[Marxism] Review of Adam Tooze's "Crashed: How a Decade of Financial Crises Changed the World"

Louis Proyect lnp3 at panix.com
Fri Oct 19 07:51:18 MDT 2018


LRB, Vol. 40 No. 20 · 25 October 2018
Bait and Switch
Simon Wren-Lewis

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze
Allen Lane, 706 pp, £30.00, August, ISBN 978 1 84614 036 5

In 2007, Alan Greenspan, the former chair of the Federal Reserve, was 
asked by a Swiss newspaper which presidential candidate he was 
supporting. He said it didn’t matter: ‘We are fortunate that, thanks to 
globalisation, policy decisions in the US have been largely replaced by 
global market forces. National security aside, it hardly makes any 
difference who will be the next president. The world is governed by 
market forces.’ This was the ultimate hope – the ultimate delusion, as 
it turns out – of one of the architects of neoliberalism. Over the next 
two years market forces inflicted major damage on the global economy, 
and politics was forced back into the picture, though it had never 
really gone away. In Crashed, Adam Tooze sets himself the mammoth task 
of making sense of the Global Financial Crisis (GFC) and its 
consequences over the last ten years. By and large he succeeds brilliantly.

The origins of the GFC are usually traced to the sub-prime housing crash 
in the US, or to the problems facing the countries on the periphery of 
the Eurozone. Tooze argues that these might have been the triggers for 
the crisis, but they were not its cause. The cause was transatlantic – 
because that is what the major US and European banks had become – and 
that’s the reason its consequences were felt in most countries that had 
close financial ties to the West. What the West experienced in 2008 was 
a global bank run, a complete collapse of interbank credit. It is 
commonplace to hear the great recession of 2008-9 talked about as if it 
were a more modest version of the Great Depression of the 1930s. That 
may be true, looking back, but at the time the crisis of 2008-9 had the 
potential to be far worse. ‘Never before,’ as Tooze writes, ‘not even in 
the 1930s, had such a large and interconnected system come so close to 
total implosion.’ Ben Bernanke, chairman of the Fed at the time, calls 
the GFC the worst financial crisis in global history.

The reason the GFC was more globally co-ordinated than the Depression is 
that it was caused by interconnected global banks. Tooze notes that 
every one of the 104 countries for which the World Trade Organisation 
collects data experienced a fall in imports and exports between the 
second half of 2008 and the first half of 2009. It was only the often 
frantic interventions of central banks and governments that mitigated 
the impact of the crisis. In the 1930s, the Great Depression had not 
been moderated in that way. To a very limited extent, the GFC shows that 
we can learn from history.

The implosion was triggered by events in the US, but the proximate cause 
could equally well have been some other mishap involving the loans made 
by the big banks. The more fundamental reason for the collapse was that 
the transatlantic banking system, which is in practice a ‘tight-knit 
corporate oligarchy’ of around 25 global banks, had left itself without 
buffers sufficiently robust to cushion it against local shocks. The 
banks had become highly leveraged: they had loaned far too much money 
compared to their capital and so they couldn’t cover the total amount of 
loans going bad. And it didn’t make much difference which loans went 
bad, because the global banks had become more and more intertwined.

Tooze argues that conventional macroeconomics, which focuses on the 
workings of single economies, was ill equipped to handle let alone 
anticipate a global crisis. I think that is only partly right. A good 
example of where it does hold true is the UK. It is taken for granted by 
many that the collapse of the UK banking system reflected a crisis 
originating in UK borrowing, and that people and governments before the 
GFC must have indulged in overspending. That is simply not the case. The 
UK banking system got in trouble because it had far too little capital 
compared to the size of its loan book, and the loans that went bad were 
not to UK residents or firms. Northern Rock collapsed not because the 
people to whom it had lent mortgages stopped paying, but because it got 
the money for those loans from short-term borrowing on the global 
interbank market rather than from domestic savers, and in 2007 that 
market dried up.

It would be wrong, though, to argue that a global perspective was needed 
in order to anticipate and even prevent the GFC. Although banks may be 
global, and therefore vulnerable to shocks from around the world, their 
vulnerability is quite obvious to domestic regulators. Each global bank 
is accountable to a single national regulator, and to a government that 
will or will not bail it out if things go wrong. The Bank of England, 
for example, had data concerning the rapid increase in the leverage of 
UK banks in the few years before the GFC, but did little about it beyond 
talking euphemistically about changing attitudes to risk. Perhaps the 
fact that it was an international trend persuaded regulators to let 
things pass, since to act alone would, initially at least, have hurt the 
profitability of their own country’s banks. It is not as if the 
possibility of a banking crisis hadn’t been considered, but there was no 
appetite for what we now call stress-testing. The possibility of a joint 
UK-US analysis was mooted at the Bank of England after the 1990s, Tooze 
reports, but it never got off the ground because no one thought it a 
priority. The GFC was a regulatory failure not just in the sense that an 
overleveraged transatlantic banking system was allowed to develop in the 
first place, but also in the sense that the warning signs in the 
mid-2000s were ignored.[*]

Once the crisis arrived, it was down to national governments and central 
banks to deal with it, and here Tooze is correct to suggest that those 
who thought in global terms did rather better than those who didn’t. The 
ways in which different governments responded when their banks crashed 
forms a large part of his discussion. The Fed and the US Treasury may 
have misjudged the devastating market reaction to the Lehman bankruptcy 
in 2008, which many mark as the beginning of the GFC, but once the 
extent of the problem became clear they not only bailed out their own 
financial institutions, but the Fed also provided dollars on a huge 
scale to European central banks, which fed them to their own banks.

In contrast, and despite the help they were getting, too many Eurozone 
politicians in 2008 were happy to present the GFC as an Anglo-American 
crisis, preferring not to acknowledge that their own national banks too 
were deeply involved. Later on, in making an example of Greece, these 
European politicians preferred to talk about a government debt crisis 
rather than a banking crisis. It was, as Mark Blyth wrote in Austerity: 
The History of a Dangerous Idea (2013), the biggest bait and switch in 
history. Pretending the crisis was about government borrowing rather 
than banking led to the widespread adoption of austerity policies in the 
Eurozone. This in turn was the main cause of a second Eurozone recession 
in 2012, which ‘through wilful policy choices’ drove up unemployment 
across Europe. Tooze does not mince words about what happened: ‘It is a 
spectacle that ought to inspire outrage. Millions have suffered for no 
good reason.’ In the US, he writes, ‘there was a clear logic operating’ 
in the response to the financial crisis of 2008-9. ‘It was a class 
logic, admittedly – “Protect Wall Street first, worry about Main Street 
later” – but at least it had a rationale and one operating on a grand 
scale. To impute that same logic to the management of the Eurozone is to 
give Europe’s leaders too much credit.’ The casualties were not just the 
unemployed. ‘In the battlefield of corporate competition, the crisis of 
2008-13 brought European capital a historic defeat.’ In this story the 
UK behaved like the US until 2010, when the newly elected 
Conservative-led government switched the UK onto the Eurozone’s path of 
austerity.

Sometimes the detail Tooze gives of how decisions were made during the 
crisis is fascinating even to someone familiar with these events. I did 
not know, for example, that the Eurozone almost managed to co-ordinate 
on a joint bailout scheme in October 2008 equivalent to what was 
happening in the US. But the project was scuppered by Germany and the 
head of the European Central Bank (ECB) at the time, Jean-Claude 
Trichet. ‘If we cannot cobble together a European solution then it will 
be a debacle,’ the French president Nicolas Sarkozy remarked, ‘but it 
will not be my debacle, it will be Angela’s.’ It isn’t that Germany had 
no banking problems; its resistance reflected its more general 
reluctance to do things at the Eurozone level if that might lead to 
transfers from Germany to other Eurozone countries. Tooze quotes a 
‘disillusioned British official’ remarking that the Europeans ‘didn’t 
understand the economics. They did not understand how collective action 
could work.’

Shortly after the failure to agree on a joint European bailout, the 
situation of the German bank Hypo Real Estate became critical. Axel 
Weber, the head of the Bundesbank, talked of nuclear meltdown. What 
looked like the beginnings of a German bank run forced Merkel to declare 
that all savings deposits were safe. The problem was that the Eurozone 
had a common currency, so other Eurozone countries with large banks were 
forced to do the same (or risk money flowing from their banks to become 
guaranteed deposits in German banks). The UK too was feeling the 
pressure. British officials desperately tried to talk to Berlin, but 
Berlin wasn’t answering the phone. No one knew quite what the German 
guarantee amounted to. The basic problem was that the money markets 
could co-ordinate on a global level more easily, and create a crisis 
more quickly, than politicians could respond. Unlike in the US, where a 
bailout had explicitly been undertaken after the Lehman collapse, in the 
Eurozone bank deposits were guaranteed without a major restructuring of 
the banks. As a result, the impact of the crisis was allowed to persist.

Banking problems in the countries of the Eurozone periphery continued to 
bubble up – most seriously in Ireland and Spain – and the markets were 
spooked each time. The ECB had not stepped up to act as the lender of 
last resort for individual Eurozone countries. Because politicians were 
blaming the crisis on government debt and not on the banks, everyone’s 
focus was on the implementation of austerity policies in periphery 
Eurozone countries. But this was not the way to solve the Eurozone 
crisis. Any solution had to come from the ECB, and eventually it came 
from one man: Mario Draghi, who had succeeded Trichet as president of 
the ECB. Draghi was at a global investment conference in London in July 
2012, where he heard lots of pessimistic talk about the euro. (‘All 
those stories about the dissolution of the euro really suck,’ he later 
confided in a friend. Tooze says the original Italian was more 
colourful.) So in a speech at that conference he said the ECB was ready 
to do ‘whatever it takes’ to preserve the euro. Back in Frankfurt the 
ECB press office couldn’t answer questions about what exactly he meant, 
since Draghi had only shared his ideas with a small number of people. 
That select group did not include the head of the Bundesbank, who wanted 
to maintain market pressure in the form of high interest rates on 
individual countries’ government borrowing because this would encourage 
austerity programmes to reduce public spending. But Merkel, under 
intense pressure from Spain and Italy, retreated from her previous 
position and backed Draghi, and the ECB went on to outline the 
Eurozone’s version of unlimited purchases of government debt. The 
Eurozone crisis was ended. As Tooze notes, some took Draghi’s speech as 
a tacit admission that the ECB should have dealt with the Eurozone 
crisis in the same way the US and UK had dealt with theirs two years 
earlier.

The one country that did not get the benefit of the ECB’s new policy was 
Greece, which had been the main casualty of the Eurozone’s attempt to 
hide its banking crisis. A Greek default could have been enforced by the 
Troika (the European Commission, ECB and IMF) in 2010, but instead it 
was delayed – and when finally it did come, it was only a partial 
default. The reason for the delay was to protect the national banks of 
the Eurozone, which were exposed to Greek debt and remained fragile 
because there hadn’t been a US or UK-style bailout in the Eurozone. As a 
result, the Greek government was left with a huge level of debt, mostly 
owed to other Eurozone governments. These governments, or more 
specifically their finance ministers, wanted their money back, which 
meant wave after wave of austerity for Greece.

In 2015, when the left-wing party Syriza was elected to govern Greece, 
the OECD estimated that one in six Greeks was going hungry on a daily 
basis. What Syriza’s unorthodox finance minister, Yanis Varoufakis, 
wanted was debt relief on a scale that would make possible a sustained 
economic recovery. His posing of rational economic arguments against the 
conservative ideology of the Eurogroup won him an international 
following, but the Eurogroup, with the ECB at its side, had the power, 
essentially because a majority of Greeks wanted to stay in the EU.[†] 
The irony, as Tooze points out, is that the Eurogroup and the IMF were 
effectively expressing a preference for the political forces and 
interests that had created Greece’s fiscal problem in the first place.

*

The geopolitical scope of this book is remarkable. There is a chapter on 
how the GFC helped shape Russian and East European politics. To take 
just one example, in October 2008 Hungary reached an agreement with the 
IMF and the EU on a $25 billion loan package, on terms that the lenders 
viewed as lenient but which polarised Hungarian politics and set Hungary 
‘on the path to a self-declared illiberal democracy’. Also little known 
but described expertly by Tooze is the reaction of China to the GFC, in 
what is perhaps the only unambiguous success story of this period. 
China’s rapid growth in earlier decades had been built on exports, so it 
was especially vulnerable to the collapse of world trade in 2008. As 
winter approached that year, 30 per cent of new graduates were unable to 
find work, and unemployment was growing (in a country the size of China, 
such changes involve millions of people). The Chinese government knew 
there was a danger of civil unrest, so in November 2008 agreed to an 
increase of spending amounting to 12.5 per cent of GDP. As Tooze sees 
it, China was taking the US’s maximum force approach to dealing with the 
banking crisis and applying it to public spending. Combined with an 
equally strong monetary stimulus, the results were impressive. China’s 
growth rate in 2009, at 9.1 per cent, was barely lower than in 2008, 
while in most other advanced economies growth in 2009 was significantly 
negative. In 2009, China was the chief counterweight to global recession.

Did these actions lead China into financial ruin, as many in the West 
argued fiscal stimulus was bound to do? Ten years later the Chinese 
economy is still strong. The Chinese panic of 2015-16 that Tooze 
describes was a stock market bubble rather than a government debt 
crisis. Did the stimulus impose a huge burden on future generations of 
Chinese? Since the money was used to build infrastructure, with 
associated technological spin-offs, it did the opposite. One of the 
projects funded by the fiscal expansion was a high-speed rail network, 
which has made China a global leader in railway technology and construction.

At 5 per cent of GDP, the US fiscal stimulus passed in February 2009 
(despite unanimous Republican opposition) was much less than required, 
but it was enough to help bring the US recession to an end. The Eurozone 
crisis that began in 2010 was quelled two years later when the ECB 
finally decided to act as a lender of last resort. At the time it looked 
as if a potential disaster had been moderated if not completely 
overcome; Tooze says he began writing his book in 2012 as a 
retrospective look at a crisis that seemed to be over. But it wasn’t 
over: it morphed from a financial and economic crisis into a 
comprehensive political and geopolitical crisis of the post-Cold War 
order. Tooze describes Brexit, the Ukraine crisis and Trump’s election 
in typically incisive prose, yet here I felt the lack of an overarching 
narrative. These events are still unfolding, it’s true, but it seems to 
me that some elements of the story are now firmly in place.

Although US policymakers succeeded in preventing an outcome worse than 
the Depression, they did so by fixing Wall Street much more than Main 
Street. There was modest growth after the crisis, but much of it went to 
the 1 per cent, not the 99 per cent. Main Street suffered even more in 
Europe, with a second Eurozone recession caused by austerity; in the UK 
austerity also led to the weakest economic recovery in at least a 
hundred years. All this provided the fuel for populism to emerge as a 
serious political force. Is there anything in the GFC and the reaction 
to it that can help us understand why populism should have emerged in 
the form of Trump and Brexit? The implementation of austerity in the 
wake of the GFC involved denying help to millions of people. To carry 
that off required politicians and influential parts of the media to 
ignore or actively suppress expert consensus (as well as the 
overwhelming evidence on which it is based) that austerity is harmful 
and unnecessary. In other words, a political deceit with huge costs to 
the economy was enacted in order to achieve a political or ideological 
goal. That is the story of Brexit, too. In the US, meanwhile, the 
Republicans who tried to stop the Obama stimulus in 2009, and imposed 
subsequent cuts in the name of bringing down the deficit, found no 
problem with huge increases in the deficit under Trump to fund tax cuts 
for corporations and the rich. Perhaps it isn’t so surprising, after 
all, that many of the same politicians and sections of the media that 
argued for austerity should also have promoted Trump and Brexit.

[*] Tamim Bayoumi describes in Unfinished Business: The Unexplored 
Causes of the Financial Crisis and the Lessons Yet to Be Learned (Yale, 
296 pp., £10.99, September, 978 0 300 23869 3) the process by which 
regulators on both sides of the Atlantic allowed the global banks to 
become so enmeshed with one another, and as a consequence able to take 
great risks.

[†] Varoufakis gives a full account of his dealings with the Eurogroup 
in Adults in the Room: My Battle with Europe’s Deep Establishment, 
discussed by James Angelos in the LRB of 27 September.




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