Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

For macroeconomists this was a cause to celebrate the stabilizing properties of the modern tax and welfare state. For fiscal hawks it was a cause of deep concern. In the long run those debts would require higher taxes to service and repay them. This would pose major political challenges. And how would capital markets react? According to the script set out by conventional fiscal conservatism, one might have expected serious and immediate repercussions. Would the debt shock trigger the loss of confidence that Orszag and Rubin and so many others had warned about? How would savers be induced to hold trillions of dollars in government bonds? Would interest rates have to rise? Would this crowd out private investment? Would bondholders get jumpy? Would the bond vigilantes of the 1990s swing into the saddle, selling government bonds, driving Treasury prices down and yields up? In the spring of 2009, as the scale of the deficit became clear, business media reported that markets were up in arms. In light of “Washington’s astonishing bet on fiscal and monetary reflation,” the Wall Street Journal looked forward to a stern response from bond markets.23