Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

only amplified and intensified since? In foreign policy circles the beginning of Obama’s second term saw an impassioned argument over American retrenchment and the foundations of its international power.69 And in economic policy too there were skeptics. Had enough really changed to make another crisis less likely? Had the tensions within the financial system really been resolved, or merely contained? If another Great Depression had been avoided, did that have the perverse effect of removing the spur to truly profound reform?70 It was not without irony that among the Cassandras one of the loudest and most compelling voices was none other than Larry Summers, Treasury secretary to Clinton and chief economic adviser to Obama until December 2010. Twelve months on from Obama’s second election victory, at an IMF event in November 2013, Summers warned: “[M]y lesson from this crisis, and...

Amid the banking crisis of 2008, the American motor industry had been collateral damage. With sales collapsing, GM and Chrysler were knocked to their knees. In December 2008 a truculent Congress voted down an emergency aid package, but neither Bush nor Obama thought they could let GM and Chrysler fail. These once great powerhouses of American industrialism were rescued by diverting funds originally allocated to the bank bailout. By 2013 both GM and Chrysler were back in profit. Like the rest of American big business, they weathered the storm and Chrysler celebrated its recovery in the way that corporate America does, by booking a slot to run a headline-grabbing commercial during the Super Bowl in February 2014. They wanted something that would make a splash and they commissioned the man to do it. The spot was written, directed and acted in person by Bob Dylan, the wizened bard of offbeat Americana. Against a backdrop of Hopperesque noir, Dylan delivered a striking piece of high-caliber nationalist kitsch: Is there anything more American than America? ’Cause you can’t import original. You can’t fake true cool. You can’t duplicate legacy. Because what Detroit created was a first and became an inspiration to the . . . rest of the world.

Yeah . . . Detroit made cars. And cars made America. Making the best, making the finest, takes conviction. And you can’t import the heart and soul, of every man and woman working on the line. You can search the world over for the finer things, but you won’t find a match for the American road and the creatures that live on it. Because we believe in the zoom, and the roar, and the thrust. And when it’s made here, it’s made with the one thing you can’t import from anywhere else. American pride. So let Germany brew your beer, let Switzerland make your watch, let Asia assemble your phone. We . . . will build . . . your car.

His lines were all the more resonant because of what the audience could be expected to know about the place where the spot was filmed, Detroit. If the American motor industry was back from the dead, the same could not be said for Motor City.

2005, of all the mortgages in Detroit, 68 percent were subprime.3 As the crisis cut a swath across America, 65,000 homes in Detroit were foreclosed. Of those, 36,400 were considered of so little value that they were simply abandoned,

Trying to contain the contamination effect, the city demolished

entire tracts. Though it received state and federal subsidies for the house-razing program, it cost Detroit $195 million. That came on top of lost tax revenues of $300 million.4 None of this could the city afford. Detroit appointed an emergency manager who in June 2013 filed for bankruptcy, with debts owing between ...

the recovery had been needlessly slowed by the premature shift to austerity.

The global shift to austerity for which Reinhart and Rogoff had been the cheerleaders reduced the recovery to an agonizing crawl.

big burst of public investment.

Physical reconstruction

deliver, a concerted drive to unify American society around a sustained program of investment-driven growth and comprehensive modernization.

Nevertheless, the data they released in October 2013 were astonishing. 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.17 But in 2013 the numbers were a sensation. The slow growth in GDP that worried Summers, in fact, hid two radically divergent realities. Whereas a tiny elite were doing extremely well, for average Americans the secular stagnation thesis that Summers advanced as a tentative academic hypothesis was simply the lived reality of the last forty years. Since America’s bicentennial in 1976, productivity growth, which drove overall economic growth, and the returns to labor in the form of household incomes had starkly diverged. The average American shared only to a small degree in national economic growth as measured by GDP statistics. Almost all the benefits of growth were being monopolized by the highest paid and those

wealthy enough to own significant portfolios of financial assets. The financial crisis of 2008 had revealed how in extremis national economic policy was subordinated to the needs of a cluster of giant transnational banks. Now, in the face of a dismal recovery, the correspondence between economic growth and the progress of a national society was being challenged from the bottom up. Could the national economy any longer be plausibly presented as a project common to all Americans?

The decay of the American Dream had been a staple of Barack Obama’s political discourse since his days as a junior senator. It was a common thread

in the Hamilton Project agenda. In December 2013, a year into his second term as president, Obama visited a community center in Ward 8, an African American section of Washington, DC, to make a major speech about America’s ongoing social crisis.18 He described the “daily battles” of ordinary Americans struggling against the “relentless decades-long trend” toward “dangerous and growing inequality.” The “basic bargain at the heart of our economy has frayed,” he declared. Of course, the trend toward growing inequality was not confined to America. But, Obama insisted, there must be no more evasion, “this increasing inequality is most pronounced in our country. . . . [S]tatistics show . . . that our levels of income inequality rank near countries like Jamaica and Argentina.” Comparable “wealthy allies, countries like Canada or Germany or France . . . have greater mobility than we do, not less.” Half of all Americans would experience poverty during at least one period of their lives. “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life and what we stand for around the globe.” Inequality was, the president declared, the “defining challenge of our time.”

The racialized distress of cities like Detroit was clearly shocking. But, as Obama emphasized, America’s crisis was not confined to predominantly African American communities. Across the country, class, not race, was the most important determinant of an American’s life chances, and the big story of his second term as president was rural white working-class despair. It was Appalachia—West Virginia and Kentucky—held back by structural change, educational failure and immobility, that lurched into the headlines. At its most extreme, this lethal cocktail came to be symbolized by an epidemic of drug addiction, fed by cheap heroin from Mexico and rampant opioid abuse.19 Already in 2007 deaths from drug overdose had overtaken road accidents as a major cause of death in the United States.20 Among white Americans, deaths from overdose increased by 297 percent between 2010 and 2014 alone. Unlike in any other developed society, life expectancy among working-class white Americans had been decreasing since the early 2000s.

Anne Case and Angus Deaton’s famous account of “deaths of despair.”

Between 1977 and 2014 the share of national income going to the top 1 percent before taxes and benefits had risen by 88.8 percent. After fiscal redistribution their share increased by 81.4 percent. Nor did the tax and welfare state prevent the share of the bottom 50 percent from declining from 25.6 to 19.4 percent.25 Nor was this by accident. 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.”26 Buffett was so appalled at the consequences that in 2011 he made himself into a spokesman for proposals to impose a minimum 35 percent tax on America’s highest earners, a proposal that Obama had backed but that had been blocked by the Republicans in Congress.27 It was a sign of both Buffett’s personal decency and the utter lopsidedness of the balance of power in twenty-first-century America that a program of social improvement should consist of well-meaning billionaires volunteering to pay a bit more for the greater good of American society. For those at the bottom of the pile, none of this was news. Opinion polls, especially those commissioned by the right wing, had for a long time been recording the profound resentment among the American population at the way that both the economy and the political system seemed to be engineered to their disadvantage.28 These views we...

isn’t broken, it’s rigged.”30 In many ways the liberal centrists were the last to know. They, of all the segments of political opinion, had the most invested in the idea that America’s social ills were amenable to technocratic remedy and that the state was a suitable instrument for making such change. It was precisely the conversion of commentators of this ilk to a more radical view that marked how serious the sense of crisis had become.

In a remarkable series of articles following the 2012 election, Paul Krugman at the New York Times adopted a profoundly dark view of American society, economy and politics. “What do the pre- and postcrisis consensuses have in common?” Krugman asked in December 2013.32 “Both were economically destructive: Deregulation helped make the crisis possible, and the premature turn to fiscal austerity has done more than anything else to hobble recovery. Both consensuses, however, corresponded to the interests and prejudices of an economic elite whose political influence had surged along with its wealth. . . . Some pundits [might wish to] depoliticize our economic discourse, to make it technocratic and nonpartisan. But that’s a pipe dream. Even on what may look like purely technocratic issues, class and inequality end up shaping—and distorting—the debate.” This from a Nobel Prize–winning economist who in the 1980s and 1990s had counted squarely in the mainstream.

Robert Reich, a former Clinton-era Labor secretary, underwent a similar disillusionment at exactly the same historical moment. “For a quarter century,” he now admitted, “I’ve offered in books and lectures an explanation for why average working people in advanced nations like the United States have failed to gain ground and are under increasing economic stress.” He had pitted an interventionist state against the forces of globalization and technological change. What Reich now recognized was that much of this was “insufficient,” if not “beside the point,” because it overlooked a “critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs. . . . The problem is not the size of government but whom the government is for.”

After the events of 2008–2009 and the spectacularly lopsided bailouts, could anyone seriously doubt whom government was for? At the level of

personnel, the revolving door that connected the Treasury, the Fed and the top banks continued to spin at a steady pace. By 2014 both Bernanke and Geithner were on their way from public service to well-upholstered positions in finance. Geithner went to the well-connected private equity firm Warburg Pincus. Bernanke advises the Citadel hedge fund and chaired an advisory board for the giant PIMCO bond fund, owned by Allianz of Germany, which also included as its members Jean-Claude Trichet and Gordon Brown as well as Anne-Marie Slaughter of the Obama foreign policy team.34 It was like a mini reunion of 2008 crisis fighters. And they had plenty to celebrate.

Clearly, Wall Street enjoyed a privileged connection to government. After 2008 no one could doubt that. But what was striking in the aftermath of the crisis was how critical commentary on America’s political economy widened its scope beyond the banks. In so doing it followed the evolving contours of the economy itself. With the advent of the smartphone and social media boom in 2007, tech had regained the luster it had lost in the dot-com crash. Silicon Valley was the new cutting edge of American capitalism. Big Pharma continued to rake in profits. As oil prices resurged from their lows in 2009, big oil and the new technology of fracking were back. As the recession of 2008–2009 receded, what came ever more to the fore was a tendency toward concentration and oligopoly that went far beyond Wall Street. One of the side effects of Bernanke’s QE policy of low interest rates was that it made it hugely attractive for companies to borrow to buy out their competitors. In three giant merger waves, cresting in 2000, 2006 and 2015, with the antitrust authorities looking on, American capitalism remade itself in a more concentrated and monopolistic mode.36 By 2013 profits were booming to an almost embarrassing extent.37 Even chronic loss makers, like the airlines, were now making money. But the really big

returns were elsewhere. As Peter Orszag, Obama’s former director of management and budget, now at Citigroup, and Jason Furman, serving as chair of the Council of Economic Advisers, reported in a research paper, two thirds of the nonfinancial firms that had managed to achieve a return on invested capital of 45 percent or more between 2010 and 2014 “were in either the health care or information technology sectors.”38 What allowed such gigantic profits and enormous salaries to be concentrated in these sectors were market power, IP protection and government-licensed pricing.

Antitrust, data protection and intrusive tax investigations were, as far as Tim Cook of Apple was concerned, nothing more than “political crap,” antiquated road bumps on the highway to the future.40 As tech oligarch Peter Thiel told audiences and readers: “Creating value isn’t enough—you also need to capture some of the value you create.” That depended on market power. “Americans mythologize competition and credit it with saving us from socialist bread lines,” but Thiel knew better. As far as he was concerned, “[C]apitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear . . . [c]ompetition is for losers.”

One could hardly ask for a more crass statement of robber baron hubris. The implications were bleak. America’s massively skewed distribution of income and wealth was the product of inherited assets, amplified by pervasive technological and economic change and Warren Buffett’s “class war,” which extended to every facet of the political regulation and deregulation of the economy. If this was so, what would it take to counteract the imbalance and to redress the astonishingly one-sided outcomes? A polite European social democrat like Thomas Piketty inferred from his inequality data that what the world needed was a global wealth tax. This was the message of his remarkable global bestseller, Capital in the Twenty-First Century, which redefined the public debate about inequality in 2014.42 That would certainly help to offset the tendency toward massive inequality. But in a system as starkly polarized and lopsided as that of the United States,

what relevance did such well-meaning suggestions have? 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.

In January 2014 Reich went to Congress to testify. “I’ve served in Washington, and know how difficult it is to get anything done unless the broad public understands what’s at stake and actively pushes for reform. That’s why we need a movement against economic inequality and in favor of shared growth—a movement on a scale similar to the Progressive movement at the turn of the last century that fueled the first progressive income tax and antitrust laws, the women’s suffrage movement that got women the vote, the labor movement that helped animate the New Deal of the 1930s and fueled the great prosperity of the first three decades after World War II, the Civil Rights movement that achieved the landmark Civil Rights and Voting Rights Acts, and the environmental movement that spawned the Environmental Protection Act and other critical legislation.”43 Reich’s call to arms was powerful and compelling. To fix a rigged system, what was needed was a comprehensive mobilization. But as Reich was only too well aware, the progressive Left were not the only ones who could draw this conclusion. In fact, the American right wing got there first. Unlike liberal progressives, the libertarian right w...

Of course the low top tax rates that had helped to create that outcome of extreme disparity were set by a Republican Congress and kept there by them. But the polemic was telling. A large part of the American Right agreed with Obama that the American Dream was in trouble, but for them, he was the personification of everything that was wrong. His defeat of Mitt Romney in 2012 only vindicated them in their belief that existing Republican politics were hopelessly inadequate. The Republicans would never achieve the transformation they craved with a candidate like Romney, an upper-class financier. In 2013, while the Democrats were still lulled by the sweet scent of Obama’s second victory, the Right counterattacked. Their target was the great social policy initiative of Obama’s first term, the Affordable Care Act. The hostage they would take was the budget.

That the astonishing events in Congress in 2013 did not lead to an immediate crisis in the bond market pointed to the resilience of the US Treasurys as the global safe asset of choice. Though the Chinese and Germans might complain and the market blipped, demand for US Treasurys quickly recovered. Ultimately, the market for IOUs drawn on the American taxpayer was underwritten by the Fed. Unlike the ECB, America’s central bank left no doubt that it backed its government’s debt. QE3 bond purchases provided immediate support, keeping prices up and rates down. This provided at least one point of stability for global investors. But after the events of 2013 questions could no longer be avoided. Was one of the unintended side effects of the stability generated by the Fed to free politics from market constraints and thus enable Republican extremism? Did America’s ability to ride out short-term budget crises like those of 2011 and 2013 lead contemporaries to underestimate the future dangers that the degeneration of American democracy might bring with it? And how long would the Fed’s technocratic interventions compensate for America’s lackluster economic recovery and the shambles in the legislative branch? How long could the Fed continue with QE3? When would the Fed begin tapering? Compared with the chaos in fiscal policy, these were, on the face of it, “normal” monetary policy questions, except that since 2008 there was no longer any such thing as normal monetary policy. The enormou...

but the entire global dollar system. Furthermore, the Fed had not just expanded its balance sheet, it had changed its composition. Buying up long-term securities in exchange for cash reserves, the Fed had absorbed onto its books the maturity mismatch that had undone the shadow banking system. After successive phases of QE, it was the Fed that held long-term securities that were matched against short-term liabilities such as cash and deposits by American and European banks. Despite some nail biting by inflation hawks, this posed no immediate stability risk. The banks were happy to hold their cash reserves with the Fed. If interest rates went up, the Fed, as one of the largest holders of bonds, would suffer a capital loss. But this was more than made up for by the $350 billion in profits that the Fed paid to the Treasury between 2008 and 2013.1 The real question was the likely fallout in the financial markets and money markets when the Fed changed its stance. Any move to moderate the Fed’s bond purchases, let alone to unwind its position, implied a comprehensive adjustment in the willingness of the markets to absorb not only a greater volume of bonds but also some of the maturity mismatch that the Fed was carrying. And that would have to happen at the same time as short-term interest rates were nudging up. If, on the other hand, the Fed continued QE3, its balance sheet would further inflate, bond prices would remain elevated, interest rates would remain stuck near zero and i...

The interdependence of the global age was all pervasive, but it was emphatically not symmetrical. Some received shocks, others dealt them out.

In any case, given that Republican insurgents were in the process of shutting down the federal government, and were eyeing the IMF’s budget as a potential hostage, it would have been politically disastrous for the Fed to acknowledge that it was conditioning its latest policy move on business conditions in Indonesia. Instead, the protests from the emerging markets provided a convenient occasion for the Fed to make a stout show of American patriotism.

“We’re not going to make policy based on emerging-market volatility alone.”33

Then, on September 18, came the Fed’s long-awaited decision. After the buildup since May, the FOMC announced that it would leave interest rates where they were and continue bond buying at the current rate, pending “more evidence that progress will be sustained.”34 The taper, the prospect of which had been giving the markets jitters since May, was off.

The decision to change nothing unleashed a frenzy of interpretation not about the likelihood of tapering but about why it had not happened. Were the doves on the Fed board resisting an interest rate shock? Had Bernanke got cold feet? Was he kicking the can down the road for his successor to deal with?35 Or was the Fed consistent in its policy, but bad at forecasting? Between the spring of 2013, when it began to think about tapering, and September, when it decided to postpone it, the Fed had adjusted its forecast for economic growth sharply downward.36 If the economy was recovering less strongly than expected, this would rescue the Fed’s reputation as a consistent policy maker, but at the price of undermining confidence in its forecasts and highlighting the downturn in expectations. Or was the Fed neither cowardly nor a bad forecaster? Was it playing a subtle tactical game? If it was committed to ensuring that the US economy completed its slow recovery without interruption from a premature and violent increase in rates, it needed to know how severely bond markets would react to a reduction in monetary stimulus. The evidence of the taper tantrum in June 2013 was clear. The markets were impatient. Investors would rapidly tighten credit conditions on any hint of movement by the Fed. If the Fed believed that what was necessary was something more gradual, then after the initial tapering announcements in May and June, it needed to shock markets a third time in the opposite direct...

Four different interpretations: Fed politics, Fed weakness, Fed forecasting error, Fed game playing. Which was it? How were markets to know, and without knowing, how were they to react?

Before 2008 the driver of crisis was expected to be the balance of financial terror between the United States and China. A huge unwinding of the global disequilibrium centered on China and America and driven by profound domestic imbalances in each of them would, it was feared, rock American power to its foundations. In 2008 the expansion of the EU and NATO in the face of Russian opposition had added another dimension of risk. Georgia and Russia had clashed and Moscow had approached Beijing to mount a joint attack on America’s fragile finances. Beijing had held back. There was no great dollar selloff. The geoeconomic course of the crisis took an unexpected and innovative direction. The Fed’s liquidity swap lines stabilized the dollar-based financial system. In November 2008 the upgrading of the G20 had added a global leadership forum and this had been important in legitimizing the dramatic expansion of IMF resources in 2009. This backstopped the IMF’s urgent engagement in Eastern Europe. A year later, remarkably, the IMF would find itself committing hundreds of billions of dollars to rescuing the eurozone. At the same time, the United States was aggressively pushing a new system of regulation for global banking through the normally slow-moving Basel Committee.

In 2008 and 2009 Washington kept ahead of the geoeconomic challenges unleashed by the crisis. Could it stay on pace? In May 2010 the

Obama administration and the IMF were crucial to forcing the Europeans toward the first fix for the eurozone. But then things began to get sticky. November 2010 was a turning point. The Democrats lost control of Congress. The recovery was so lame and the fiscal impasse so threatening that the Fed launched its cautious second wave of QE, to be met with violent opposition at the G20 meeting in Seoul. But carping at the G20 was one thing. When it came to chaperoning the Europeans through the near disaster of 2011 and 2012 it was obvious that only the Obama administration could serve as a counterbalance to Germany. Obama was right. At least as far as Europe was concerned, the United States as an “inside outside” arbiter was indispensable. But with the stabilization of Europe and the beginning of the second Obama administration, the questions of the Bush era returned.1 Should Washington maintain its massive global footprint?...

anodyne

Estonia joined the euro on January 1, 2011. Latvia, the pivotal crisis country of 2009, adopted the common currency on January 1, 2014, followed a year later by Lithuania.

In Poland the nationalists were in opposition. In Hungary they were the government. In the April 2010 election, the ruling Socialist Party paid the price for its corrupt and duplicitous handling of economic policy and the financial disaster of 2008. Promising to protect the Hungarian nation and Hungarian pensioners from the depredations of the IMF, a coalition headed by the nationalist Fidesz party and the Christian Democrats won 53 percent of the vote. Even more startlingly, the Jobbik movement, which toyed openly with neofascism, scored 17 percent, bringing the total nationalist vote to 70 percent. Among Fidesz’s heresies was its refusal to separate the questions of political sovereignty and financial dependence. Ignoring protests from the IMF and the EU, it justified its taxes on foreign banks and a raid on private pension funds in terms of harsh historical necessity.26 Since freeing itself from the Soviet yoke, over the past twenty years Hungary “had to bitterly experience the validity and truth of the old wisdom that a nation can be subjugated in two ways—with the sword or with debt.”27 As Greece was submitting itself to the troika in April 2010, a defiant Prime Minister Orban told a news conference: “In my view, neither the IMF nor the EU’s financial bodies are our bosses. We are not subordinate to them.” Hungary would negotiate but it would not accept “diktats.”28 Orban’s aggressive nationalism and Fidesz’s campaign to curtail civil liberties and political pluralism...

office in Budapest.29 To further bolster his position, in early 2013 Orban embarked on a new détente with Moscow. An alliance with Russia was by no means an obvious choice for a Hungarian nationalist. But Orban was given a warm welcome in the Kremlin. Putin cheered his experiment in illiberal democracy and offered material assistance in the form of nuclear reactor technology and subsidized gas supplies, which were popular with Fidesz voters.

Securely embedded in both the EU and NATO, Hungary could afford to take the risk of balancing between East and West. A tiny candidate country for an EU Association Agreement, like Armenia, menaced by sanctions from Russia, was not in the same position. Faced with a clear threat from Moscow, in September 2013 Yerevan pulled back. It declared its intention of joining Putin’s Eurasian Customs Union, prompting Brussels to close the door on the Association Agreement.31 This setback for the EU’s Eastern policy made Ukraine all the more important. Given its size and geopolitical significance, it was Kiev’s posture that would decide the balance of influence in the region. 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.

That Ukraine needed a change was undeniable. Even after the losses of 2008–2009 were made good, according to official figures average incomes in 2013 were barely higher than in 1989. Unlike in its neighbors to the west, the post-Communist transition in Ukraine had produced a generation of stagnation. While a tiny minority grew fabulously rich, the standard of living for the least well-off was kept at a tolerable level only by a system of pensions and energy subsidies that consumed 17 percent of GDP. In 2008 the IMF had provided emergency assistance. But the program came with demands for changes in taxes and benefits that made it impossible for a government to sustain legitimacy. By the time of the February 2010 election, much of the population was deeply disillusioned. Ukraine was falling further and further behind not only its Western neighbors but Putin’s Russia too. President Yushchenko effectively withdrew from the electoral race,

leaving Prime Minister Tymoshenko to go head-to-head with Yanukovych, whose fraudulent election had triggered the revolution of 2004. With the electorate split between East and West, in 2010 it was...

Yanukovych was a corrupt manipulator who tacked back and forth between the West and Russia. He took funds from the IMF. He continued negotiations with the EU.32 He imprisoned Tymoshenko on corruption charges and used her as a pawn. At the same time, he dallied with Putin and his Eurasian bloc. As his clan enriched itself, his popularity drained and foreign exchange reserves dwindled. On the occasion of the next elections, which he had little hope of winning, it seems that he was preparing the security forces for a showdown.33 But the 2014 election was not the only deadline. Already in 2013, negotiations with the...