Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

though the Fed is a national central bank, at least half the liquidity support it provided went to banks not headquartered in the United States, but located overwhelmingly in Europe.

But though the distribution of costs and benefits was outrageous, at least America’s crisis management worked. Since 2009 the US economy has grown continuously and, at least by the standards set by official statistics, it is now approaching full employment. By contrast, the eurozone, through willful policy choices, drove tens of millions of its citizens into the depths of a 1930s-style depression. It was one of the worst self-inflicted economic disasters on record. That tiny Greece, with an economy that amounts to 1–1.5 percent of EU GDP, should have been made the pivot for this disaster twists European history into the image of bitter caricature.

A rather different vision of the balance of power is suggested by those moments in 2016 when the financial world waited with bated breath to learn the size of the settlement that the US Department of Justice was going to impose on Deutsche Bank for mortgage fraud. Deutsche’s financial condition was understood to be so fragile that the US authorities held its fate in their hands.43 A bank that for more than a century had been a powerhouse of Germany Inc. was at the mercy of the United States. In the wake of the crisis it was the last European investment bank with any global standing.

China had no intention of becoming either the victim of a sudden stop or the needy recipient of US assistance.26 To reverse the balance of risk, when Beijing pegged its exchange rate it chose one that was not too high, but too low. This was what Japan and Germany had done in the 1950s and 1960s.27 It was a recipe for export-led growth, but it created tensions of its own. Undervaluing the currency made imports more expensive than they needed to be, which lowered the Chinese standard of living.

By one estimate, the share of American real estate in global wealth is as much as 20 percent.1 American homes account for 9 percent of the total.

By the end of the century Fannie Mae and Freddie Mac together were backstopping at least 50 percent of the total national mortgage market. Creating conforming loans—loans that qualified for GSE backstop—was the basis of the American home loan business. It is a deep irony that the era in which America is commonly thought of as leading the world in a market revolution saw its housing market become dependent on a government-sponsored mortgage machine descended from the New Deal.

“[A]lmost all human history can be written as the search for and the production of different forms of safe assets.”

The subprime mortgage boom of the early 2000s led to a financial crisis because, contrary to the professed logic of securitization, hundreds of billions of private label MBS were not spread outside the banking system, but were stockpiled on the balance sheets of the mortgage originators and securitizers themselves.

too? It was a choice. Not every bank did it. Those that took the biggest risks were large mortgage originators and the most aggressively expansive commercial banks—Citigroup, Bank of America and Washington Mutual—and the two smallest and scrappiest investment banks—Lehman and Bear Stearns. By contrast, J.P. Morgan began throttling back its mortgage pipeline already in 2006 and bought as much protection as it could in the CDS market. Goldman Sachs went beyond hedging to place a large bet on an imminent housing market collapse.45

This was the truly lethal mechanism at the heart of the crisis. Funds from money market cash pools were channeled into financing the holding of large balance sheets of MBS.

In 2006 fully a third of new mortgages issued in the United States were for second, third or even fourth properties. In what became known as the “bubble states”—Florida, Arizona, California—the percentage was as high as 45 percent.

Americans liked to think of their problems as American and outsiders were only too happy to concur. As the mortgage meltdown spread like a lethal virus across urban America in 2007–2008, European commentators took up the narrative of an American national crisis. “Feral” financial capitalism, like the Iraq war and climate change denial, was part of a toxic Anglo-American variant on modernity.

By 2008 roughly a quarter of all securitized mortgages were held by foreign investors.

But in the riskier segment of the securitized mortgage business it was Europeans, not Asians, who led the way.6

According to the calculations of the Bank for International Settlements (BIS), Deutsche Bank, UBS and Barclays, three of the most aggressive European players in global financial markets, all boasted leverage in excess of 40:1, compared with an average of 20:1 for their main American competitors. In 2007, even before the crisis struck with full force, leverage at Deutsche and UBS touched 50:1.50 Even allowing for differences in the ways in which Europeans and Americans account for bank balance sheets, the gap was significant.

Whereas the US crisis involved overextended banks and mortgage borrowers impelled by greed and financial excess, the eurozone crisis would revolve around quintessentially European themes of public finance and national sovereignty. It would pit Greeks against Germans and reawaken memories of World War II.

There are many risks involved in forming a currency union and it would no doubt have made sense for Europe to have added a fiscal constitution. But Europe’s chief problem was not the lack of a fiscal fire code. Its problem was the lack of a financial fire department.

Coping with a banking crisis on the scale that was brewing in Europe required a very capable state indeed.

By this standard every member of the eurozone was at least three times more “overbanked” than the United States. Furthermore, Europe’s banks were far more dependent on volatile “wholesale,” market-based funding than their US counterparts.

Contrary to prevailing myth, the EU is by no means a gigantic bureaucracy. The EU employs fewer people than most medium-sized cities. But it was a sprawling, incoherent constitutional structure lacking in democratic accountability.

At the worst point in the crisis more than a quarter of US homes had negative equity.

If we look instead at the median household—the household that sits at the 50 percent mark in the wealth distribution—it saw its net worth halved from $107,000 to $57,800.42 And as bad as these figures are, the experience of America’s minority populations was worse.

The political party that had demonstrated its willingness to mobilize the full resources of the US government to fight the financial crisis was the Democratic Party. The Republicans weren’t so much a partner in managing the crisis as a symptom of it. In the course of the crisis the GOP had shown itself to be less a party of government than a political vehicle through which conservative, white Americans expressed their alarm at the earthquakes shaking their world.

52 percent of the mortgage-backed securities sold to the Fed under QE were sold by foreign banks, with Europeans far in the lead. Deutsche Bank and Credit Suisse were the two largest sellers, outdoing all their American rivals by a healthy margin. Barclays, UBS and Paribas came in eighth, ninth and tenth.

In 2010 they spilled over into a general struggle for the future of Europe. Europe’s single currency almost came apart. Greece, Portugal, Ireland and Spain were driven into depressions the likes of which had not been seen since the 1930s. Italy became collateral damage. France’s sovereign credit was put in jeopardy. Prime ministers were ousted. Political parties collapsed.

the Irish Times went on: “The true ignominy of our current situation is not that our sovereignty has been taken away from us, it is that we ourselves have squandered it. Let us not seek to assuage our sense of shame in the comforting illusion that powerful nations in Europe are conspiring to become our masters. We are, after all, no great prize for any would-be overlord now. No rational European would willingly take on the task of cleaning up the mess we have made. It is the incompetence of the governments we ourselves elected that has so deeply compromised our capacity to make our own decisions.”

Standard & Poor’s, downgraded the United States from AAA to AA+. S&P cited the “political brinkmanship of recent months” and the mounting evidence that “America’s governance and policymaking” was “becoming less stable, less effective, and less predictable.”76 It also pointed to the supposedly unsustainable level of US debt and the speed of its accumulation, which would take it well over 90 percent of GDP by 2021—the notorious Reinhart and Rogoff threshold.

In October 2011 a poll conducted for the New York Times and CBS News found that almost half those questioned felt that the FBI’s “anarchist camp” reflected the views of most Americans.83 Two-thirds thought wealth should be distributed more evenly—nine out of ten Democrats, two thirds of Independents and even one third of Republicans agreeing with that sentiment. But only 11 percent of Americans trusted their government to do the right thing, 84 percent disapproved of the Congress that had threatened to bring the US federal government to its knees and 74 percent thought their country was on the wrong track.

In 2008 Greek unemployment had been 8 percent. Four years later it was rising inexorably toward 25 percent. Half of young Greeks were without jobs. In a nation of ten million, a quarter of a million people were fed daily at church-run food banks and soup kitchens.

But when he was asked to rank a disorderly Greek exit on a “scale of one to 10, where the collapse of Lehman is a 10,” Furman opined that “a Greek default would likely register as a six; that is down from eight in 2012.”41 When the stakes had been high, Washington had not hesitated to meddle in the politics of the euro area. For a crisis that registered only 6 out of 10, Washington was not about to jeopardize its relationship with Berlin. As one American official told Varoufakis: “For us you belong to the sphere of influence of Berlin, which we will not question.”42

A poll in the summer of 2017 revealed that 60 percent of Americans still regarded Wall Street as a “danger to our economy,” and only 27 percent thought regulation had gone far enough or posed “a threat to innovation or economic growth.” Fully 47 percent of Trump’s voters wanted to “keep or expand” Dodd-Frank, as opposed to only 27 percent favoring repeal or scaling back.

With a personal net worth estimated in excess of $100 million Powell was by far the wealthiest person to take the position of Fed chair since the 1930s.