The Post-Crash World: How the 2008 Crisis Led to Our Current Age of Extremes
How a Decade of Financial Crises Changed the World
In the middle of 2007, I had lunch with the boys who were about to run the economy. We were both new to this. I’d just joined the Guardian as economics leader writer and, with no great perceptiveness, could see that Gordon Brown would not be stopping long at No 10. To learn what the Conservatives had in store for us, I went to see George Osborne’s team.
Given how many meals ago it was, aspects of that meeting remain very clear in my mind. I entered a Japanese restaurant (now defunct) in Westminster to find a small cluster of young men, otherwise known as the shadow chancellor’s brains. Before too long, nearly all of these advisers would be running the government and writing Budgets – but none of that was obvious that afternoon.
The man now in charge of the NHS, Matt Hancock, was then not yet 30. He sat, hurling the husks of his edamame beans into a bowl with unusual vehemence. The future father of tech policy Rohan Silva kept the kind of beatific silence more usually associated with chronic potheads. After they’d exhausted themselves on climate change and public services (they were talking to a Guardian man, after all), I asked what seemed to me an obvious question: what plans did the Tories have for when the good times ended?
Confusion rippled around the table. Hancock furrowed his brow. What was this guy on about? There was a sticky pause, before one ventured: “Are you talking about high inflation?” That must be it! There followed happy chatter about the Tories’ policies on something called “the cost of living crisis”.
Just weeks later, the curtain did indeed start to come down. As Northern Rock teetered that September, some of Britain’s streets resembled downtown Buenos Aires, crammed with savers wanting their money back. Bradford & Bingley and America’s Bear Stearns tottered in the ensuing months, and both had to be bought out in the first half of 2008. Then things got really nasty.
First Lehman Brothers died in September 2008, and then RBS and Lloyds had to be rescued by Brown and Alistair Darling the next month. The entire financial system keeled over, and the economic shock travelled the globe. By that Christmas Katsuaki Watanabe, the president of Japanese carmaker Toyota, was warning: “The change in the world economy is of a magnitude that comes once every hundred years… We are facing an unprecedented emergency.”
Hardly anybody saw it coming: not the financiers, not the economists, and certainly not my friends the inflation-hawks, nor the rest of the political classes. Yet an event so widely unforeseen was almost immediately interpreted in a thousand different ways. Osborne’s team may have been thrown by my pessimism, but they fast decided that the global banking carnage was somehow the fault of Brown’s orgy of spending on Sure Starts and working-age benefits – the same fiscal policy, mind, that they’d previously espoused as their own.
Even as companies were folding and millions of families were losing their homes, the crash became an ideological Rorschach test: you saw in it precisely what you wanted to see. And more often than not, what you saw was other people’s flaws. Just as the storm reached its height in September 2008, Germany’s finance minister, Peer Steinbrück, proclaimed: “The financial crisis is above all an American problem.”
Days later, he would be scrabbling around to save Hypo Real Estate, a bank in Munich. If only the Germans had a word for schadenfreude. But it wasn’t just preening European ministers. Unabashed by their wrong-footing, every know-all had an off-the-peg story to tell about what had just happened – and what must be done next.
It was the end of neoliberalism; it was the stupidity of the regulators; it was the inevitable decline of the West. We had to save more and spend less, or we had to be paid less and work more. Having displeased the market gods so spectacularly, we couldn’t afford to do it again – couldn’t afford, that is, to spend to boost demand or to have adequate public services and social security. That is the route that led us over ten years from Lehman Brothers to Donald Trump, from Fred Goodwin to austerity to Brexit.
Adam Tooze’s greatest achievement in his new book is to chronicle what actually happened before, during and in the long aftermath of the biggest financial crash of our lifetimes. It sounds simple but it is radical.
Spanning everything from credit derivatives to Russia’s occupation of Crimea to the details of China’s vast public-spending programme, Crashed is a big and bold work. Only an insider would be commissioned to write it; but only an outsider would write it well; and Tooze makes an ideal combination of both. Educated at Cambridge and the LSE, he is now an Ivy League professor. He’s also a historian writing about the present day, a left-winger tackling finance and a disciplinary outsider trespassing into a terrain jealously guarded by economists. This, then, is a 700-page sliding tackle.
One of Tooze’s trademarks is to rough up some greying progressive intellectual – to menace a passing Terry Eagleton or scrape the shins of a Wolfgang Streeck. In Crashed, it’s Paul Krugman. Tooze quotes the Nobel laureate’s argument from 2007 that what America should fear most was George Bush’s government borrowing too much and a country importing too much: the classic “twin deficits”. What beckoned, wrote the economist, was a “Wile E Coyote moment”, in which it would dawn on the Chinese and other investors that the only thing holding up US assets was the fact that they were buying them. Coming from the New York Times liberal who would spend the next decade ventriloquising John Maynard Keynes and telling governments not to worry about budget deficits, today this reads as an amazing argument. Back then, however, he warned: “This won’t be fun.”
It wouldn’t be right, either. The borrowing that was to prove so lethal to the world economy was not done by governments but by financiers. Krugman shared with many economists a blithe assumption that banks didn’t merit intense scrutiny – that they were fundamentally an obedient cog in a much bigger machine serving the “real” economy. That was how he missed the credit crisis, even while airily prophesying others.
Those analysts who had predicted aspects of the crash shared neither academic background nor political beliefs – they included NGO lefties such as Ann Pettifor of the New Economics Foundation and right-wing technocrats such as the IMF’s Raghuram Rajan (who was publicly dismissed as a “Luddite” by former US treasury secretary Larry Summers) – but a focus on those privatised creators of credit, the banks.
And that’s where Tooze starts. The era in which capital could travel the world almost unimpeded had prompted our financial institutions to change both what they were and the very nature of our economy.
A Newcastle-based building society such as Northern Rock could convert itself into a bank, get into the FTSE 100 and offer housebuyers mortgages worth 125 per cent of the property’s value. In this amazing feat of expansion, a bank with hardly any high-street branches was, by early 2007, the largest mortgage lender in the UK. And what enabled it to grow so fast was access to global money markets. The old world, in which banks relied on savers depositing cash that they could use to lend out, caged Northern Rock. The new world, in which it could turn to wholesale markets for 80 per cent of its funding, enabled it to build an empire. Then when credit suddenly dried up in August 2007, it would kill the bank.
Of the three biggest banks in the world in 2007 not one was American. They were France’s Paribas, Deutsche Bank and RBS and each one had a balance sheet about as big as their host country’s GDP. It was the same story across Europe: from Ireland (where the liabilities of the finance sector in 2008 came to eight times the size of the economy) to Iceland, the banks had been allowed to outgrow their homes. That fact sank country after country in the crash.
What mattered to Gordon Brown was the banks. It was the supersized taxes raised from the dotcom bubble that enabled his Treasury to rack up a Budget surplus (a feat that hasn’t been repeated in the near two decades since); it was why he’d open any City HQ and make those cringeworthy speeches at Mansion House. But what mattered to our banks wasn’t Brown or even Britain, but other banks around the West that could keep funnelling them money.
As Tooze describes, hundreds of billions of dollars flowed “from the branches of foreign banks in New York to the head offices of European banks, from which they returned for investment in the United States, sometimes by way of an offshore tax haven such as Dublin or the Cayman Islands.” Financiers had spent decades lobbying for less regulation and lower taxes – and then set up shadow banking vehicles offshore to evade even those tiresome remaining obstacles.
This was the world that finally blew apart in autumn 2008: one where senior bankers didn’t understand what was going on in their own banks; watchdogs were watching the wrong things; economists couldn’t keep up with the changing economy and globalisation-loving politicians couldn’t grasp the nature of globalisation.
That autumn, politicians and central bankers threw everything they had into saving a regime they didn’t fully comprehend. Huge amounts were mobilised: based on 2009 IMF figures, every man, woman and child in Britain underwrote £19,271 for the finance sector in bailouts, and loans and state guarantees on bankers’ trading during the crisis. None of us were asked, and no other sector has ever received the same largesse.
But then, democratic voice was often treated as a luxury item. In 2007, the year after he had left the US central bank and when he was still the known as the “maestro”, Alan Greenspan was asked whether he was a John McCain or Barack Obama kind of guy. His response: “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.” During the eurozone crisis, this turned into Germany’s Angela Merkel promising “market-conforming” politics, even while her officials crowed over the ousting of legitimately elected leaders in Greece and Italy: “We do regime change better than the Americans.”
We have lived through a decade-long elite debacle. The unprecedented bailouts concocted over long nights and cold curry, the tens of trillions pumped in by central banks, the multilateral shrugging in the face of the Greek referendum against more austerity: all of these things have worked to undermine the legitimacy of the very thing politicians and policymakers had been trying to save. As Tooze notes of Donald Trump’s appeal, the “financial globalisation that Greenspan and his ilk had worked so hard to institutionalise as a quasi-natural process had been exposed as… an artefact of deliberate political and legal construction with stark consequences for the distribution of wealth and power”. The roots of our present political extremism lie in the era economists call the Great Moderation.
Crashed is already being described as a “landmark” work. It deserves that accolade and others for its ambition and its construction of a financial-political history. What qualms I have about it lie in its status as a contemporary history.
Mine are not the age-old objections that scholars writing about their times can not know enough or be sufficiently objective. Instead, I wonder whether it’s sufficient to write a history of our age that follows the scholarly conventions of considering how it has been framed by others and scores a few points along the way (take that, Krugman!), but leaves no scratches on anyone that actually matters. This is to package up the biggest political-economic event in our lifetime (so far) as an ideal beach read for Ed Miliband.
Any chronicle of our time that minds all its Ps and Qs will fail to convey what this age is really like. We are living in an era of anger. The financiers who caused the crash took the money and stuck the rest of us with the bill. Many are still making tidy sums, such as Northern Rock’s boss Adam Applegarth, who now works in American private equity. They behaved like bandits in the boom and got clean away during the bust.
The same goes for our politicians: Osborne and his team, who didn’t see the crash coming, quickly worked out how to use it to transfer more money from the poor to the rich. The most cynical chancellor of modern times first delivered the slowest recovery in 300 years, then failed to prevent Brexit, and now holds no fewer than eight jobs, including a day a week at BlackRock for £650,000 a year.
Tooze prefers to look at the thousands of wrong-headed decisions than to explore some of the possible alternatives, and he is more likely to quote from a minister’s memoirs rather than reflect the experience of those people whose livelihoods are damaged by their decisions. Crashed focuses on what a decade of financial crisis meant for the Big Powers of the US and China. Yet look down rather than up, and you can see how financial globalisation coupled with austerity for the many and largesse for the few is breaking up the very unit of the nation state. Brexit Britain, Trump’s America: these are stories of deep fissures and polarisation whose causes are economic. And the anger is being channelled by the far right increasingly effectively: by Tommy Robinson, whose online videos garner hundreds of thousands of viewers and whose release was celebrated by singing on football terraces, and by Breitbart and Steve Bannon in the US.
The obvious riposte is to say that this isn’t the job of an academic. Tell that to Eric Hobsbawm or EP Thompson or C Wright Mills. There’s no point in being up to the minute if you won’t be relevant. There’s no jeopardy in chronicling the facts without telling the truth. Crashed is a brilliant book, but it is ultimately bloodless.
Aditya Chakrabortty is senior economics commentator for the Guardian