Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

By one estimate, the share of American real estate in global wealth is as much as 20 percent.

Between the 1990s and the outbreak of the crisis in 2007, American housing finance was turned into a dynamic and destabilizing force by a fourfold transformation—the securitization of mortgages, their incorporation into expansive and high-risk strategies of banking growth, the mobilization of new funding sources and internationalization. All four of these changes can be traced back to the transformation in world economic affairs between the late 1970s and the early 1980s in the wake of the collapse of Bretton Woods.

The backdrop to the eurozone crisis was, indeed, a gigantic surge in debt, but it was in the private, not the public, sector. The eurozone played host to the same runaway, market-driven process of credit creation that European banks were contributing to so actively in the North Atlantic economy.

Unlike the United States, where equity and bond markets were the main sources of business finance, Europe’s economies had long relied heavily on bank lending. But spreading out across the EU and feeding off the transatlantic financial circuit, the European banks had grown to gargantuan size. In 2007 the three largest banks in the world by assets were all European—RBS, Deutsche Bank and BNP. Combined, their balance sheets came to 17 percent of global GDP.

Looking back over the course of events since 2007, if one stopped the historical clock in the autumn of 2012, the story of the North Atlantic financial crisis could thus be twisted back into a familiar shape. Faced with a crisis of historic proportions, after its own fashion, the Obama administration had delivered a twenty-first-century demonstration of hegemonic leadership. It lacked the urgency and razzmatazz of the Marshall Plan era, but the upshot was decisive. 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.

As tech oligarch Peter Thiel told audiences and readers: “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.”

The project of fiscal consolidation imposed on Europe under German leadership was certainly political. But it was not only that. It was a vision of a long-term reordering of Europe’s society and economy. Merkel was fond of shocking unsuspecting visitors with the remark that unless Europe reformed it would go the way of Inca civilization.23 In pursuit of its goal, to be realized over the course of a decade, Berlin did not flinch from imposing heavy short-term costs. That is what reform of a failing social and economic model entailed. That was the lesson of the collapse of communism, the economic project of German unification and the incorporation of Eastern Europe into the EU. In pursuing that project one could make concessions neither to the short-term time horizons of markets nor to Syriza-style protest politics. To ensure that Europe stayed the course, it was essential to contain “political contagion.” It would be disastrous to make concessions to the Far Left government in Greece, concessions that during the crisis had been denied to the governments of Eastern Europe, Ireland, Spain and Portugal. Whatever the misery of the Greek population, it hardly mattered in the wider economic balance of the eurozone. The battle was about the wider questions of political discipline and authority, which, as the conservative globalists in Berlin saw it, were the foundations for long-term economic success.

The revolving door that feeds government in America regularly rotates between public service and the corporate world. In firms like Goldman Sachs, the rotation is de rigueur for senior figures. It is not easy for a patriotic American to turn down an invitation from the White House to serve. But why, one has to ask, would a senior business figure be willing to be associated with such an administration? To which the simple answer is that Trump’s victory changed everything. His objectionable personality and outlandish policy proposals now had to be weighed against the more basic political question of who would do what for whom.