, if at all, will liberal democracy survive the age of Trump, Brexit, Putin and Xi? That is the biggest question raised by this transformative decade.
Crashed: How a Decade of Financial Crisis Changed the World, by Adam Tooze, Allen Lane RRP£30, 704 pages
Martin Wolf is the FT’s chief economics commentator
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