Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

But even more than low education and low income, Brexit voting was correlated with authoritarianism. On the kind of cultural maps drawn by marketing experts, Brexit voting sat in close proximity to values like security, support for the death penalty and a preference for the public flogging of sex offenders.

As the referendum result was announced, sterling suffered its biggest one-day loss in history.

Those investors might well see Brexit as a signal to withdraw. The devaluation benefited them only marginally because most exports from the UK have low price elasticity and the gains in competitiveness were substantially offset by the increase in the cost of imported materials.

As May put it in a defining speech to the Tory party conference in October 2016: “Today, too many people in positions of power behave as though they have more in common with international elites than with the people down the road. . . . But if you believe you are a citizen of the world, you are a citizen of nowhere.

Characteristically, as the true complexity and difficulty of the situation began to dawn on London, May’s government reacted with drastic, crude and contradictory threats.

On July 21, 2016, a burly figure strode across a podium dressed seemingly to inspire memories of Captain America, Citizen Kane or a 1930s fascist rally. The man in the spotlight was there to deliver a speech with which he meant to change American history.

If Jamie Dimon quipped that to make sense of Dodd-Frank one needed the services of a lawyer and a psychiatrist, the same is no doubt true of the business of deciphering Donald Trump.

Hyman Minsky, the legendary analyst of financial crises, observed already in 1990, Donald Trump was the very epitome of a Ponzi scheme capitalist, living hand to mouth by borrowing against the expected appreciation of his assets.

There were sectors, perhaps most notably in coal mining, where this alignment did not hold. In polluting industries such as fossil fuels, opposition to globalism, the rejection of the politics of climate change and the blue-collar appeal of American nationalism fit together all too neatly.

In the pages of the Washington Post, former Treasury secretary Hank Paulson put the question: “What would have happened if a divisive character such as Trump were president during the 2008 financial crisis? . . .

In Bannon’s dark vision of American history, the moment on the morning of September 18, 2008, when Paulson and Bernanke confronted President Bush with the need for a massive bailout marked a new epoch, what Bannon called the “fourth turning,” the opening of an apocalyptic phase of struggle.

How he voted did not matter, Greenspan declared, because “(we) are fortunate that, thanks to globalization, policy decisions in the US have been largely replaced by global market forces. National security aside, it hardly makes any difference who will be the next president. The world is governed by market forces.”34 This was the mantra of an age of globalization without alternatives.

Great quote

Globalization was not a natural process, opposed to politics. It had been shaped since the 1940s by an alliance of America’s politicians, business elites and policy experts like Greenspan.

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.

In fact, a deep dive into the poll data showed that Trump’s voters were better off than the average American.40 The voters with the lowest incomes—overwhelmingly minorities—continued to vote Democratic.

What Trump did understand, or at least what he inhabited, was a rawer world of power, a world dominated by a single logic: bully or be bullied.

Similar Quote about Hitler in his biography

As one commentator put it, Trump viewed the world as a “kind of Manhattan real estate market writ large, a vicious snake pit where the strong and hungry eat the weak and soft.”

Trump’s populism revolved not so much around policy as around the pure realization of power.

When it came to governing, it was not easy to fashion a coherent program out of such a mixed coalition. But there was one thing on which the Trump administration and the Republicans in Congress could agree: overturning the Obama legacy.

To have favors lavished on them by the man who had pilloried them on the stump might seem topsy-turvy. But the bankers were not complaining. As the Financial Times commented: “Imagine going to the races, betting 98 per cent of your stake on the favourite [Clinton], which loses in the final stretch, and going home with huge winnings.”

The Trump administration exposed the basic weakness of Geithner’s regulatory design. It depended on those operating the law to have a programmatic commitment to systemic stability. Without that, the legislation per se was largely empty.

It was a mechanical formula that required interest rates to be adjusted upward if inflation was high and unemployment low, or downward if the reverse was the case. If the Fed preferred a different rule, the CHOICE Act stipulated that it must spell out its own formula in similarly mechanical terms and demonstrate econometrically that its rule was preferable to the Taylor model.

We Europeans must really take our destiny in our own hands. Of course we need to have friendly relations with the US and with the UK and with other neighbours, including Russia. But we have to fight for our own future ourselves.”

The ECB’s belated monetary expansion at a time of Fed tightening was a real source of transatlantic imbalance and it was a reminder of the disharmony over monetary policy that had marked the world economy since the onset of the crisis, a disharmony to which conservative voices in Germany had contributed as much as anyone.

World trade had recovered from the disaster of 2008–2009. But since 2010 trade volumes had stagnated. In 2015 they had declined.120 This was driven in part by the business cycle. The taper tantrum and the setback to commodity prices had rocked the emerging markets. But it also reflected a wave of protectionist measures adopted by countries across the world, concentrated not on tariffs but on a variety of nontariff barriers.

Was “America first” an adequate answer, even for America? Whatever the answer to that question, the reality that the rest of the world had to deal with was that the American electorate had put in office an erratic, narcissistic nationalist who no longer offered any commitment to upholding an international order unless it directly and immediately connected to American national interests, however those were defined.

In 2017 economic growth in the United States was steady. Unemployment was down to precrisis levels. The markets were booming. In Europe the economy was finally bouncing back. An immediate crisis was not in the cards. The real force of the question becomes apparent if we direct our attention, in conclusion, not to America and Europe, the old hub of transatlantic globalization, but to China and the emerging markets, where the future of the world economy will be decided. There the years prior to 2017 had been anything but calm.

The emerging market economies had been in trouble since the taper tantrum of 2013. Two of the great economic success stories of the new millennium, Brazil and South Africa, had crash-landed. The commodity price collapse in the fall of 2014 dealt a heavy blow to exporters of oil, gas, iron ore and other raw materials. Russia and much of Central Asia were struggling under the impact of sanctions and the Ukraine crisis. Given lackluster growth in Europe and the United States, the one sustaining force in the world economy was China’s relentless growth, and in 2015 even that suddenly seemed in doubt.

But what worried the observers studying the Chinese scene most acutely was the huge wave of money that was exiting China at the rate of hundreds of billions of dollars per month in search of safe haven.5 Did they know something that the rest of the world did not?

And the explanation was the same in 2015 as it was in 2008. Globalization operated through different channels at different levels. The visible trade channel on which countries like South Korea and China were so dominant was only one, and not the most decisive, channel for a financial crisis. An economy with a strong trade surplus, ample foreign currency reserves and an appreciating currency might well have banks, corporations and private citizens accumulating debts in foreign currencies.

Interest rates in China were low. But thanks to Bernanke’s QE they were even lower in the dollar world. The only likely movement in the yuan was upward. Put the two together and you had the ingredients for a profitable “carry trade”: borrow in dollars; invest in yuan; repay the dollar loan from the proceeds of the booming Chinese economy at an appreciating yuan exchange rate.6 If China’s exchange regulations made it difficult to import US dollars directly, one or two further steps were added: borrow in dollars; buy commodities; use the expected receipts from the sale of the commodities as collateral to borrow in yuan; invest the yuan in China.

All told, 25 percent of China’s corporate debts were in dollars, but only 8 percent of its corporate earnings. This mismatch was profitable but risky. If any one of the underlying conditions changed—interest rates, exchange rates or commodity prices—then the position could become loss making. In 2015 all three conditions changed. The Fed’s retreat from QE promised that the interest margin would soon be shifting the wrong way. The slowdown in China’s own growth and the sudden collapse in oil prices in 2014 reversed the momentum of commodity prices. Xi’s drive against corruption in China caused wealthy families to move assets out of the country. The outflow exerted downward pressure on the yuan. For those holding some part of the $1.1 billion in foreign exposure, this combination of factors was very bad news, and due to the fact that this was common knowledge it risked a stampede.

Would a Chinese implosion turn the jarring reversal of the fortunes in the emerging markets into a comprehensive rout? A year on, this is the global crisis that the Trump administration did not inherit. The question is, why not?

Beijing unleashed another credit boom and a fiscal stimulus, while at the same time it set about purging the most overexpanded heavy industrial sectors of overcapacity. Western media ordinarily known for their advocacy of market freedom could not hide their relief that Beijing’s grip had been restored.

A threat of crisis spawned in China that threatened to destabilize the world economy was contained by China. So far so good, one might say. But 2015 demonstrated not only that China was neither invulnerable nor omnicompetent. Even more significantly, it demonstrated that it was not autonomous.

Whatever the limitations on the Fed’s mandates, markets were global. They could not ignore the threat from China. On August 24 America’s Dow Jones lost 1,000 points and the Fed pulled back. The normalization of US monetary policy was put on hold and Janet Yellen made no secret of the board’s reasoning. Instability in China was the key.

In October 2015 finance minister Lou Jiwei had the temerity to tell a meeting of the IMF that the Fed couldn’t raise interest rates because China was on the line. “The United States isn’t at the point of raising interest rates yet and under its global responsibilities it can’t raise rates,” Lou said. The United States, he argued, “should assume global responsibilities” because of the dollar’s status as a global currency.

In 2015–2016 the world economy dodged a third installment of the global crisis. The emerging market recessions remained confined to individual economies—Russia, Brazil, South Africa—and particular commodities—notably oil.

did not in 2017 face the full force of Paulson’s question: How would America and the world have fared if Trump at his inauguration had faced the kind of challenges facing Obama in 2009?

But Paulson’s financial diplomacy also highlights the fact that in 2008, managing Sino-American financial relations was still very much a matter of intergovernmental relations. By contrast, in 2015–2016 not only were the risks on the Chinese side but the people moving the money were private businesses and investors. In less than ten years, Chinese commercial and financial integration had come a staggeringly long way. Given the narrative unfolded in this book, this has daunting implications.

Bank failures forced scandalous government intervention to rescue private oligopolists.

All the more telling was the inability of the Democratic Party that carried the brunt of the effort to capitalize in political terms. In fact, TARP and the bailouts became dirty words and the Fed suffered a spectacular loss of legitimacy.

The Germans might reply that they were teaching discipline, forcing Europe to prepare for a future of global competition. But what use was that if not only Greece but Ireland, Portugal, Spain and Italy were overwhelmed by the immediate crisis?

The role of the FDP in Merkel’s handling of the eurozone crisis in 2010–2012 was baneful, as was that of the right-wing CSU in Bavaria. At the time of writing, Europe waits for the formation of a new German government.

The politics of Chinese foreign investment and suspicion of the role played by its state-owned enterprises suggest that deeply shared economic interests, of the kind that legitimated the Fed’s swap lines for Europe, will be far harder to develop.

the great economist Abba Lerner once cuttingly remarked, “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.”22 The future of China’s political economy and its relations with the West do not belong to that domain.

The events of 2015–2016 in China recall another major theme of this book. Even to a regime as competent and well informed as that of China, the economic setbacks came suddenly and unexpectedly.

The eurozone crisis posed the question over and over again. How could coalitions be assembled for unpopular but essential actions?

It is shocking, perhaps, that this degree of indeterminacy should characterize one of the most vital pivots of the global order. But building such ad hoc and lopsided political coalitions is what the governance of capitalism under democratic conditions entails.

The GOP commands an impressive vote-winning organization, a take-no-prisoners media machine, deep fund-raising resources. But to judge by the record of the last ten years, it is incapable of legislating or cooperating effectively in government.