Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Tuesday, September 16, 2008, was the “day after Lehman.” It was the day global money markets seized up. At the Federal Reserve Board in Washington, DC, September 16 began with urgent plans to sluice hundreds of billions of dollars into the world’s central banks.

On Wall Street all eyes were on AIG. Would the global insurance giant make it through the day, or would it follow the investment bank Lehman into oblivion? A shock wave was rippling outward. Within weeks its impact would be felt on factory floors and in dockyards, financial markets and commodity exchanges around the world. Meanwhile, in Midtown Manhattan, September 16, 2008, was the opening day of the sixty-third meeting of the UN General Assembly.

The UN building, on East Forty-second Street, is not where financial power is located in New York. Nor did the speakers at the plenary session that began on the morning of September 23 dwell on the technicalities of the banking crisis. B...

The first head of government to speak was President Lula of Brazil, who energetically denounced the selfishness and speculative chaos that had triggered the crisis.1 The contrast with President George W. Bush, who followed him to the rostrum, was alarming. Bush seemed not so much a lame duck as a man out ...

The first half of his address spiraled obsessively around the specter of global terrorism. He then took solace in the favorite neoconservative theme of the advance of democracy, which he saw culminating in the “color revolutions” of Ukraine and Georgia. But that was back in 2003/2004. The devastating financial crisis raging just a short walk a...

The “turbulence” was, as far as Bush was concerned, an American challenge to be handled by the American government, not...

Others disagreed. Gloria Macapagal Arroyo, president of the Philippines, spoke of America’s financial crisis as having unleashed ...

It was spreading around the globe, “not just here in Manhattan Island.” Since the first tremors had shaken the financial markets in 2007, the world had repeatedly reassured itself that the “worst had passed.” But, again and again, “the light at the end of the tunnel” had revealed itself as “an oncoming train hurtling forward with new shocks to the global...

One after another, the speakers at the UN connected the crisis to the question of global governance and ultimately to America’s position as the dominant world power. Speaking on behalf of a country that had recently lived through its own devastating financial crisis, Cristina ...

For once, this was a crisis that could not be blamed on the periphery. This was a crisis that “emanated from the first economy of the world.” For decades, Latin America had been lectured that “the market would solve everything.” Now Wall Street was failing and Pres...

But was the United States in a fit state to respond? “[T]he present intervention,” Fernández pointed out, was not just “the largest in memory,” it was being “made by a State with an incredible trade and fiscal deficit.”4 If this was to stand, then the “Washington Consensus” of fiscal and monetary discip...

“It was a historic opportunity to review behaviour and policies.” Nor was it just Latin American resentment on display. The Europeans joined the chorus. “The world is no longer a unipolar world with one super-Power, nor is it a bipolar world with the East and the West. It’s a multipolar world now,”5 intoned Nicolas Sarkozy, speaking as both president of France and president of the European Council. “The 21st century world” could not be “governed with the institutions of th...

It was not the first time that the question of global governance and America’s role in it had been posed at the United Nations in the new millennium. When the French president spoke at the UN against American unilateralism, no one could ignore the echoes of 2003, Iraq and the struggles over that disastrous war. It w...

had revealed an alarming gulf in political culture between the two continents. Bush and his cohorts on the right wing of the Republican Party were not easy for bien-pensant, twenty-...

By 2008 the Bush administration had lost that battle. And the financial crisis clinched the impression of disaster.

It was a stark historical denouement. In the space of only five years, both the foreign policy and the economic policy elite of the United States, the most powerful state on earth, had suffered humiliating failure.

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 ch...

And the worst of it was that a large part of the American electorate didn’t get the joke. They loved Palin.9 After years of talk about overthrowing Arab dictators, global opinion was beginning to wonder whose regime it was that w...

Only weeks before the General Assembly opened in New York, the world had been given two demonstrations of the reality of multipolarity.

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.10 If bread and circuses are the foundation of popular legitimacy, the Chinese regime, bolstered by its booming economy, was putting on quite the show.

Meanwhile, as the fireworks flared in Beijing, the Russia military had meted out to Georgia, a tiny aspirant to NATO membership, a severe punishment beating.11 Sarkozy came to New York fres...

It was to be the first of a series of more or less open clashes between Russia and the West that would culminate in the violent dismemberment of Ukraine, another aspiring NATO member, and feverish speculation about Ru...

The financial crisis of 2008 appeared as one more sign of America’s fading dominance. And that perspective is all too easily confirmed, when we return to the crisis from the distance of a decade, in the wake of the ...

On that overcast Friday, from the steps of the Capitol, the forty-fifth president summoned the image of America in crisis, its cities in disorder, its international standing in decline. This “carnage,” he declared, must end. How? Trump’s answer boomed out: He and his followers, that day, were issuing a “decree, to be heard in every city, in every foreign capital, and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first . . .”12

If America was indeed suffering a profound crisis, if it was no longer supreme, if it needed to be made “great again,” truths that for Trump were self-evident, then it would at least “decree” its own terms of engagement. This was the answer that the right wing in American politics would give to the challenges of the twenty-first century.

The events of 2003, 2008 and 2017 are all no doubt defining moments of recent international history. But what is the relationship among them? What is the relationship of the economic crisis of 2008 to the geopolitical disaster of 2003 and to America’s political crisis following the election of November 2016?

What arc of historical transition do those three points stake out? What does that arc mean for Europe, for Asia? How does it relate to the minor but no less shattering trajectory traced by the United Kingdom from Iraq to the crisis of the City of London in 2008 and Brexit in 2016?

The contention of this book is that the speakers at the UN in September 2008 were right. The financial crisis and the economic, political and geopolitical responses to that crisis are essential t...

But to understand their significance we have to do two things. We have to place the banking crisis in its wider political and geopolitical context. And, at the same t...

We have to do what the UN General Assembly in September 2008 could not do. We have to grapple with the economics of the financial system. This is a necessarily technical and at times perhaps somewhat coldhearted business. There is a chilly remoteness to much o...

But the necessary complement to those more tactile renderings is the kind of account offered here, which attempts to show how the circulation of power and money was understood to function—and not to function—from within.

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...

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.

Clarifying the scale of this interdependence and the ultimate dependence of the global financial system on the dollar is important not just for the sake of getting the history right. It matters also because it throws new light on the perilous situation created by the Trump administratio...

The crisis that will forever be associated with 2008 was not an American sovereign debt crisis driven by a Chinese sell-off but a crisis fully native to Western capitalism—a meltdown on Wall Street driven by toxic securitized subprime mortgages that threatened to take Europe down with it.

Nor did European banks confine themselves to dealing in the securities. The Europeans went native, joining their American counterparts in integrating down the supply chain so as to control mortgage origination itself. After all, if a Wall Street investment bank could do it, why not a European bank with some experience in retail banking? From the mid-1990s banks like Britain’s HSBC aggressively bought into the American mortgage market.

By 2005 HSBC could boast of having serviced 450,000 mortgages to a total value of $70 billion.10 Credit Suisse built an American mortgage-servicing department that fed one of the largest ABS CDO operations of the early 2000s.

Deutsche Bank had close relationships with the giant mortgage-generating machines at Countrywide and AmeriQuest. In 2006 the German bank bought the subprime specialis...

As a Deutsche Bank press release glowed, ownership of these operations at the bottom of the US credit pyramid would “provide significant competitive advantages, such as access to a steady source of product for distribution into the mortgage capital markets.”12 From the point of view of generating high-yielding ...

How was this possible? It was easy enough to understand how China acquired claims on the United States. It had a gigantic trade surplus, the dollar proceeds of which were bought up by its financial authorities and invested in US Treasurys, giving rise to Larry Summers’s scenario of a “balance of financial terror.”

But among those who worried about global macroeconomic imbalances, Europe was rarely mentioned. The EU current account surplus with the United States was modest compared with that of China. With the world as a whole, Europe’s current account was in modest deficit.

The Europeans did not peg their currencies against the dollar. There was no agency in Brussels accumulating foreign assets as part of a currency stabilization effort, no German sovereign wealth funds. So how did European bank...

The answer is that European banks operated just like their adventurous American counterparts. They borrowed dollars to lend dollars. And the scale of this activity is revealed if we look not at the net flow of capital in and out of the United States (inflows minus outflows), which has its counterpart in the trade deficit or surplus, but...

As the gross inflow data show, by far the largest purchasers of US assets, by far the largest foreign lenders to the United States prior to the crisis, were not Asian but European. Indeed, in 2007, roughly twice as much m...

The rise of China dominated contemporary perceptions of early twenty-first-century globalization. And the axis of imbalance that attracted most attention was that between China and the United States. Worries about geopolitics, Larry Summers’s balance of financial terror, Ben Bernanke’s savings glut, all pointed the finger in that direction.

European banking claims on the United States were the largest link in the system, followed by Asian claims on Europe and American claims on Europe. European claims on Asia exceeded the much commented upon Asian-American connections.

In the aftermath of World War II, the Bretton Woods monetary system had sought to restrict speculative capital flows. This gave the US Treasury and the Fed controlling roles.

Driven by the search for profit, powered by bank leverage, offshore dollars were from the start a disruptive force.