Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Exports matter, but, as both China and the United States demonstrate, there is no substitute for a profitable home market. If we take the cynical view that the basic mission of the eurozone was not to serve its citizens but to provide European capital with a field for profitable domestic accumulation, then the conclusion is inescapable: Between 2010 and 2013 it failed spectacularly.

A rather different vision of the balance of power is suggested by those moments in 2016 when the financial world waited with bated breath to learn the size of the settlement that the US Department of Justice was going to impose on Deutsche Bank for mortgage fraud.

A bank that for more than a century had been a powerhouse of Germany Inc. was at the mercy of the United States. In the wake of the crisis it was the last European investment bank with any global standing.

Europeans may wish to opt out of the global battle for corporate domination. They may even hope that they may thus achieve a greater degree of freedom for democratic politics. But the risk is that their growing reliance on other people’s technology, the relative stagnation of the eurozone and the consequent dependence of Europe’s growth model on exports to other people’s markets will render those pretensions to autonomy quite empty.

If this were simply a drama of Europe’s self-inflicted wounds, it would be bad enough. But to write the history of the eurozone crisis as simply European would be barely less misleading than writing the history of 2008 as all-American. In fact, the eurozone crisis spilled over, repeatedly.

The resulting inversion of the fronts was spectacular. In 2008 it had been the worldly Europeans calling on the out-of-touch Bush administration to recognize the reality of globalism. Eighteen months later it was the centrist liberals of the Obama administration pleading for the eurozone to stabilize its financial system in the face of dogged and unheeding resistance from conservatives in Berlin and Frankfurt.

To prevent Greece from becoming “another Lehman,” the Americans mobilized the IMF, that quintessential creation of mid-twentieth-century globalism, to rescue twenty-first-century Europe. That rescue in May 2010 stopped a further escalation, but it locked Europe, the IMF and the United States as an accessory into a nightmarish entanglement from which they still had not extricated themselves seven years later.

Despite the unpromising start, it would have been churlish to deny that American corporate liberalism, as embodied by the Obama administration, had prevailed once again. Indeed, even today, our sense that the financial crisis had an ending, that at some point in the not too distant past something like normality was restored, depends on looking back to the fall of 2012.

Insofar as the first Obama term had been disappointing, this could be laid at the door of conservative opposition. That was depressing but predictable. Modernity and the global capitalism that gave it so much of its dynamic are demanding pacesetters; foot-dragging from conservatives is only to be expected. But in the end history moves on.

at the time the sense of self-confidence restored was real enough and it left an intellectual legacy. It was the moment when the first surveys of the crisis began to be written. The most optimistic insisted that The System Worked.47 Another declared that 2008 had turned out to be The Status Quo Crisis.48 The more pessimistic version argued that we lived in a Hall of Mirrors.49 Precisely because the crisis had been contained so early and effectively, it had produced a false sense of stability.

this meant that there was an acute risk of repetition. But repetition is not the same as continuation or extension. What all of these narratives took for granted—both the more and the less pessimistic versions—was the fact that the 2008–2012 crisis was over. That was also the basis on which this book was begun. It was intended to be an anniversary retrospect on a crisis that had reached closure.

it is only if we get to grips with the inner workings of the dollar-based financial system and its fragility that we can understand the risks that lurk in the situation of 2017. If Trump’s presidency marks the nadir of American political authority, that is all the more troubling given the deep functional dependence on the United States revealed not only by 2008 but by the eurozone crisis as well.

What we have to reckon with now is that, contrary to the basic assumption of 2012–2013, the crisis was not in fact over. What we face is not repetition but mutation and metastasis. As Part IV of this book will chart, the financial and economic crisis of 2007–2012 morphed between 2013 and 2017 into a comprehensive political and geopolitical crisis of the post–cold war order.

Conservatism might have been disastrous as a crisis-fighting doctrine, but events since 2012 suggest that the triumph of centrist liberalism was false too.50 As the remarkable escalation of the debate about inequality in the United States has starkly exposed, centrist liberals struggle to give convincing answers for the long-term problems of modern capitalist democracy.

Meanwhile, the geopolitical challenges thrown up, not by the violent turmoil of the Middle East or “Slavic” backwardness but by the successful advance of globalization, have not gone away. They have intensified. And though the “Western alliance” is still in being, it is increasingly uncoordinated.

rather than being taken as an expression of the vitality of European democracy in the face of deplorable governmental failure, however disagreeable that expression may in some cases be, the new politics of the postcrisis period were demonized as “populism,” tarred with the brush of the 1930s or attributed to the malign influence of Russia. The forces of the status quo gathered in the Eurogroup set out to contain and then to neutralize the left-wing governments elected in Greece and Portugal in 2015.

Against the Left, preying on its reasonableness, the brutal tactics of containment did their job. Against the Right they did not, as Brexit, Poland and Hungary were to prove.

Distance in time, historians like to tell themselves, is a tonic. It permits the detachment and sense of perspective that are commonly touted as virtues of the discipline. But that depends on where time takes you.

Power appears to have become unmoored from the basic values of reason, logical consistency and factual evidence. What has caused this degeneration?

Gerontocracy.

to attribute our current state of postfactuality to Trump and his cohorts is to succumb only to further delusion.51 As this book will show, what the history of the crisis demonstrates are truly deep-seated and persistent difficulties in dealing “factually” with our current situation.

It was the current president of the European Commission who announced in the spring of 2011: “When it becomes serious, you have to lie.”52 At least, one might say, he knows what he’s doing. If we believe Jean-Claude Juncker, a posttruth approach to public discourse is simply what the governance of capitalism currently demands.

In 1993 Rubin had moved from his position at the top of Wall Street, as cochairman at Goldman Sachs, to serve as the first head of the National Economic Council, which Bill Clinton had called into existence as a counterpart to the National Security Council. Two years later Rubin was appointed Treasury secretary. Alongside Rubin presiding over the Brookings meeting in April 2006 was a youthful economist by the name of Peter Orszag, also a veteran of the Clinton administration, who would go on to become Obama’s budget director.

Twelve months ahead of the financial crisis, two and a half years before Obama took office, the launch of the Hamilton Project presents the worldview of some of his most influential advisers in microcosm. It reveals both what they could see and what they could not.

two years into President Bush’s second term, the policies of the Republican administration were putting America at risk. Rather than mitigating the pressures of global competition, they were dividing American society. This risked provoking both an antiglobalization backlash and a catastrophic financial crisis that would call into question America’s monetary stability and the global standing of the dollar.

For the meritocrats of the Hamilton Project it was clear where the finger of blame pointed. America’s schools were failing to give its young people the education essential to stay ahead of the game. The first reports issued by the Hamilton Project bristled with proposals to improve the recruitment of teachers and make better use of kids’ summer vacations.

Alongside global competitiveness, the other preoccupation that defined the Hamilton team was the question of debt.

Robert Rubin’s great boast was to have turned the deficits of the Reagan era into substantial budget surpluses. Since then under the Republicans, America was headed fast in the wrong direction. In June 2001, in the wake of the dot-com bust and a disputed election, the Bush administration had delivered a tax cut estimated to cost the federal government $1.35 trillion over ten years.

This paid off key constituencies, but it also wiped out Rubin’s surpluses and it did so deliberately. The Republicans had convinced themselves that surpluses tended to encourage more government spending.

Dumbfucks

The problem was that the spending cuts that were supposed to follow the tax cuts never happened. The terrorist attack of September 11, 2001, put America on a war footing. The Bush administration responded with a huge surge in defense and security spending. In a manner horribly reminiscent of Vietnam, it then plunged America into the Iraq quagmire.

The Bush administration did its best to keep the costs of the war off the regular budget. So a cottage industry of Democratic Party experts set itself to doing the sums. By 2008 the bill for Afghanistan and Iraq alone was at least $904 billion. Less conservative estimates put the bill as high as $3 trillion. It was certainly more than the United States had spent on any war since World War II.

America was far richer than it was at the time of Pearl Harbor. But the Bush administration was not only not going to reverse its tax cuts; in May 2003 it doubled down, introducing a further round of tax relief.

It was this logjam that turned Rubin’s budget surplus of $86.4 billion in 2000 into a record deficit of $568 billion in 2004 with no end in sight.

The original inspiration for the Hamilton Project was a paper written in 2004 by Orszag and Rubin sounding the alarm.11 First, the Bush deficits would drive up interest rates and squeeze private investment. Further down the line lurked a far more serious scenario.

Conventional analysis, in short, was not sufficiently alarmist. What it did not “seriously entertain” was the possibility that America was headed toward “fiscal or financial disarray.”

Veterans of the Clinton administration knew what they were talking about when they invoked a “negative cycle” of “underlying fiscal deficit, financial markets, and the real economy.” This, in their view, is what they had inherited from the high-spending Reagan and Bush administrations.

domestic investors were not what most worried the Rubinite crowd. Foreign investors were the key concern. The Bush administration’s deficits were financed overwhelmingly by bond buying from abroad.

In 2003 the nonpartisan Congressional Budget Office saw fit to remind its audience of an extreme scenario in which foreign investors stopped buying US securities, the dollar plunged and interest rates and inflation shot up.

The scale of America’s deficits made it vulnerable to bond market pressure. The fact that foreign investors might suddenly turn away from Treasurys evoked the nightmare of a sudden stop to external financing of America’s imbalances. But it was the identity of the foreign investors that infused the scenario with real terror.

Yellow Peril Part Deux.Barf.

In November 1995, Washington encouraged Beijing’s application to join the newly founded World Trade Organization (WTO). America had done this before, of course, with Western Europe after 1945, with Japan and East Asia in the 1950s and 1960s and with Eastern Europe in the 1990s. Opening markets was good for American business, for American investors and for American consumers. America’s economic interests were so widespread that they were de facto identical with global capitalism.

With the Tiananmen crackdown of 1989, the Communist Party had signaled its intent not to abandon its one-party leadership. Since then it had fashioned a popular ideology that was as much nationalist as Communist.

The party’s leaders wagered that supercharged growth would not weaken them but would consolidate their position as the successful helmsmen of their nation’s spectacular comeback. Beijing took advantage of trading opportunities. But it never subscribed to fully open markets.

In choosing a dollar peg, China was far from unique. Despite the reigning narrative of market liberalization, the financial world was not flat.

The twenty-first century began with a network of dollar-linked currencies accounting for c. 65 percent of the world economy (weighted by GDP).21 Those currencies that were not pegged to the dollar tended to be hooked to the euro.

Often pegging was a sign of weakness.

Laughs Butthead style

In many cases the exchange rate was set at an aspirational, overvalued rate. This created short-term advantages. It made imports cheap. Local oligarchs could snap up prestige foreign real estate at a discount. But it also harbored huge risk...

When international investors lost confidence, the result was a devastating sudden stop. Then the central bank’s foreign exchange reserves would drain and it would have no option but to let the currency peg go.

This was the saga of the 1990s: 1994 in Mexico; 1997 in Malaysia, South Korea, Indonesia and Thailand; 1998 in Russia; 1999 in Brazil. It was containing these crises that earned US Federal Reserve chairman Alan Greenspan, Treasury secretary Robert Rubin, and Larry Summers, Rubin’s number two, the accolade of the “Committee to Save the World.”

With the Bush administration fully distracted by the terror attack of 9/11, financial speculation built against Argentina. Despite a $22 billion loan from the IMF, without American backing the Argentinian position became untenable; 80 percent of Argentine private debt was in dollars, whereas only 25 percent of Argentina’s economy was export oriented.

On December 24, 2001, Argentina announced the suspension of payments on $144 billion of public debt, including $93 billion owed to foreign creditors. The peso plunged in value from 1:1 to 3:1 against the dollar, bankrupting the dollar debtors.

As the twenty-first century began, more than half of Argentina’s population fell below the poverty line.