Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

And, as if to compound the process of delegitimatization, in August 2008 American democracy made a mockery of itself too. As the world faced a financial crisis of global proportions, the Republicans chose as John McCain’s vice presidential running mate the patently unqualified governor of Alaska, Sarah Palin, whose childlike perception of international affairs made her the laughingstock of the world.

And yet

On the one hand, China’s staggering Olympic display put to shame anything ever seen in the West, notably the dismal Atlanta games of 1996, which had been interrupted, it is worth recalling, by a pipe bombing perpetrated by an alt-right fanatic.

Eh. Did anyone care?

And this particular black box is worth prizing open, because, as this book will show, the simple idea, the idea that was so prevalent in 2008, the idea that this was basically an American crisis, or even an Anglo-Saxon crisis, and as such a key moment in the demise of American unipolar power, is in fact deeply misleading.

Eagerly taken up by all sides—by Americans as well as commentators around the world—the idea of an “all-American crisis” obscures the reality of profound interconnection.14 In so doing, it also misdirects criticism and righteous anger.

And in a contentious and problematic way it had the effect of recentering the world financial economy on the United States as the only state capable of meeting the challenge it posed.15 That capacity is an effect of structure—the United States is the only state that can generate dollars. But it is also a matter of action, of policy choices—positive in the American case, disastrously negative in the case of Europe.

To view the crisis of 2008 as basically an American event was tempting because that is where it had begun. It also pleased people around the world to imagine that the hyperpower was getting its comeuppance. The fact that the City of London was imploding too added to the deliciousness of the moment.

As we will see in the first section of this book, economists inside and outside America critical of the Bush presidency, including many of the leading macroeconomists of our time, had prepared a disaster script. It revolved around America’s twin deficits—its budget deficit and its trade deficit—and their implications for America’s dependence on foreign borrowing.

The contention of this book is that to view the 2008 crisis and its aftermath chiefly through its impact on America is to fundamentally misunderstand and underestimate its economic and historical significance. Ground zero was America’s housing market, for sure. Millions of American households were among those hit earliest and hardest. But that disaster was not the crisis that had been widely anticipated before 2008, namely, a crisis of the American state and its public finances.

Instead, it was a financial crisis triggered by the humdrum market for American real estate that threatened the world economy. The crisis spilled far beyond America. It shook the financial systems of some of the most advanced economies in the world—the City of London, East Asia, Eastern Europe and Russia. And it went on doing so. Contrary to the narrative popular on both sides of the Atlantic, the eurozone crisis is not a separate and distinct event, but follows directly from the shock of 2008.

The redescription of the crisis as one internal to the eurozone and centered on the politics of public debt was itself an act of politics. In the years after 2010, it would become the object of something akin to a transatlantic culture war in economic polic...

The impact of the crisis was uneven but global in its reach, and by the vigor of their reactions, emerging market governments spectacularly confirmed the reality of multipolarity.

After a decade of determined “self-strengthening,” in 2008, none of the victims of the 1990s were forced to resort to the International Monetary Fund. China’s response to the financial crisis it imported from the West was of world historic proportions, dramatically accelerating the shift in the global balance of economic activity toward East Asia.

if we look closely not at the periphery but at the core of the 2008 crisis, it is clear that this diagnosis is partial at best. Among the emerging markets, the two that struggled most with the crisis of 2008 were Russia and South Korea. What they had in common apart from booming exports was deep financial integration with Europe and the United States.

What they experienced was not just a collapse in exports but a “sudden stop” in the funding of their banking sectors.17 As a result, countries with trade surpluses and huge currency reserves—supposedly the essentials of national economic self-reliance—suffered acute currency crises.

Hidden below the radar and barely discussed in public, what threatened the stability of the North Atlantic economy in the fall of 2008 was a huge shortfall in dollar funding for Europe’s oversized banks.

It was the opposite of the crisis that had been forecast. Not a dollar glut but an acute dollar-funding shortage. The dollar did not plunge, it rose.

Forged in the wake of World War I and World War II, the macroeconomic perspective on international economics is organized around nation-states, national productive systems and the trade imbalances they generate.

Keynesian economics is, indeed, indispensable for grasping the dynamics of collapsing consumption and investment, the surge in unemployment and the options for monetary and fiscal policy after 2009.

when it comes to analyzing the onset of financial crises in an age of deep globalization, the standard macroeconomic approach has its limits. In discussions of international trade it is now commonly accepted that it is no longer national economies that matter. What drives global trade are not the relationships between national economies but multinational corporations coordinating far-flung “value chains.”

To understand the tensions within the global financial system that exploded in 2008 we have to move beyond Keynesian macroeconomics and its familiar apparatus of national economic statistics.

we need to analyze the global economy not in terms of an “island model” of international economic interaction—national economy to national economy—but through the “interlocking matrix” of corporate balance sheets—bank to bank.

government deficits and current account imbalances are poor predictors of the force and speed with which modern financial crises can strike.23 This can be grasped only if we focus on the shocking adjustments that can take place within this interlocking matrix of financial accounts.

What the Europeans, the Americans, the Russians and the South Koreans were experiencing in 2008 and the Europeans would experience again after 2010 was an implosion in interbank credit. As long as your financial sector was modestly proportioned, big national currency reserves could see you through. That is what saved Russia.

None of the leading central banks had gauged the risk ahead of time. They did not foresee how globalized finance might be interconnected with the American mortgage boom. The Fed and the Treasury misjudged the scale of the fallout from the bankruptcy of Lehman on September 15. Never before, not even in the 1930s, had such a large and interconnected system come so close to total implosion.

As we shall see in Part II, not only did the Europeans and Americans bail out their ailing banks at a national level. The US Federal Reserve engaged in a truly spectacular innovation. It established itself as liquidity provider of last resort to the global banking system. It provided dollars to all comers in New York, whether banks were American or not.

This response was surprising not only because of its scale but also because it contradicted the conventional narrative of economic history since the 1970s. The decades prior to the crisis had been dominated by the idea of a “market revolution” and the rollback of state interventionism.

The events of 2008 massively confirmed the suspicion raised by America’s selective interventions in the emerging market crises of the 1990s and following the dot-com crisis of the early 2000s.

In the event of a major financial crisis that threatened “systemic” interests, it turned out that we lived in an age not of limited but of big government, of massive executive action, of interventionism that had more in common with military operations or emergency medicine than with law-bound governance.

this revealed an essential but disconcerting truth, the repression of which had shaped the entire development of economic policy since the 1970s. The foundations of the mo...

money and credit and the structure of finance piled on them are constituted by political power, social convention and law in a way that sneakers,...

At the apex of the modern monetary pyramid is fiat money.28 Called into existence and sanctioned by states, it has no “backing” other than its status as legal tender. That uncanny fact became literally true for the first time...

The social and economic forces that had made the gold peg unsustainable even for the United States were powerful—at home the struggle for income shares in an increasingly affluent society, abroad the liberalization of offshore dollar trading in London in the 1960s. When those forces were unleashed in the 1970s without a monetary anchor, the result was to send inflation soaring toward 20 percent in the advanced economies, something unprecedented in peacetime.

By the mid-1980s Fed chair Paul Volcker’s dramatic campaign to raise interest rates had curbed inflation. The only prices going up in the age of the great moderation were those for shares and real estate. When that bubble burst in 2008, when the world faced not inflation but deflation, the key central banks threw off their self-imposed shackles.

because the modern banking system is both global and based on dollars, that meant unprecedented transnational action by the American state.

The bank bailouts of 2008 provoked long-running and bitter recrimination and for good reason. Hundreds of billions of taxpayer funds were put in play to rescue greedy banks. Some interventions yielded a return. Others did not. Many of the choices made in the course of the bailouts were highly contentious. In the United States they would exacerbate deep rifts within the Republican Party, with dramatic consequences eight years later. But the problem goes beyond individual decisions and party political programs to the way in which we think and talk about the structure of the modern economy.

By contrast, the new macrofinancial economics, with its relentless focus on the “interlocking matrix” of corporate balance sheets, strips away all the comforting euphemisms. National economic aggregates are replaced by a focus on corporate balance sheets, where the real action in the financial system is. This is hugely illuminating. It gives economic policy a far greater grip. But it exposes something that is deeply indigestible in political terms.

The financial system does not, in fact, consist of “national monetary flows.” Nor is it made up of a mass of tiny, anonymous, microscopic firms—the ideal of “perfect competition” and the economic analogue to the individual citizen. The overwhelming majority of private credit creation is done by a tight-knit corporate oligarchy—the key cells in Shin’s interlocking matrix.

At a global level twenty to thirty banks matter. Allowing for nationally significant banks, the number worldwide is perh...

The stark truth about Ben Bernanke’s “historic” policy of global liquidity support was that it involved handing trillions of dollars in loans to that coterie of banks, their shareholders and their outrageously remunerated senior staff.

To compound the embarrassment, though the Fed is a national central bank, at least half the liquidity support it provided went to banks not headquartered in the United States, but located overwhelmingly in Europe.

However unprecedented and effective the Fed’s actions might have been, even for those politicians whose support for globalization was unfailing, its practical implications were barely speakable. Though it is hardly a secret that we inhabit a world dominated by business oligopolies, during the crisis and its aftermath this reality and its implications for the priorities of government stood nakedly exposed.

The Europeans all too easily dismissed the American crisis fighting of 2008–2009 as yet another instance of the kind of improvisation and indiscipline that had got the world into trouble in the first place. It became the first stage in a transatlantic culture war over economic policy that culminated in the acrimonious debate about the crisis of the eurozone, which takes center stage in Part III of this book.

The sustainability of public debts may be a problem in the long term. Greece was insolvent. But excessive public debt was not the common denominator of the wider eurozone crisis. The common denominator was the dangerous fragility of an overleveraged financial system, excessively reliant on short-term market-based funding.

The eurozone crisis was a massive aftershock of the earthquake in the North Atlantic financial system of 2008, working its way out with a time lag through the labyrinthine political framework of the EU.

the puzzle is that if this were so, if what was happening in the eurozone was a veiled rerun of 2008, then at least one might have expected to have seen American-style outcomes. As its protagonists were well aware, America’s crisis fighting exhibited massive inequity.

Since 2009 the US economy has grown continuously and, at least by the standards set by official statistics, it is now approaching full employment. By contrast, the eurozone, through willful policy choices, drove tens of millions of its citizens into the depths of a 1930s-style depression. It was one of the worst self-inflicted economic disasters on record.

It is a spectacle that ought to inspire outrage. Millions have suffered for no good reason. But for all our indignation we should give that point its full weight. The crucial words are “for no good reason.”

The story told here is not that of a successful political conjuring trick, in which EU elites neatly veiled their efforts to protect the interests of European big business. The story told here is of a train wreck, a shambles of conflicting visions, a dispiriting drama of missed opportunities, of failures of leadership and failures of collective action.

amid the outrage this shambles should inspire, we are apt to forget another of its long-term consequences. The botched management of the eurozone crisis coming on the heels of the transatlantic financial crisis of 2008–2009 was damaging not only for millions of Europe’s citizens. It had dramatic consequences for European business too, on whom willy-nilly those same people rely for jobs and wages.

Since 2008, it is not just the rise of Asia that is shifting the global corporate hierarchy. It is the decline of Europe.40 This might ring oddly to Europeans used to hearing boasts of Germany’s trade surplus. But as Germany’s own most perceptive economists point out, those surpluses are as much the result of repressed imports as of roaring export success.