Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

doubt all commodities have politics. But money and

challenge of the 1990s. In the new millennium it was even more so. But two years into President

investment banking elite earned returns of more than 50 percent

A case in point was the German bank Depfa. Founded in 1922 at the time of the Weimar Republic by the government of Prussia to make subsidized housing loans, Depfa moved to Dublin’s International Financial Services Center in 2002 to take advantage of Ireland’s welcoming tax laws.

Nice to know Ireland iss mentioned

What could signify your arrival in the West more clearly and in a more personal way than the fact that your newly privatized home was financed in Swiss francs?

Ha

What the Fed had done for money markets, the central banks now did for the global provision of dollar bank funding. They absorbed the currency mismatch of the European bank balance sheets directly onto their own accounts. Compensating public action ensured that private imbalances did not spill over into a general crisis.

twin strategy of the us fed

the Fed had reaffirmed the role of the dollar as the world’s reserve currency

The Fed’s programs were decisive because they assured the key players in the global system—both central banks and large multinational banks—that if private funding were to become unexpectedly difficult, there was one actor in the system that would cover marginal imbalances with an unlimited supply of dollar liquidity.

Size of what was provided did not matter. US was ultimate backstop for global liquidity.

global lender of last resort.

After 2008 it was openly organized around the Fed and its liquidity provision.

swap be done with a central bank than with the fragile banks themselves.

Of the liquidity on one-month or three-month terms that the Fed provided to big banks, European banks took the majority.

What the Fed was struggling to contain in 2008 were not two separate American and European crises but one gigantic storm in the dollar-based North Atlantic financial system.

The reality of global financial policy disappeared in a “spiral of silence,” in which it suited both the Fed and its collaborators to bury the reality of massive and explicitly hierarchical interdependence. Chapter 9

one might have expected the ECB to extend similar support to the East European neighbors of the eurozone. Certainly this was the expectation of the Fed.

Interesting

Austria’s banks were in particular difficulty because they had made loans in Swiss francs, funding them with borrowing in Switzerland, where interest rates were low. Now the Swiss franc was soaring and funding was scarce.

The G20 was a reflection of the new world created since the 1970s by globalized economic growth.

Meanwhile, rather than recognizing the political trauma caused by the 2008 bailouts, the bankers in their self-satisfied insulation continued to help themselves to the lion’s share of whatever revenue they generated.

2009 banks stalled progress

Ireland was overwhelmed by the consequences of its panic-stricken announcement on September 30, 2008, that it was guaranteeing 440 billion euros of bank liabilities.

Consequences of guarantee

It is not surprising, therefore, that the Greek and the Irish situations, followed by Portugal’s, should have caused political and financial stress and that this should have spread to both sides of the Atlantic. But what happened in the eurozone from 2010 was extraordinary.

Oh yeah.....?

Ireland was an overgrown offshore banking hub. The costs of the bailout that Dublin saddled itself with were enough to have put even the most fiscally sound state in danger.

Clear definition

One could hardly ask for a clearer statement of the “bait and switch” substitution, by which a problem of excessive bank lending was turned into a crisis of public borrowing.63 But this substitution resulted less from a skillful ideological conjuring trick than from a lowest common denominator compromise between the main players in the Greek debt drama—Germany, France, the ECB, the IMF and the Obama administration.

True but still

eurozone had not “come without warning.” The ECB and the German government were deliberately courting the bond vigilantes who swarmed over Greece. If they wanted to ease the pressure, all the ECB needed to do was what the Fed, the Bank of England or the Bank of Japan did as a matter of course—buy Greek bonds. But the ECB had no intention of doing that, not, at least, until the very last minute. The ECB meant to send a message: Austerity or else! They must have been delighted by the global reaction. The year 2010 would become a turning point in the recovery. Using

True

If only the creditors of the most troubled Anglo Irish Bank took a haircut, the savings were estimated at 2.4 billion euros.

If investors in all four of the protected banks were haircut, the budgetary relief might amount to as much as 12.5 billion euros. In relation to total tax revenue of 32 billion euros, these were huge savings. The position of the ECB was well known by this point. It would fight restructuring to the last ditch.

Didn't know this

Advocates of extend-and-pretend would insist forever after that it was Merkel and Sarkozy who tipped Ireland over the edge, that Trichet was right, that this was Europe’s “Lehman moment”: an unforced, politically motivated error. But, as in the case of Lehman, political and technical judgments were mingled. Given its gigantic budget deficit and the expiry of the 2008 guarantee for its banks, Ireland was heading into rough waters in any case, with or without Deauville. Spreads on Irish government debt were already surging before Merkel and Sarkozy’s surprise announcement. Deauville did not help. But it did not cause a market panic.

The question at the time was whether it was the nature of the guantee

The loss of political sovereignty was no doubt painful. But who would really pay the price for “cleaning up the mess”? Would it be voters and taxpayers, or those who had profited from inflating the credit bubble? In the Greek case, at least, the debts were public. In Ireland taxpayers were being asked to pay for huge losses incurred by deeply irresponsible banks and their investors all over Europe.

RIght

with a new round of 6 billion euros in cuts, half of what would have been saved if the bank bondholders had been haircut across the board.

Ha

Prime Minister Lenihan admitted resignedly: “I can’t go against the whole of the G7.”

Ha a mistake

Puerta del Sol.

Notr

Bailing in creditors without backstopping the bond market and strengthening the banks was not so much responsible policy as a high-wire act that the ECB, the French and the Americans all regarded with horror. And this is the most charitable interpretation of Berlin’s motivations. The less charitable reading was that Germany was engaged in a strategy of tension, deliberately fostering market uncertainty to bully the rest of the eurozone into

I'd go with the latter

But Germany’s exports to the rest of the world were booming. Labor markets were tightening. It was a long way from the affluence and complacency of Munich or Frankfurt to the turbulent streets of Madrid and Athens. Berlin could afford to wait it out.

True

infinite.”73 Indeed, given Draghi’s subsequent

a review of its European sovereign ratings

In fact, German opposition to Draghi’s initiative was fierce.56 Some insiders are convinced that it was not until the German government’s joint meeting with its Chinese counterparts on August 30 that Merkel and Schäuble were finally committed to backing the ECB’s initiative and holding Greece in the currency zone.

Chinese Influence was required to force Germany to accept whatever it takes remark and what it meant. The remark itself was forced based on the Dragis understanding of the sentiment in the city

It was hedged with far more conditions than the unconditional bond buying in which the ECB had engaged under Trichet.

Interesting

But this was far too kind to the Europeans. Draghi’s OMT as it emerged by September 2012 was a conditional confidence-building measure. It worked by calming markets and stopping the panic. But beyond that it provided no stimulus to the eurozone economy.

Important point

Here was a powerful central banker and he was saying that he would do “whatever it takes.” Finally,

G

European policy maker had realized what was needed. He was speaking the language of the financial Powell Doctrine, in the City of London, to an audience of investors, in English. What Draghi was signaling was that Europe, finally, “got it.”

Saw it as a version of federalism. They were all about the backstop

the worst of the eurozone crisis might have been avoided.

Thos is what galbraith said to me in 2010

The eurozone was saved by its belated Americanization.

Blah

Not only had America led the way through its own domestic stimulus and monetary policy programs. Through discreet diplomacy and the Fed’s massive liquidity programs, it had helped Europe across its worst crisis since the end of World War II. Americanization was the answer. Nor were the exponents of US economic policy shy about trumpeting their achievements.

Gah capitalism requires universal socialim

This narrative was also, in the American context, a thoroughly political one.

Politics more than economics

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

Thoss is what makes Toozes analysis different

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.

Good point

was precisely the conversion of commentators of this ilk to a more radical view that marked how serious the sense of crisis had become.