Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

In the event, Summers and the other skeptics were proven right. There was no run against Treasurys. The bond vigilantes were a spook. America’s households were rebuilding their savings. Mutual funds were shifting out of risky mortgage bonds. Everyone wanted Treasurys. These were the kinds of systemic macroeconomic and financial mechanics that all too often escape fiscal hawks, who view the public budget like that of a private household. When the private sector is undergoing a shock episode of deleveraging, when the savings rate is surging as it was in 2009, what is needed to preserve the overall financial balance of the national economy is not for the state to cut its deficit too. Everyone cannot save at once without provoking a recession. As the proponents of “functional finance” have argued since the 1940s, the state must act as a borrower of last resort.26 In so doing it preserves aggregate demand and provides a flow of safe long-term bonds to financial markets. After the shock of 2008 the entire world was keener than ever to hold safe assets. A huge class of AAA-rated private label securities had shown itself to be far from safe, so the demand for Treasurys was huge. It wasn’t only Americans who wanted US government debt. As Treasury debt held by the public increased by $2.9 trillion between the summer of 2007 and the end of 2009, foreign buyers took more than half. Chinese holdings of Treasurys increased by $418 billion.