Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

But by focusing attention on the European dimension of interdependence, that judgment in fact understates the case. The banks and the borrowers of Europe were indeed interdependent. But even more basic and far more pressing in the fall of 2008 was their dependence on the United States. The closure of interbank and wholesale funding markets created huge pressures in the dollar-funding markets all over the world, and it was in Europe that the pressure was most acute. This was a shortfall that even the strongest European states were powerless to address. That it did not result in a spectacular transatlantic crisis was decided not in Europe but in the United States, where the Fed, acting in the enlightened self-interest of the US financial system, acknowledged the compelling force of financial interconnectedness and acted on it. At a moment when Paulson and the Treasury were struggling with Congress to mobilize political support for a backstop for the American financial system, the Fed, without public consultation of any kind, made itself into a lender of last resort for the world. When the music in the private money markets stopped, the Fed took up the tune, providing a stopgap of liquidity that, all told, ran into trillions of dollars and was tailored to the needs of banks in the United States, Europe and Asia. It was historically unprecedented, spectacular in scale and almost entirely unheralded. It transformed what we imagine to be the relationship between financial system...