Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The outspoken Brazilian board member insisted that the program not be referred to as “a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions.”62 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.

On February 14, 2010, twenty senior economists, including Ken Rogoff, wrote to the Sunday Times repeating Osborne’s charge that the Labour government was not doing enough to bring the budget under control.9 They were answered by a letter to the Financial Times from a much longer and no less distinguished list who opposed the call for fiscal retrenchment as premature and pointed out the irony that “[i]n urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place!”10

In what was dubbed an “emergency budget” in June 2010, Chancellor Osborne slashed spending and raised VAT. The aim was to calm markets by committing to close the deficit by 2015.14 The argument in 2010 was “necessity.” But, as Neil Irwin later commented: “Britain … was embarking on something that has rarely been attempted … cutting spending and raising taxes in a preemptive strike against the risk of a future debt crisis.”15 As Paul Krugman remarked from New York: “It’s one thing to be intimidated by bond market vigilantes. It’s another to be intimidated by the fear that bond market vigilantes might show up one of these days.”16 As the squeeze continued, other motives revealed themselves. Shrinking the state, it turned out, was an aim in itself. The ultimate goal, as David Cameron would put it in his speech to the Lord Mayor’s Banquet three years later, was “something more profound”: to make the state “leaner … not just now, but permanently.”17

By 2015 Chancellor Osborne would claim to have slashed £98 billion in annual spending from the UK budget. From a maximum of 6.44 million public sector employees in September 2009, the UK public sector workforce would be reduced to 5.43 million in July 2016.18 One million jobs were cut, privatized or outsourced. It was a reduction larger than that imposed by the Thatcher or Major governments of the 1980s and 1990s. Translated to the US public sector payroll, it would be the equivalent of the elimination of 3.3 million positions. Because pension and health spending were ring-fenced, the pain was concentrated above all in local government. As the minister in charge roundly declared: “[L]ocal government is a massive part of public expenditure. It has lived for years on unsustainable growth, unsustainable public finance …. People blame the bankers, but I think big government is just as much to blame as the big banks.”19 Between 2010 and 2016 spending by local councils on everything from elderly day-care centers to bus services, public parks and library facilities fell by more than a third. Britain became a darker, dirtier, more dangerous and less civilized place. Hundreds of thousands of people who were barely coping on disability and unemployment benefits were tipped into true desperation.20 According to the OECD, only Greece, Ireland and Spain were put through worse contractions than those inflicted on the UK.21

Desperate not to allow the recovery to grind to a halt, the Obama administration worked feverishly to pass a second round of stimulus in the lame duck session of the old Congress. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of December 2010 provided, by some estimates, a demand boost of as much as $858 billion.32 But it was a measure of their political predicament that the stimulus now consisted entirely of tax cuts, including the prolongation of the grossly inequitable giveaways for top income earners inherited from the Bush era. Two years into eight years in office, it would be the last major economic policy bill that the Obama administration would pass. In the New Year, with the new Republican Congress, they would be on the defensive. Because they included modest increases on the revenue side, the centrist recommendations of the Simpson-Bowles committee were dead on arrival, even though they were heavily slanted toward cuts in entitlements.

As Angela Merkel admitted in the summer of 2010, “[O]ther EU members, and the US administration, have urged Germany to spend more to maintain the current economic recovery, and reduce its export surplus.”34 But that was not how Germany saw its role. The crisis, so the prevalent German interpretation went, was a result of excessive debt. What the world needed to guide its recovery was for Germany not to act as an expansionary counterweight but to lead the way in offering a model of austerity.

For Berlin it was more important to achieve the 3 percent deficit rule specified by the eurozone’s Stability and Growth Pact than it was to honor its commitment to NATO to spend at least 2 percent of GDP on defense.38

At the insistence of the Obama administration the final text of the G20 communiqué referred to the need to sequence fiscal consolidation so that “the momentum of private sector recovery” was not jeopardized.41 But this was trumped by demands for fiscal consolidation.42 After the worst economic crisis since the 1930s, at a time when, according to the OECD, 47 million people were unemployed across the rich world, and the total figure for underemployed and discouraged workers was closer to 80 million, the members of the G20 committed themselves to simultaneously halving their deficits over the next three years.43 It was the householder fallacy expanded to the global scale. It was a recipe for an agonizingly protracted and incomplete recovery.

The troika went on pretending that Greek debt was sustainable, if only Athens adopted enough austerity. This was not true, as was becoming evident month by month: Greece was simply being driven into the ground.

In general one might have expected European banks with an interest in their own survival and prosperity to be energetically recapitalizing and reorienting their businesses for a future beyond the crisis. But there was little sign of that. Whereas America’s big banks operated under the discipline of annual “capital plans” and were required to retain whatever profit they didn’t distribute as bonuses so as to rebuild reserves, Europe’s banks were free to do as they saw fit. In a desperate effort to keep their shareholders happy, they paid out what little profit they earned in dividends in the hope that at some point in the future they would be able to raise new capital.55 But that moment was not now.

The Stability and Growth Pact first agreed in 1997 would be reinforced with German-style constitutional debt brake rules. But the French got Germany to agree that when it came to disciplinary measures there must be an element of political discretion. Sanctions would be triggered only by a qualified majority vote in cases where governments ran deficits greater than 3 percent of GDP or debts in excess of 60 percent of GDP. Sanctions would be tough—up to and including deprivation of voting rights.

Trichet was determined that Dublin should not use Merkel and Sarkozy’s announcement as cover to burn the banks’ bondholders. Instead, Ireland must accept a program like that imposed on Greece. And, as in Greece, with Irish banks wholly dependent for their day-to-day survival on ECB funding, Trichet had the whip hand.65 Dublin did not surrender without a fight. To find itself pushed into the financial emergency ward alongside Greece was a humiliating shock. So the ECB applied main force. On November 12 the ECB Governing Council threatened to withdraw support from the Irish banking system while leaking to the media that Ireland was about to apply for a bailout. On November 18 the Irish central bank chairman, Patrick Honohan, fresh from an ECB meeting in Frankfurt, contacted Irish broadcaster RTÉ to say that a national bailout was only days away.66 On November 19 Trichet spelled out to the Irish prime minister in a confidential letter the conditions under which the ECB would be willing to extend its assistance to the Irish banks.67 Dublin must immediately apply for aid and submit to the instructions of the troika. It must agree to an urgent program of further fiscal consolidation, structural reforms and financial sector reorganization. The banks must be fully recapitalized and the repayment of the ECB’s short-term financing for the Irish banking system must be fully guaranteed.

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. On December 7 Dublin announced a budget 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. Instead taxes were raised on low-paid workers. Child-care allowances were cut and college fees were increased. Benefits for the unemployed, caregivers and the disabled were slashed.

How exactly quantitative easing works remains a subject of controversy.74 Large-scale purchasing of mainly short-term bonds drives up bond prices and thus reduces yields. Reduced short-term rates may help to lever down long-term rates and thus to stimulate investment. But that depends on there being businesses willing to invest, which cannot be taken for granted at a time of crisis. The most direct effect of QE comes via financial markets. As the central bank hoovers up bonds, it drives down yields, forcing asset managers to go in search of yields in other classes of assets. Switching out of bonds into stocks inflates the stock market, increasing the wealth of those with stock portfolios, tending to make them more willing to both invest and consume. This, to say the least, is an uncertain and indirect method of stimulating the economy. By boosting the wealth of already wealthy households, it is predestined to increase inequality. Low-income households have no way of participating in capital gains.

The sense that Europe’s welfare state was being subjected to a relentless program of rollback driven by the demands of bankers and bond markets provoked outrage.

When further negotiations about the European Stability Mechanism, the permanent replacement for the EFSF, did not provide for the purchasing of bonds in the secondary market, the ECB’s patience ran out. It was time for Frankfurt to draw the line. The public side of the ECB’s new harder stance was interest rate policy. As the eurozone crisis heated up again in April and July 2011, the ECB, in one of the most misguided decisions in the history of monetary policy, raised rates.28

What Germany was benefiting from was something akin to the exorbitant privilege enjoyed by the United States in the global economy. At times of stress, global money moved into dollars. In the eurozone, money moved to Germany.35 It was a privilege measured by the yield spread. As the yields on crisis-country bonds soared, those on Bunds eased. It was one of the factors that helped to feed Germany’s prosperity bubble. That a flow of funds into Germany should come to be seen as a burden was symptomatic of the feverish discourse of the crisis.

It did so in the face of IMF calculations that suggested that to achieve debt sustainability Greece needed to sell off public assets to the tune of 50 billion euros. Indeed, according to a further IMF assessment released on July 4, even that would not be enough.46 It would take not only austerity and privatization but a truly heavy bondholder haircut to get Greece to sustainability. The tone of the talks with the International Institute of Finance (IIF), which had begun on June 27, suggested that there was little prospect of that. The banks and other bondholders were making only modest concessions. That suited the ECB, which was desperate that there should be no “default event,” but it stood in jarring contrast to the tens of billions of euros in cuts that Athens was imposing on its citizens. For Greece, the new Merkel-Obama dispensation was revealing itself to be extend-and-pretend in a new guise.

The result of this compromise was that Greece would pay the reputational price for having restructured its debts, but it would gain precious little financial relief. It would be left carrying a debt burden of 143 percent of GDP, which was clearly unsustainable. As one Goldman Sachs analyst commented: “This tendency to ‘under-size’ otherwise good policy initiatives has been a recurrent feature of European policies.” A member of the UBS economics team was less polite: “This is fiddling around at the margins …. The debt needs to halve.” As to the new support facilities provided by the EFSF, Willem Buiter, chief economist at Citigroup, told Bloomberg Television, “The European Financial Stability Facility has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo …. It needs to be increased in size urgently.”

Meanwhile, financial engineers began to contemplate the need for something no one had contemplated before—credit default swaps against US Treasurys.72 Prior to 2008 the market for US Treasury CDS had not existed. What would have been the point of insuring the risk-free asset class on which the entire global financial system rested? In the wildly improbable event of a US default, the general destabilization would be such that it was unclear whether any private financial entity would still be in a position to act as a reliable counterparty. Who would be left standing to pay out on insurance against the end of the world?

One of America’s own ratings agencies, 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. But when the US Treasury was handed the explanation for S&P’s decision, it became clear that the ratings agency had committed an elementary mistake. By applying the figures for debt growth to the wrong benchmark scenario, it had wildly overstated the deficit to be expected over the next ten years. Even more surprisingly, when this error was pointed out, S&P did not retreat. It left the downgrade in place as well as the explanatory text—minus the modeling error. This led the Treasury to fire off an official denunciation. “S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one …. The magnitude of this mistake—and the haste with which S&P changed its principal rationale for action … raise fundamental questions about the credibility and integrity of S&P’s ratings action.”77 No one doubted the weakness of the US political system. But S&P had delivered just one more demonst...

Market-conforming codetermination—was this what European democracy had been reduced to by the autumn of 2011? Was this the hidden agenda of the troika programs, imposed not only on the parliaments of Greece, Ireland and Portugal but on the Bundestag as well—to make them market conforming? For many who joined the protests of 2011, Merkel’s words confirmed their jaundiced view of the EU as little more than a container for the rule of the markets, or that new buzzword of the crisis, “neoliberalism.”2 Merkel did little to clarify the situation. On September 22, a few days ahead of the IMF meeting in Washington, she welcomed the first German pope, Benedict XVI, to the chancellery. Quizzed by curious journalists, Merkel volunteered that the European crisis had been at the heart of their conversation: “We spoke about the financial markets and the fact that politicians should have the power to make policy for the people, and not be driven by the markets …. This is a very, very big task in today’s time of globalization.”3

these statements are symptomatic of the depth of the crisis by the autumn of 2011. In the space of barely three weeks, the German chancellor managed to tell the press that politicians should be responsible to markets and to tell the pope that politicians should make policy for “the people” regardless of those markets. Was it a contradiction? Or was she implying some kind of synthesis? If so, was it a matter of finding the market-conforming mode of expression that would allow politicians to slyly exert their power or, more ominously, a matter of hammering democracy into such conformity that no market ever need fear the policy parliament might make? Did anyone in Berlin know? No surprise that Gregor Gysi, the sharp-tongued spokesman of Die Linke, should lash Merkel’s handling of the eurozone crisis as an engine of chaos and confusion.4

The pressure the more fragile members of the eurozone were under depended not on some inescapable clash of peoples and markets, or global capitalism and democracy.6 It was dictated, first and foremost, by the willingness, or not, of the ECB to buy bonds. In the markets many banks and traders were not just crying out for the EU to undertake a stabilization effort but betting billions that it ultimately would. What delayed the stabilization and escalated the conflict between democracy and markets to an extraordinary pitch was the struggle among Germany, France and the ECB over the future governance of the eurozone, a question in which politics and economics were inseparably intertwined. Ironically, the result, as in 2010, was to escalate the crisis to the point that European affairs could no longer be safely left to the Europeans.

Neither Spain nor Italy had applied for a troika program, but that did not stop the ECB from demanding huge cuts to government spending and increased taxation. In the Italian case, Trichet and Draghi called for the privatization of local public services, a proposal that had recently been decisively rejected in a nationwide referendum.8 The ECB also called for dramatic changes to labor market policy, infringing on rights of Italian and Spanish trade unions. Such changes were necessary, the ECB insisted, to cut unemployment and increase growth. It was a blatant attempt to shift the balance of social and political power by means of monetary policy, poorly disguised by the ECB’s proviso that care should be taken to ensure that the social safety net remained intact.

Trichet and Draghi suggested that the Italian government should invoke the decree powers of Article 77 of the Italian constitution, which allowed executive action “in cases of extraordinary need and urgency.” Originally designed to counter the specter of Communist insurrection during the cold war, Article 77 was a legal fig leaf that had been repeatedly invoked since the 1970s to cover “emergency measures.”9 Its overuse had been criticized by the Italian courts. If Berlusconi was worried about the legality of these proceedings, Trichet and Draghi advised that he should apply retrospectively for parliamentary sanction. Perhaps not surprisingly, legally minded members of Berlusconi’s cabinet wondered whether it was their malodorous prime minister or Draghi and Trichet who posed the greater risk to the rule of law.

European political obfuscations were obscuring the basic lesson of 2008: Questions of macroeconomic policy and systemic stability could not be hygienically separated from the workings of megabanks, now more politely known as systemically important financial institutions.

On every possible occasion Prime Minister Cameron lectured the eurozone members on the need for deeper integration, while at the same time exempting London from any commitments. For the good of Europe, Britain and the wider world economy, London demanded that the eurozone move toward full economic union. Meanwhile, for Cameron, struggling to contain an upsurge of Euroscepticism in the Tory party, Europe’s crisis was an opportunity to haggle. By exploiting the divisions within the eurozone, Cameron thought he could obtain explicit opt-outs for the City of London, especially from demands for a tax on financial transactions. But any such concessions were violently opposed by Sarkozy, and Merkel needed France far more than she needed the UK. When he realized that he was isolated, Cameron announced that he would not only veto a collective deal among the twenty-seven EU members.64 He would exercise his right to block any steps toward deeper integration by the eurozone members within the framework of the EU.

It was clear that at least as far as Britain’s conservatives were concerned, a decision would soon be necessary on whether they could continue as cooperative members of the union.

what emerged from the clashes of early December 2011 was the lowest common denominator of both options on offer. Germany got its fiscal compact, although it was cast not in the form of the treaty change that Merkel had wanted but in the minimal legal form of an intergovernmental agreement outside the framework of the Lisbon Treaty.65 The terms of the fiscal compact were draconian. In the future, Europe’s budgets were to be balanced or in surplus. By constitutional amendment or its equivalent, deficits were to be restricted to 0.5 percent of GDP. The European Court of Justice was to oversee the transposition of these rules at a national level. States that had a deficit in excess of 3 percent of GDP would be subject to automatic sanctions unless a qualified majority of states were opposed. Countries with debt levels in excess of 60 p...

And his sympathy with German demands for “reform” was unfeigned. As Draghi told the Wall Street Journal in February 2012, Europe’s social model that prioritized job security and social welfare was “already gone.” What, after all, did talk of a social model mean when 50 percent of Spanish youth were unemployed?72 Europe’s labor markets would have to be reinvented, presumably along the lines of Germany’s Hartz IV agenda. In his grad student days at MIT in the 1970s, Draghi recalled, his American professors had marveled at Europe’s willingness to “pay everybody for not working. That’s gone.” For the new head of the ECB there was “no feasible trade-off” between labor market reform and fiscal austerity. “Backtracking

In its briefing for the full meeting of finance ministers and central bank governors that would convene in Mexico City on February 25–26, 2012, the IMF’s headline was stark. The “overarching risk” to the world economy was of an intensified global “paradox of thrift.” As households, firms and governments around the world all tried to cut their deficits at once, there was an acute risk of global recession. “This risk is further exacerbated,” the IMF went on, “by fragile financial systems, high public deficits and debt, and already-low interest rates, making the current environment fertile ground for multiple equilibria—self-perpetuating outcomes resulting from pessimism or optimism, notably in the euro area.”2 The place where the paradoxes of thrift were most visible was Greece.

The problem in achieving debt sustainability was Greece’s collapsing GDP as much as it was its elevated debt level. By the time of the discussions in Mexico in early 2012, it was clear that the deal hammered out three months earlier was no longer viable, not because the Greek government or the creditors were reneging but because the Greek economy was contracting too fast.3

The restructuring that was forced on the creditors of Greece between February and April of 2012 was the largest and most severe in history, larger in inflation-adjusted terms than the Russian revolutionary default or Germany’s default of the 1930s.9 By April 26, 2012, 199.2 billion euros in Greek government bonds were converted in exchange for 29.7 billion in short-term cash equivalent notes drawn on the EFSF and 62.4 billion in new long-term bonds at concessionary rates.

This meant that altogether, of the 226.7 billion euros in assistance loans received by Greece, only 11 percent went toward meeting the needs of the Greek government deficit and directly to the benefit of the Greek taxpayer.

what the SPD demanded in 2012 was a new focus not on debt and fiscal sustainability but on growth. And this appeal received support from an unexpected corner: the IMF. The emphasis on the paradox of thrift in the G20 briefing for Mexico City was the first sign of a major shift in Fund thinking on fiscal policy.20 In the summer of 2012 its staff revisited the forecasts they had made in the spring of 2010 as the eurozone crisis began and discovered that they had systematically underestimated the negative impact of budget cuts. Whereas they had started the crisis believing that the multiplier was on average around 0.5, they now concluded that from 2010 forward it had been in excess of 1.21 This meant that cutting government spending by 1 euro, as the austerity programs demanded, would reduce economic activity by more than 1 euro. So the share of the state in economic activity actually increased rather than decreased, as the programs presupposed. It was a staggering admission. Bad economics and faulty empirical assumptions had led the IMF to advocate a policy that destroyed the economic prospects for a generation of young people in Southern Europe.

If only the ECB had moved to the Fed model earlier, as Obama had spelled out at Cannes, the worst of the eurozone crisis might have been avoided. What Draghi now promised was what Geithner, Bernanke and Obama had been preaching to the Europeans since 2010: “Do it our way.” Nor was it a coincidence that it was Draghi—an American-trained economist; a Goldman Sachs associate; a paid-up member of the global financial community; a “friend of Ben”; an internationalized, urbane Italian, not a provincial German—who delivered this conclusion to the agonizing story of the eurozone crisis. The Draghi formula—America’s formula—was self-fulfilling. He spoke the magic words. The markets stabilized. The eurozone was saved by its belated Americanization.

Faced with a crisis of historic proportions, after its own fashion, the Obama administration had delivered a twenty-first-century demonstration of hegemonic leadership.

But this reconciled narrative of crisis resolution obscures deep tensions on both sides of the Atlantic. In Europe, the eurozone had survived. Draghi was right. An important phase of state building had emerged from the crisis. But it was at an appalling economic and political cost. The governments of Italy and Greece had been overturned. Ireland and Portugal had been put on troika tutelage and Spain had escaped by the skin of its teeth. And though the acute sovereign bond crisis was over, after two years of nail-biting anxiety, consumer and business confidence were shot. Unemployment took a huge toll on eurozone demand. Fiscal policy was constrained by the German drive to balance budgets. Perversely, Germany’s trade surplus was surging at a time of plunging aggregate demand across the continent. It was a time, if there ever was one, for an active monetary policy. But stopping the bond market panic was one thing, reviving the eurozone economy another. Unlike the Fed, Draghi had no mandate. As social misery deepened, as the sense of humiliation set in, what would be the reaction across Europe? Nor was it only the “victims” who were unsatisfied. German conservatives were indignant at Merkel’s litany of compromises. In the German media, Draghi, the savior of the eurozone, faced hostility and doubt. Unless this German Euroscepticism could be overcome, there was little prospect of actually realizing the agenda of ambitious integration and institution building that Draghi had tru...

And in economic policy too there were skeptics. Had enough really changed to make another crisis less likely? Had the tensions within the financial system really been resolved, or merely contained? If another Great Depression had been avoided, did that have the perverse effect of removing the spur to truly profound reform?

Twelve months on from Obama’s second election victory, at an IMF event in November 2013, Summers warned: “[M]y lesson from this crisis, and my overarching lesson, which I have to say I think the world has under-internalized, is that it is not over until it is over, and that time is surely not right now.”71 He could not have known how right he would turn out to be.

In an astonishing makeover of America’s recent economic history Summers proposed that for at least two decades American economic growth had been on weak foundations. To achieve no more than a “normal” rate of growth it had depended on “abnormal” financial bubbles. Looking back over recent decades, Summers asked in a subsequent speech, “[C]an we identify any sustained stretch during which the economy grew satisfactorily with conditions that were financially sustainable? Perhaps one can find some such period, but it is very much the minority, rather than the majority, of the historical experience.”11 It was a remarkable indictment of the policy consensus of which Summers himself had been a defining figure.12 It had dramatic implications for current policy. If America simply waited, the long-awaited rebound from the crisis of 2008 might never arrive.

If a moment when the United States can borrow at lower than 3 percent in a currency we print ourselves, and when the unemployment rate for construction workers hovers above 10 percent, is not the right moment to do it, when will that moment come?”13

Though there had been many well-intentioned efforts by government agencies to modify and improve the condition of average Americans, on balance their net effect had been modest, to say the least. Between 1977 and 2014 the share of national income going to the top 1 percent before taxes and benefits had risen by 88.8 percent. After fiscal redistribution their share increased by 81.4 percent. Nor did the tax and welfare state prevent the share of the bottom 50 percent from declining from 25.6 to 19.4 percent.25 Nor was this by accident. Every conceivable source of leverage and influence had been exploited by those with money to maximize their advantage. As billionaire investor Warren Buffett famously put it: “Actually, there’s been class warfare going on for the last 20 years, and my class has won.”

“What do the pre- and postcrisis consensuses have in common?” Krugman asked in December 2013.32 “Both were economically destructive: Deregulation helped make the crisis possible, and the premature turn to fiscal austerity has done more than anything else to hobble recovery. Both consensuses, however, corresponded to the interests and prejudices of an economic elite whose political influence had surged along with its wealth …. Some pundits [might wish to] depoliticize our economic discourse, to make it technocratic and nonpartisan. But that’s a pipe dream. Even on what may look like purely technocratic issues, class and inequality end up shaping—and distorting—the debate.” This from a Nobel Prize–winning economist who in the 1980s and 1990s had counted squarely in the mainstream.

“For a quarter century,” he now admitted, “I’ve offered in books and lectures an explanation for why average working people in advanced nations like the United States have failed to gain ground and are under increasing economic stress.” He had pitted an interventionist state against the forces of globalization and technological change. What Reich now recognized was that much of this was “insufficient,” if not “beside the point,” because it overlooked a “critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs …. The problem is not the size of government but whom the government is for.”33

After the events of 2008–2009 and the spectacularly lopsided bailouts, could anyone seriously doubt whom government was for? At the level of personnel, the revolving door that connected the Treasury, the Fed and the top banks continued to spin at a steady pace. By 2014 both Bernanke and Geithner were on their way from public service to well-upholstered positions in finance. Geithner went to the well-connected investment bank Warburg Pincus. Bernanke advises the Citadel hedge fund and chaired an advisory board for the giant PIMCO bond fund, owned by Allianz of Germany, which also included as its members Jean-Claude Trichet and Gordon Brown as well as Anne-Marie Slaughter of the Obama foreign policy team.34

As the recession of 2008–2009 receded, what came ever more to the fore was a tendency toward concentration and oligopoly that went far beyond Wall Street. One of the side effects of Bernanke’s QE policy of low interest rates was that it made it hugely attractive for companies to borrow to buy out their competitors. In three giant merger waves, cresting in 2000, 2006 and 2015, with the antitrust authorities looking on, American capitalism remade itself in a more concentrated and monopolistic mode.36 By 2013 profits were booming to an almost embarrassing extent.37 Even chronic loss makers, like the airlines, were now making money. But the really big returns were elsewhere. As Peter Orszag, Obama’s former director of management and budget, now at Citigroup, and Jason Furman, serving as chair of the Council of Economic Advisers, reported in a research paper, two thirds of the nonfinancial firms that had managed to achieve a return on invested capital of 45 percent or more between 2010 and 2014 “were in either the health care or information technology sectors.”38 What allowed such gigantic profits and enormous salaries to be concentrated in these sectors were market power, IP protection and government-licensed pricing.39

“Creating value isn’t enough—you also need to capture some of the value you create.” That depended on market power. “Americans mythologize competition and credit it with saving us from socialist bread lines,” but Thiel knew better. As far as he was concerned, “[C]apitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear … [c]ompetition is for losers.”41

About the technical efficacy of the swap lines there was little doubt. Their political legitimacy was a different matter. And in the autumn of 2013 one couldn’t help thinking of another of America’s technical systems of power that had been revealed earlier that year: the NSA’s electronic surveillance network.49 The network that Edward Snowden exposed in early June also centered on US power and technological capacity. It too was no American monolith. Like the Fed, the NSA worked through local agencies. It too promised to provide a blanket of security for the United States and its allies. Of course spying and exchanging currencies were not the same things. But they did have in common that their functional power and administrative efficacy were not matched by anything resembling public political authorization. They were testimony, at one and the same time, to the continuing significance of US global power and the difficulty in justifying that power in public either in the United States or in the countries whose governments and business interests were enrolled in America’s network.