Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

In the United States the figures were far larger. In the 2008 bonus season, after suffering tens of billions in losses, Wall Street paid out $18.4 billion to its top staff. That was two and a half times the amount that Congress approved for the president’s priority of modernizing America’s broadband infrastructure.

When Obama confronted the bank CEOs on March 27 the atmosphere was frosty. But he had summoned them to Washington not to punish them but to remonstrate with them. He appealed to the bankers to show restraint in their compensation and bonuses. “Help me help you,” the president pleaded. When several of the CEOs offered the customary justifications for their exorbitant compensation—their businesses were large and risky; they were competing in an international talent pool—the president interrupted in exasperation: “Be careful how you make those statements, gentlemen. The public isn’t buying that. . . . My administration is the only thing between you and the pitchforks.”16

portrayal Geithner was not a banker but a soldier, a man

But how did Geithner define that public interest? First and foremost his commitment was to upholding the stability of “the financial system,” because without that, the entire economy was bound to fail.21 That was his key article of faith. The interests of America and the financial system were aligned. To explain his actions we do not need to imagine that he was in the pocket of any particular bank. It was his commitment to the system that dictated that Citigroup should not be broken up.

Whereas there are plenty of safety agencies, there are, in fact, no agencies responsible for ensuring the financial viability of airlines or any industry other than banks. Airlines are expected to take care of their own finances. But Geithner and Summers preferred to sidestep the ramifications of that thought.

Debtors continued to default, in other words, but their disaster did not pose systemic risks. They were the powerless ones who received precious little support from the Obama administration or anyone else.

Austerity was the medicine forced down Greek throats for years to come. But the budget adjustment required was unrealistic and its impact on the Greek economy was devastating. As restructuring was, in the end, inevitable, the question ought to have been how to make it safe, how to build a framework within which debts could be written down and losses inflicted on creditors without unleashing a general panic.

What this official narrative disguises is Berlin’s own role in precipitating the “acute pending systemic crisis.” Ahead of vital regional elections in early May the public agitation in Germany against assistance for Greece was ferocious.

One could hardly ask for a clearer statement of the “bait and switch” substitution, by which a problem of excessive bank lending was turned into a crisis of public borrowing.63 But this substitution resulted less from a skillful ideological conjuring trick than from a lowest common denominator compromise between the main players in the Greek debt drama—Germany, France, the ECB, the IMF and the Obama administration.

On closer inspection, Reinhart and Rogoff’s analysis turned out to be riddled with errors. Once their Excel spreadsheet was properly edited, there was no sharp discontinuity at the 90 percent mark and the case for emergency action was far weaker than they made out.3 But in early 2010 their arguments ruled the roost.

If they wanted to ease the pressure, all the ECB needed to do was what the Fed, the Bank of England or the Bank of Japan did as a matter of course—buy Greek bonds. But the ECB had no intention of doing that, not, at least, until the very last minute. The ECB meant to send a message: Austerity or else!

Between 2010 and 2016 spending by local councils on everything from elderly day-care centers to bus services, public parks and library facilities fell by more than a third. Britain became a darker, dirtier, more dangerous and less civilized place. Hundreds of thousands of people who were barely coping on disability and unemployment benefits were tipped into true desperation.

By the summer it was already clear that the fix devised to contain the Greek crisis in May 2010 was not sustainable. The worst fears of the more pessimistic IMF analysts were rapidly being confirmed. Not only was the PASOK government slow to push through the changes the troika demanded, but when it did, the results were counterproductive. In a classic Keynesian downward spiral, demand fell and unemployment surged further, reducing incomes.

If the Greeks were the victims of extend-and-pretend, who were the beneficiaries? Billions of euros from the first tranche of the May 2010 program were disbursed to Athens, which in turn paid them to its creditors. Those who were lucky enough to hold debt expiring in 2010 or 2011 were paid on time and in full. Those banks that decided to cut their losses and sell out could find buyers among the hedge funds who picked up debt for as little as 36 cents on the euro, gambling that things could only get better and that in the worst case they would get some cut of a final settlement.

In the Greek case, at least, the debts were public. In Ireland taxpayers were being asked to pay for huge losses incurred by deeply irresponsible banks and their investors all over Europe. On December 7 Dublin announced a budget with a new round of 6 billion euros in cuts, half of what would have been saved if the bank bondholders had been haircut across the board. Instead taxes were raised on low-paid workers. Child-care allowances were cut and college fees were increased. Benefits for the unemployed, caregivers and the disabled were slashed.

What the ECB did not have was a mandate to concern itself with the economic welfare of the eurozone or its member states in any broader sense. It was a willfully simplistic and conservative interpretation.73 It was ruinous for the eurozone. The crisis would begin to be overcome only when the ECB began to step beyond it.

Switching out of bonds into stocks inflates the stock market, increasing the wealth of those with stock portfolios, tending to make them more willing to both invest and consume. This, to say the least, is an uncertain and indirect method of stimulating the economy. By boosting the wealth of already wealthy households, it is predestined to increase inequality.

As Chopra of the IMF had laid out, the ideal accompaniment for aggressive debt restructuring in Ireland would have been an ECB bond-purchasing program designed to insulate the other fragile members of the eurozone from the fallout.

Whose interests were served by a lopsided deficit debate in which minor tax increases were traded for huge cuts in entitlements? What kind of shock would it take to break this impasse? Historical experience was not encouraging. FDR’s New Deal had not been enough. It had been hobbled by its own timidity and by relentless opposition from the Right.2 To unleash the full capacities of the American state it had taken the national emergency of a war.

Golden Dawners harassed and attacked leftists and non-European immigrants, while laying on soup kitchens, reserved, of course, only for hungry Greeks. In a textbook rerun of the 1930s, a comprehensive social and economic crisis provided the setting for a program of national racial community.

“Monetary policy is a serious issue,” the Eurogroup chair told an audience in April. “We should discuss this in secret, in the Eurogroup. . . . If we indicate possible decisions, we are fueling speculations on the financial markets and we are throwing in misery mainly the people we are trying to safeguard from this. . . . I am for secret, dark debates. . . . I’m ready to be insulted as being insufficiently democratic, but I want to be serious. . . . When it becomes serious, you have to lie.”

Since January 2009 the Obama administration had been straining every muscle to put the lid on popular discontent. Rather than seeking to mobilize the indignation simmering in American society, it had found one technocratic fix after another. Two years later the result was a spectacular delegitimization from both the Left and the Right.

The ECB also called for dramatic changes to labor market policy, infringing on rights of Italian and Spanish trade unions. Such changes were necessary, the ECB insisted, to cut unemployment and increase growth. It was a blatant attempt to shift the balance of social and political power by means of monetary policy, poorly disguised by the ECB’s proviso that care should be taken to ensure that the social safety net remained intact.

As Geithner put it in transcripts compiled for his memoirs: “The Europeans actually approach us softly, indirectly before the thing [Cannes meeting] saying: ‘we basically want you to join us in forcing Berlusconi out.’ They wanted us to basically say that we wouldn’t support IMF money or any further escalation for Italy, if they needed it, if Berlusconi was prime minister. It was cool, interesting.”

The gutting of Greek and Italian democracy in 2011 was the result of a toxic combination of massive financial integration with Berlin’s dogged insistence on intergovernmentalism. The lack of overarching structures with which to compensate for the asymmetric effects of the crisis enforced conformity to Berlin’s vision of financial probity, one state at a time. Around the chancellery in Berlin, in the wake of the changes in Greece and Italy they were not bemoaning the oppressive force of markets. Senior officials could be heard boasting: “We do regime change better than the Americans.”52

And Sikorski went on: “I demand of Germany that, for your own sake and for ours, you help it survive and prosper. You know full well that nobody else can do it. 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.”

Whereas they had started the crisis believing that the multiplier was on average around 0.5, they now concluded that from 2010 forward it had been in excess of 1.21 This meant that cutting government spending by 1 euro, as the austerity programs demanded, would reduce economic activity by more than 1 euro. So the share of the state in economic activity actually increased rather than decreased, as the programs presupposed. It was a staggering admission. Bad economics and faulty empirical assumptions had led the IMF to advocate a policy that destroyed the economic prospects for a generation of young people in Southern Europe.

And there was “another message” that Draghi wanted investors to hear: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.” Then, pausing for effect, he added: “And believe me, it will be enough.”

In an astonishing makeover of America’s recent economic history Summers proposed that for at least two decades American economic growth had been on weak foundations. To achieve no more than a “normal” rate of growth it had depended on “abnormal” financial bubbles.

From the latest round of tax releases they calculated that of the growth generated by the economic recovery since 2009, 95 percent had been monopolized by the top 1 percent. That tiny fraction of the population saw their incomes rebound from the trough of the recession by 31.4 percent.16 Meanwhile, 99 percent of Americans had experienced virtually no gain in income since the crisis. The data were subsequently revised to show a less extreme disproportion.

Every conceivable source of leverage and influence had been exploited by those with money to maximize their advantage. As billionaire investor Warren Buffett famously put it: “Actually, there’s been class warfare going on for the last 20 years, and my class has won.”

The tax proposal wasn’t wrong. It just sidestepped the reason it was needed in the first place, the brutal struggle for privilege and power, which for decades had enabled those at the top to accumulate huge wealth, untroubled by any serious effort at redistribution. The answer, if there was one, was clearly not technical. It was political in the most comprehensive sense. Power had to be met with power.

The mainstream deficit-reduction campaign was riddled with conflicts of interest. Many of the most active exponents of entitlement cuts were lobbyists for targeted tax exemptions. As one cynical observer put it, “It’s easier to get face time in Washington as a deficit hawk than as a corporate hack.”

But the Democrats had no interest in making the unthinkable more manageable, and the proposal that Chinese creditors should be paid ahead of serving military and social security recipients made easy political meat. The Full Faith and Credit Act was soon dubbed the “Pay China First Act” and voted down by the Democrats. Obama announced that he would veto the bill if it passed.

On a lighter note, a Canadian comic living in China commented: “Chinese must be wondering: When will America embrace real reform? How long can this system survive? Where is America’s Gorbachev?”62

The alignment that had first become clear during the bank bailout of 2008 was becoming something more entrenched. In the name of nationalism and the American Dream, the right wing claimed the cause of systemic change, while the Democratic Party establishment filled the middle ground the Republicans vacated. The question of the comprehensive progressive campaign to fight for greater equality was left begging.

Looking at the numbers, no one could seriously argue that the business cycles of Indonesia or India had much impact on US financial stability.32 The interdependence of the global age was all pervasive, but it was emphatically not symmetrical. Some received shocks, others dealt them out.

With goodwill a compromise between the EU’s Association Agreements and the Eurasian Customs Union could no doubt have been worked out. But that was not the mood on either side.

The EU was convinced of its own legitimacy. It offered the rule of law and prosperity. Its promise was the future. Ignoring the evident risk that Ukraine was too weak economically, too fragile politically and too exposed in geopolitical terms to stand the pressure generated between Russia and the West, Brussels pushed forward.

What was not clear, until Kiev received the IMF’s letter of November 20, 2013, was quite how unattractive the Western terms would be. The IMF offered Ukraine only $5 billion and noted that it would be expected to use $3.7 billion of it to repay the 2008 loan due in 2014. No one in Kiev had reason to expect generosity from the IMF. But the EU’s offer came as a real shock.

In light of subsequent events, Yanukovych’s decision would come to be seen as the Pavlovian response of a pro-Moscow stooge. It was quite possible that he was subject to Russian blackmail. But setting such rumors aside, his choice was hardly inexplicable. As Ukraine’s prime minister, Mykola Azarov, explained, “[T]he extremely harsh conditions” of the EU-IMF package had decided the issue.

The opinion poll evidence does not suggest that there was an overwhelming majority for a decisive shift toward the EU. According to Kiev’s International Institute of Sociology, in November 2013 only 39 percent of respondents favored association with the EU, barely 2 percent more than the 37 percent who favored a Russian-led customs union.44 And those numbers were based on a hypothetical, not the stern terms offered by the IMF and the EU. But events in Ukraine in 2013 were not decided by a referendum on the basis of clearly costed alternatives.

The European creditors had doggedly refused to discuss the only issue that mattered—debt restructuring. What was at stake was not macroeconomic performance but the imposition of discipline on a wayward eurozone member. Shielded from financial contagion, a conservative financial settlement had been demonstratively imposed on a left-wing government with a strong democratic mandate. The perverse effect of the ECB’s “liberating” move to QE was that it allowed extend-and-pretend and its concomitant, relentless austerity, to continue.

Four years later Obama was out of the picture and the Republican field was wide open. As a result, the presidential race of 2016 turned out to be more about the financial crisis of 2008 than 2012 had been.

Were the Trump and Sanders campaigns crazy or simply stating what should have been obvious: the fiasco of the project of Greenspan’s generation. Financial globalization that Greenspan and his ilk had worked so hard to institutionalize as a quasi-natural process had been exposed as just that, an institution, an artifact of deliberate political and legal construction with stark consequences for the distribution of wealth and power.

For the defenders of the status quo, Trump made a perfect caricature enemy against whom to reassert the nostrums of liberalism. But this deflected attention from a more complex and ambiguous reality. The idea that Trump constituted a sudden and shocking break with a prevailing liberal success story depends on an unduly sanguine view of the global backdrop.

Political choice, ideology and agency are everywhere across this narrative with highly consequential results, not merely as disturbing factors but as vital reactions to the huge volatility and contingency generated by the malfunctioning of the giant “systems” and “machines” and apparatuses of financial engineering.