Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

What the Democratic operatives failed to understand was that the race was theirs to win, not to lose.44 Clinton was running to succeed a two-term Democratic presidency. A change was in order. The economy might not be the disaster that Trump suggested, but it was not booming. To overcome these handicaps, Clinton needed to energize the Democratic base. That she utterly failed to do.

But in truth the entire establishment of the United States had lined up against the president-elect. In August 2016 the Wall Street Journal contacted every single surviving member of the president’s Council of Economic Advisers back to the days of Richard Nixon—all forty-five of them. Though twenty-three were Republican appointees, none would endorse Trump.47

Even an institution as deeply disappointing as the ACA was hard to budge once tens of millions of people came to depend on it and hundreds of billions of dollars began to flow through its channels. Indeed, among the states that benefited most from the extension of health coverage under Obamacare were Kentucky and West Virginia, diehard Trump country.55 As Trump took office, support for the ACA among the most important group of voters, Independents, had risen from 36 percent in 2010 to 53 percent.56 By the summer, when the desperate Republican congressional leadership made a last bid simply to repeal Obamacare without replacement, they had the support of only 13 percent of Americans.57 Not surprisingly, sufficient Republican moderates refused to go along.

Then for good measure, the Senate added the removal of the single-payer mandate that required all Americans to take out health insurance. Without this mandate, by most estimates, 13 million Americans would drop out of coverage. As many low-risk individuals left the insurance plans, the premiums for those who did remain would surge. DeLong’s fears were amply confirmed. In its redistributive impact and the scale of the giveaway, 2017 stood in comparison with the huge Reagan tax cut of 1981 and those of Bush in 2001 and 2003.66

But the vast majority of economists were scornful of these evasions. The tax cuts would clearly add to the deficit. Simpson and Bowles, who had headed Obama’s national commission on fiscal responsibility and reform, denounced the tax plan as a return to the era of “deficit denial.”69 In fact, it was not so much denial as hard-nosed political calculation. There was no way to cut the corporate tax rate to as little as 21 percent without incurring deficits.70 Nor did this scare the activist Republicans. As they saw it, the larger the deficits, the more urgent the need to move on to stage two of their program.71 With the tax cuts threatening to add a trillion and a half dollars to the national debt, spending cuts would be mandatory. Medicaid would be pared back as far as the law permitted and the rest of the federal government would be cut to the bone.

The UN’s special rapporteur on extreme poverty, who happened to be touring the United States visiting some of the 40 million Americans who lived in conditions of deep deprivation, denounced the tax plan as “a bid to make the US the world champion of extreme inequality.”72

It was easier to rail against tax breaks than it was to get them repealed. Key areas of welfare spending had supporters even in the Republican ranks. At the same time the Republican plans to expand the army by 10 percent and raise the navy to 355 fighting ships would increase military spending, the largest element of discretionary spending, by $683 billion, or 12 percent, over the decade to 2027.73 Rather than shrinking big government, the main effect of Republican fiscal tactics was likely to be a further reduction in America’s already deeply inadequate tax base. Following the tax cuts, the federal government’s take of GDP would fall to 17 percent, a figure befitting an emerging market state rather than the government of an advanced economy.74

On a global scale over the next five years, the United States would be the only source of safe, Treasury-grade assets for investors worldwide. Whatever you might think of the Trump administration, if you needed to park a large volume of funds in safe government debt, there was no alternative to US Treasurys.

As the Financial Times commented: “Imagine going to the races, betting 98 per cent of your stake on the favourite [Clinton], which loses in the final stretch, and going home with huge winnings.”84 As far as Wall Street was concerned it turned out that the game of politics was heads I win, tails you lose. Neither the politicians nor Wall Street gave a second thought to the angry voters who had actually put Trump in the White House.

Through tax breaks, subsidies and export credit systems, not to mention China’s state capitalism, world trade was increasingly shaped not only by corporate value chains, but also by state intervention. A large part of America’s huge trade deficit was accounted for not only by Chinese trade discrimination, but also by lost export earnings siphoned through offshore tax havens, located not only in the Caribbean but also in the EU.122 In this respect too the once-robust assumption that globalization was an inevitable, natural process was losing its power to convince.

The only likely movement in the yuan was upward. Put the two together and you had the ingredients for a profitable “carry trade”: borrow in dollars; invest in yuan; repay the dollar loan from the proceeds of the booming Chinese economy at an appreciating yuan exchange rate.6 If China’s exchange regulations made it difficult to import US dollars directly, one or two further steps were added: borrow in dollars; buy commodities; use the expected receipts from the sale of the commodities as collateral to borrow in yuan; invest the yuan in China. Profit could be made three ways: on the spread between Chinese returns and dollar funding costs; on the depreciation of the dollar against the yuan; and on the likely increase in the value of the commodities, driven upward by booming Chinese demand.

This is how the triumphalist narrative goes. China is not just another crisis-prone emerging market. Beijing is in control. A threat of crisis spawned in China that threatened to destabilize the world economy was contained by China. So far so good, one might say. But 2015 demonstrated not only that China was neither invulnerable nor omnicompetent. Even more significantly, it demonstrated that it was not autonomous.

As the storm clouds gathered, holding China in place was the first priority of Paulson’s Treasury. And Paulson was willing to pay a high political price for doing so. Brad Setser’s quip was to the point: Fannie Mae and Freddie Mac were “too Chinese to fail.”18 Nationalizing them helped to prevent a simultaneous Atlantic and Chinese crisis with consequences too awful to contemplate. But Paulson’s financial diplomacy also highlights the fact that in 2008, managing Sino-American financial relations was still very much a matter of intergovernmental relations. By contrast, in 2015–2016 not only were the risks on the Chinese side but the people moving the money were private businesses and investors. In less than ten years, Chinese commercial and financial integration had come a staggeringly long way. Given the narrative unfolded in this book, this has daunting implications.

In East Asia, America’s alliance system was always more loosely knit. And the victory of the West in the cold war was far from complete. China’s economic triumph is a triumph for the Communist Party. This is still the fundamental reason for doubting the possibility of truly deep cooperation with China in global economic governance. Unlike South Korea, Japan or Europe, China is not a subordinate part of the American global network. When the United States extended swap lines in 2008, it was acting in a zone that is both a depoliticized realm of economic activity and yet framed by a deep power relationship. The politics of Chinese foreign investment and suspicion of the role played by its state-owned enterprises suggest that deeply shared economic interests, of the kind that legitimated the Fed’s swap lines for Europe, will be far harder to develop.