Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

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. But once the scale of the risk became evident, the US authorities scrambled. 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. Through so-called liquidity swap lines, the Fed licensed a hand-picked group of core central banks to issue dollar credits on demand. In a huge burst of transatlantic activity, with the European Central Bank (ECB) in the lead, they pumped trillions of dollars into the European banking system.