Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

As the world faced a financial crisis of global proportions, the Republicans chose as John McCain’s vice presidential running mate the patently unqualified governor of Alaska, Sarah Palin, whose childlike perception of international affairs made her the laughingstock of the world.

The contention of this book is that the speakers at the UN in September 2008 were right. The financial crisis and the economic, political and geopolitical responses to that crisis are essential to understanding the changing face of the world today.

The future will be decided between the survivors of the crisis in the United States and the newcomers of Asia.44 They may choose to locate in the City of London, but after Brexit even that cannot be taken for granted. Wall Street, Hong Kong and Shanghai may simply bypass Europe.

Given its inside knowledge of the property market, AIG had stopped writing new CDS already in 2005. But given the relatively small size of the portfolio and the AAA rating of the assets it had written CDS on, it had not thought it necessary to insulate itself against losses. It was a fatal mistake. Out of a total of 44,000 derivatives contracts on the books of AIGFP, there were, it turned out, a cluster of 125 CDS on mortgage-backed securities that were about to go bad in a spectacular way. Those 125 contracts would inflict book value losses on AIG of $11.5 billion, twice what the ill-fated AIGFP unit had earned between 1994 and 2006.

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

The City lobbied hard for the government to prioritize the existing passporting agreements, under which banks operating in London were de facto recognized as operating inside the eurozone.73 If no such deal was forthcoming, research commissioned by the City threatened that the collapse in business with the euro area might result in losses as large as £32 billion to £38 billion in revenues, 65,000 to 75,000 jobs and perhaps as much as £10 billion in tax receipts per annum.74 These, of course, were precisely the kinds of estimates mobilized by the Remain campaign, to little effect. What influence would they have now?

In fact, a deep dive into the poll data showed that Trump’s voters were better off than the average American.40 The voters with the lowest incomes—overwhelmingly minorities—continued to vote Democratic. But a detailed accounting of the electoral statistics did show a significant shift to the Republicans among white male voters with less than a college education. It was less immediate misery than anxiety about the future that drove the Trump vote, fears that in the white population were associated with hostility to Latinos and black Americans, and among men with hostility to upwardly mobile women.