Crashed

The histories of the 2008 financial crisis that I have read focus almost exclusively on the United States. They also stop after the bank rescue and TARP or, if they press on into the aftermath, focus on the resulting damage to the US economy and the widespread pain of falling housing prices and foreclosure. Crashed does neither, instead arguing that 2008 was a crisis of European banks as much as American banks. It extends its history to cover the sovereign debt crisis in the eurozone, treating it as a continuation of the same crisis in a different guise. In the process, Tooze makes a compelling argument that one can draw a clear, if wandering, line from the moral revulsion at the propping up of the international banking system to Brexit and Trump.

Qualifications first, since they are important for this type of comprehensive and, in places, surprising and counterintuitive history. Adam Tooze is Kathryn and Shelby Cullom Davis Professor of History at Columbia University and the director of its European Institute. His previous books have won multiple awards, and Crashed won the Lionel Gelber Prize for non-fiction on foreign policy. That it won a prize in that topic, rather than history or economics, is a hint at Tooze's chosen lens.

The first half of the book is the lead-up and response to the crisis provoked by the collapse in value of securitized US mortgages and leading to the failure of Lehman Brothers, the failure in all but name of AIG, and a massive bank rescue. The financial instruments at the center of the crisis are complex and difficult to understand, and Tooze provides only brief explanation. This therefore may not be the best first book on the crisis; for that, I would still recommend Bethany McClean and Joe Nocera's All the Devils Are Here, although it's hard to beat Michael Lewis's storytelling in The Big Short. Tooze is not interested in dwelling on a blow-by-blow account of the crisis and initial response, and some of his account feels perfunctory. He is instead interested in describing its entangled global sweep.

The new detail I took from the first half of Crashed is the depth of involvement of the European banks in what is often portrayed as a US crisis. Tooze goes into more specifics than other accounts on the eurodollar market, run primarily through the City of London, and the vast dollar-denominated liabilities of European banks. When the crisis struck, the breakdown of liquidity markets left those banks with no source of dollar funding to repay dollar-denominated short-term loans. The scale of dollar borrowing by European banks was vast, dwarfing the currency reserves or trade surpluses of their home countries. An estimate from the Bank of International Settlements put the total dollar funding needs for European banks at more than $2 trillion.

The institution that saved the European banks was the United States Federal Reserve. This was an act of economic self-protection, not largesse; in the absence of dollar liquidity, the fire sale of dollar assets by European banks in a desperate attempt to cover their loans would have exacerbated the market crash. But it's remarkable in its extent, and in how deeply this contradicts the later public political position that 2008 was an American recession caused by American banks. 52% of the mortgage-backed securities purchased by the Federal Reserve in its quantitative easing policies (popularly known as QE1, QE2, and QE3) were sold by foreign banks. Deutsche Bank and Credit Suisse unloaded more securities on the Fed than any American bank by a significant margin. And when that wasn't enough, the Fed went farther and extended swap lines to major national banks, providing them dollar liquidity that they could then pass along to their local institutions.

In essence, in Tooze's telling, the US Federal Reserve became the reserve bank for the entire world, preventing a currency crisis by providing dollars to financial systems both foreign and domestic, and it did so with a remarkable lack of scrutiny. Its swap lines avoided public review until 2010, when Bloomberg won a court fight to extract the records. That allowed the European banks that benefited to hide the extent of their exposure.

In Europe, the bullish CEOs of Deutsche Bank and Barclays claimed exceptional status because they avoided taking aid from their national governments. What the Fed data reveal is the hollowness of those boasts. The banks might have avoided state-sponsored recapitalization, but every major bank in the entire world was taking liquidity assistance on a grand scale from its local central bank, and either directly or indirectly by way of the swap lines from the Fed.

The emergency steps taken by Timothy Geithner in the Treasury Department were nearly as dramatic as those of the Federal Reserve. Without regard for borders, and pushing the boundary of their legal authority, they intervened massively in the world (not just the US) economy to save the banking and international finance system. And it worked.

One of the benefits of a good history is to turn stories about heroes and villains into more nuanced information about motives and philosophies. I came away from Sheila Bair's account of the crisis furious at Geithner's protection of banks from any meaningful consequences for their greed. Tooze's account, and analysis, agrees with Bair in many respects, but Bair was continuing a personal fight and Tooze has more space to put Geithner into context. That context tells an interesting story about the shape of political economics in the 21st century.

Tooze identifies Geithner as an institutionalist. His goal was to keep the system running, and he was acutely aware of what would happen if it failed. He therefore focused on the pragmatic and the practical: the financial system was about to collapse, he did whatever was necessary to keep it working, and that effort was successful. Fairness, fault, and morals were treated as irrelevant.

This becomes more obvious when contrasted with the eurozone crisis, which started with a Greek debt crisis in the wake of the recession triggered by the 2008 crisis. Greece is tiny by the standards of the European economy, so at first glance there is no obvious reason why its debt crisis should have perturbed the financial system. Under normal circumstances, its lenders should have been able to absorb such relatively modest losses. But the immediate aftermath of the 2008 crisis was not normal circumstances, particularly in Europe. The United States had moved aggressively to recapitalize its banks using the threat of compensation caps and government review of their decisions. The European Union had not; European countries had done very little, and their banks were still in a fragile state.

Worse, the European Central Bank had sent signals that the market interpreted as guaranteeing the safety of all European sovereign debt equally, even though this was explicitly ruled out by the Lisbon Treaty. If Greece defaulted on its debt, not only would that be another shock to already-precarious banks, it would indicate to the market that all European debt was not equal and other countries may also be allowed to default. As the shape of the Greek crisis became clearer, the cost of borrowing for all of the economically weaker European countries began rising towards unsustainable levels.

In contrast to the approach taken by the United States government, though, Europe took a moralistic approach to the crisis. Jean-Claude Trichet, then president of the European Central Bank, held the absolute position that defaulting on or renegotiating the Greek debt was unthinkable and would not be permitted, even though there was no realistic possibility that Greece would be able to repay. He also took a conservative hard line on the role of the ECB, arguing that it could not assist in this crisis. (Tooze is absolutely scathing towards Trichet, who comes off in this account as rigidly inflexible, volatile, and completely irrational.)

Germany's position, represented by Angela Merkel, was far more realistic: Greece's debt should be renegotiated and the creditors would have to accept losses. This is, in Tooze's account, clearly correct, and indeed is what eventually happened. But the problem with Merkel's position was the potential fallout. The German government was still in denial about the health of its own banks, and political opinion, particularly in Merkel's coalition, was strongly opposed to making German taxpayers responsible for other people's debts. Stopping the progression of a Greek default to a loss of confidence in other European countries would require backstopping European sovereign debt, and Merkel was not willing to support this.

Tooze is similarly scathing towards Merkel, but I'm not sure it's warranted by his own account. She seemed, even in his account, boxed in by domestic politics and the tight constraints of the European political structure. Regardless, even after Trichet's term ended and he was replaced by the far more pragmatic Mario Draghi, Germany and Merkel continued to block effective action to relieve Greece's debt burden. As a result, the crisis lurched from inadequate stopgap to inadequate stopgap, forcing crippling austerity, deep depressions, and continued market instability while pretending unsustainable debt would magically become payable through sufficient tax increases and spending cuts. US officials such as Geithner, who put morals and arguably legality aside to do whatever was needed to save the system, were aghast.

One takeaway from this is that expansionary austerity is the single worst macroeconomic idea that anyone has ever had.

In the summer of 2012 [the IMF's] 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. 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.

Another takeaway, though, is central to Tooze's point in the final section of the book: the institutionalists in the United States won the war on financial collapse via massive state interventions to support banks and the financial system, a model that Europe grudgingly had to follow when attempting to reject it caused vast suffering while still failing to stabilize the financial system. But both did so via actions that were profoundly and obviously unfair, and only questionably legal. Bankers suffered few consequences for their greed and systematic mismanagement, taking home their normal round of bonuses while millions of people lost their homes and unemployment rates for young men in some European countries exceeded 50%. In Europe, the troika's political pressure against Greece and Italy was profoundly anti-democratic.

The financial elite achieved their goal of saving the financial system. It could have failed, that failure would have been catastrophic, and their actions are defensible on pragmatic grounds. But they completely abandoned the moral high ground in the process.

The political forces opposed to centrist neoliberalism attempted to step into that moral gap. On the Left, that came in the form of mass protest movements, Occupy Wall Street, Bernie Sanders, and parties such as Syriza in Greece. The Left, broadly, took the moral side of debtors, holding that the primary pain of the crisis should instead be born by the wealthy creditors who were more able to absorb it. The Right by contrast, in the form of the Tea Party movement inside the Republican Party in the United States and the nationalist parties in Europe, broadly blamed debtors for taking on excessive debt and focused their opposition on use of taxpayer dollars to bail out investment banks and other institutions of the rich. Tooze correctly points out that the Right's embrace of racist nationalism and incoherent demagoguery obscures the fact that their criticism of the elite center has real merit and is partly shared by the Left.

As Tooze sketches out, the elite centrist consensus held in most of Europe, beating back challenges from both the Left and the Right, although it faltered in the UK, Poland, and Hungary. In the United States, the Democratic Party similarly solidified around neoliberalism and saw off its challenges from the Left. The Republican Party, however, essentially abandoned the centrist position, embracing the Right. That left the Democratic Party as the sole remaining neoliberal institutionalist party, supplemented by a handful of embattled Republican centrists.

Wall Street and its money swung to the Democratic Party, but it was deeply unpopular on both the Left and the Right and this shift may have hurt them more than helped. The Democrats, by not abandoning the center, bore the brunt of the residual anger over the bank bailout and subsequent deep recession. Tooze sees in that part of the explanation for Trump's electoral victory over Hilary Clinton.

This review is already much too long, and I haven't even mentioned Tooze's clear explanation of the centrality of treasury bonds to world finances, or his discussions of Russia and Ukraine, China, or Brexit, all of which I thought were excellent. This is not only a comprehensive history of both of the crises and international politics of the time period. It is also a thought-provoking look at how drastic of interventions are required to keep the supposed free market working, who is left to suffer after those interventions, and the political consequences of the choice to prioritize the stability of a deeply inequitable and unsafe financial system.

At least in the United States, there is now a major political party that is likely to oppose even mundane international financial institutions, let alone another major intervention. The neoliberal center is profoundly weakened. But nothing has been done to untangle the international financial system, and little has been done to reduce its risk. The world will go into the next financial challenge still suffering from a legitimacy crisis. Given the miserly, condescending, and dismissive treatment of the suffering general populace after moving heaven and earth to save the banking system, that legitimacy crisis is arguably justified, but an uncontrolled crash of the financial system is not likely to be any kinder to the average citizen than it is to the investment bankers.

Crashed is not the best-written book at a sentence-by-sentence level. Tooze's prose is choppy and a bit awkward, and his paragraphs occasionally wander away from a clear point. But the content is excellent and thought-provoking, filling in large sections of the crisis picture that I had not previously been aware of and making a persuasive argument for its continuing effects on current politics. Recommended if you're not tired of reading about financial crises.

Rating: 8 out of 10

Reviewed: 2022-01-02