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Crashed: How a Decade of Financial Crises Changed the World
"An intelligent explanation of the mechanisms that produced the crisis and the response to it...One of the great strengths of Tooze's book is to demonstrate the deeply intertwined nature of the European and American financial systems."
--The New York Times Book Review
From a prizewinning economic historian, an eye-opening reinterpretation of the 2008 economic crisis (and its ten-year aftermath) as a global event that directly led to the shockwaves being felt around the world today.
In September 2008 President George Bush could still describe the financial crisis as an incident local to Wall Street. In fact it was a dramatic caesura of global significance that spiraled around the world, from the financial markets of the UK and Europe to the factories and dockyards of Asia, the Middle East, and Latin America, forcing a rearrangement of global governance. In the United States and Europe, it caused a fundamental reconsideration of capitalist democracy, eventually leading to the war in the Ukraine, the chaos of Greece, Brexit, and Trump.
It was the greatest crisis to have struck Western societies since the end of the Cold War, but was it inevitable? And is it over? Crashed is a dramatic new narrative resting on original themes: the haphazard nature of economic development and the erratic path of debt around the world; the unseen way individual countries and regions are linked together in deeply unequal relationships through financial interdependence, investment, politics, and force; the ways the financial crisis interacted with the spectacular rise of social media, the crisis of middle-class America, the rise of China, and global struggles over fossil fuels.
Finally, Tooze asks, given this history, what now are the prospects for a liberal, stable, and coherent world order?
From a prizewinning economic historian, an eye-opening reinterpretation of the 2008 economic crisis (and its ten-year aftermath) as a global event that directly led to the shockwaves being felt around the world today.
In September 2008 President George Bush could still describe the financial crisis as an incident local to Wall Street. In fact it was a dramatic caesura of global significance that spiraled around the world, from the financial markets of the UK and Europe to the factories and dockyards of Asia, the Middle East, and Latin America, forcing a rearrangement of global governance. In the United States and Europe, it caused a fundamental reconsideration of capitalist democracy, eventually leading to the war in the Ukraine, the chaos of Greece, Brexit, and Trump.
It was the greatest crisis to have struck Western societies since the end of the Cold War, but was it inevitable? And is it over? Crashed is a dramatic new narrative resting on original themes: the haphazard nature of economic development and the erratic path of debt around the world; the unseen way individual countries and regions are linked together in deeply unequal relationships through financial interdependence, investment, politics, and force; the ways the financial crisis interacted with the spectacular rise of social media, the crisis of middle-class America, the rise of China, and global struggles over fossil fuels.
Finally, Tooze asks, given this history, what now are the prospects for a liberal, stable, and coherent world order?
720 pages, Hardcover
First published August 7, 2018
About the author
Adam Tooze
46 books642 followersAdam Tooze is a British historian who is a professor at Columbia University. Previously, he was Reader in Modern European Economic History at the University of Cambridge and professor at Yale University.
After graduating with a B.A. degree in economics from King's College, Cambridge in 1989, Tooze studied at the Free University of Berlin before moving to the London School of Economics for a doctorate in economic history.
In 2002, he was awarded a Philip Leverhulme Prize for Modern History. He is best known for his economic study of the Third Reich, The Wages of Destruction, which was one of the winners of the Wolfson History Prize for 2006.
After graduating with a B.A. degree in economics from King's College, Cambridge in 1989, Tooze studied at the Free University of Berlin before moving to the London School of Economics for a doctorate in economic history.
In 2002, he was awarded a Philip Leverhulme Prize for Modern History. He is best known for his economic study of the Third Reich, The Wages of Destruction, which was one of the winners of the Wolfson History Prize for 2006.
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August 11, 2018
Some writers know a little bit about a lot of things. Some know a lot about one thing. Foxes and hedgehogs I suppose. Rarely does an author know a lot about a lot. Adam Tooze is that author. This book is so comprehensive and so insightful. He seems to understand nuanced political thought and history in every country in the world. I know the most about the aftermath of the 2008 crisis in the US and his description hits the nail on the head. I didn't know much about the Eurozone crisis and the Chinese crisis, but now I feel so much more informed.
The thesis of this book is so important. To misquote the Clinton's team: It's politics stupid. Not just the economy.
The thesis of this book is so important. To misquote the Clinton's team: It's politics stupid. Not just the economy.
September 16, 2018
The more I read of Crashed the less I liked it. Not because it is a bad book per se. But because it wasn't the book I thought it was going to be. It wasn't the book it *could* have been.
The book is divided into three sections: a history of the 2008 crash with a focus on the US; a history of the 2010 Eurocrisis with a focus on Europe; and a third chapter that is a smattering of quasi-related "other stuff that has happened since 2010".
It was while reading this third section that my disappointment crystalized. Each of these chapters is almost entirely standalone and reads like a run-of-the-mill, not very spectacular The Atlantic article on the subject. (The section on Trump's election is probably the worst example of this.) Ukraine, Brexit, Trump's election, further European developments (particularly in Greece), even China's 2015 stock market slump. But there's very little tying these together and usually only very slight ties to earlier 2008 & 2010 crises.
In a book that is both a 10-year retrospective and carries the subtitle "how a decade of financial crises changed the world" it actually spends most of its time in "at the moment" journalistic re-telling rather than looking back historical analysis. What I mean is: you'll get lots of "and then Merkel had a meeting and said X; and then Geitner had a meeting and said Y". You get far less of "and now that 8 years have passed we can see that Merkel's statement X was totally off base because of A, B, C".
The first time I really noticed this was in a passage on the 2008 crisis when bankers & regulators were arguing about capital increases and whether X% would destroy the banks or whether Y% would leave the system disastrously risky. Well, they eventually settled on a number and 10 years have passed. Surely there's been some research? Or at least some anecdotes & case studies? Were the bankers completely wrong? Were the regulators? Instead of clarity brought to us by the passing of time we are just left with a "he said, she said" argument.
Ultimately, that's the why I felt disappointment as I read more & more. Much of this book could have been written shortly after the respective events; you'll notice, for instance, that when discussing 2008 most of the references are to things published in the 2009-2012 period. For the Eurocrisis, most of the references are to things published in 2010-2012. And the situation is even worse for the more recent events, simply because very little time has passed since most of them have occurred.
There are times where it feels like Tooze is trying to show us major recurring themes or make explicit the linkages between all of these events. But it happens pretty rarely in the 700+ pages and often takes a backseat to more detailed day-by-day journalistic reporting. I would have liked to see that priority inverted -- bring those themes to the forefront and just put in the details as needed to support the themes.
For instance, one of the themes running throughout the book is the tension between decision-making in a crisis, which doesn't exactly have time for parliamentary/Congressional discussions that can takes days or weeks, and democracy -- and the eventual backlash, especially in the US and parts of Eastern Europe, against loss of autonomy to regional/global institutions.
There's another thread about the surprising solidification of US supremacy via dollar-denominated debt but it only comes up occasionally and the consequences of it aren't explored in much detail.
Don't let my low review make you think this is a bad book. If you've never read anything else on the 2008 crisis or the Eurocrisis, this is a pretty good place to start. But I feel like this book missed an opportunity to really tie all these things together and advance a strong thesis, instead of spending so much times just being a retelling of what happened & when.
The book is divided into three sections: a history of the 2008 crash with a focus on the US; a history of the 2010 Eurocrisis with a focus on Europe; and a third chapter that is a smattering of quasi-related "other stuff that has happened since 2010".
It was while reading this third section that my disappointment crystalized. Each of these chapters is almost entirely standalone and reads like a run-of-the-mill, not very spectacular The Atlantic article on the subject. (The section on Trump's election is probably the worst example of this.) Ukraine, Brexit, Trump's election, further European developments (particularly in Greece), even China's 2015 stock market slump. But there's very little tying these together and usually only very slight ties to earlier 2008 & 2010 crises.
In a book that is both a 10-year retrospective and carries the subtitle "how a decade of financial crises changed the world" it actually spends most of its time in "at the moment" journalistic re-telling rather than looking back historical analysis. What I mean is: you'll get lots of "and then Merkel had a meeting and said X; and then Geitner had a meeting and said Y". You get far less of "and now that 8 years have passed we can see that Merkel's statement X was totally off base because of A, B, C".
The first time I really noticed this was in a passage on the 2008 crisis when bankers & regulators were arguing about capital increases and whether X% would destroy the banks or whether Y% would leave the system disastrously risky. Well, they eventually settled on a number and 10 years have passed. Surely there's been some research? Or at least some anecdotes & case studies? Were the bankers completely wrong? Were the regulators? Instead of clarity brought to us by the passing of time we are just left with a "he said, she said" argument.
Ultimately, that's the why I felt disappointment as I read more & more. Much of this book could have been written shortly after the respective events; you'll notice, for instance, that when discussing 2008 most of the references are to things published in the 2009-2012 period. For the Eurocrisis, most of the references are to things published in 2010-2012. And the situation is even worse for the more recent events, simply because very little time has passed since most of them have occurred.
There are times where it feels like Tooze is trying to show us major recurring themes or make explicit the linkages between all of these events. But it happens pretty rarely in the 700+ pages and often takes a backseat to more detailed day-by-day journalistic reporting. I would have liked to see that priority inverted -- bring those themes to the forefront and just put in the details as needed to support the themes.
For instance, one of the themes running throughout the book is the tension between decision-making in a crisis, which doesn't exactly have time for parliamentary/Congressional discussions that can takes days or weeks, and democracy -- and the eventual backlash, especially in the US and parts of Eastern Europe, against loss of autonomy to regional/global institutions.
There's another thread about the surprising solidification of US supremacy via dollar-denominated debt but it only comes up occasionally and the consequences of it aren't explored in much detail.
Don't let my low review make you think this is a bad book. If you've never read anything else on the 2008 crisis or the Eurocrisis, this is a pretty good place to start. But I feel like this book missed an opportunity to really tie all these things together and advance a strong thesis, instead of spending so much times just being a retelling of what happened & when.
March 17, 2019
Tooze digs deep into the 2008 financial crisis and its aftermath through 2017. He explains in great detail how the Fed, ECB, IMF, economic and political leaders dealt with a globally integrated financial system facing collapse. He ties in the political fallout which paved the way for the turmoil and nationalist movements we see today including the Ukraine crisis, Brexit and the election of Trump. It is a demanding but very worthwhile read best suited to those with an interest strong enough to wade through ten years of the constantly shifting economic policies and endless negotiations in the US, Europe and Asia. My notes follow.
The real key to the 2008 financial crisis was not just that subprime mortgages and other low grade debt were bundled and labelled AAA by rating agencies paid by the owners of the securities. The real key was that large amounts of these overvalued collateralized debt obligations (CDO) were owned by banks. With sleight of hand the banks offloaded them to Structured Investment Vehicles (SIV) that had only a fraction of the capital reserve requirements the banks had to meet, yet the banks were still responsible. The banks then used the SIV’s holdings to back lower interest rate short term securities called asset-backed commercial paper (ABCP) they sold to money market funds and others wanting short term investments. The banks through their SIVs would make the difference between the higher long term interest rate and lower short term rate. Thus the lower the debt quality of the CDOs the more the banks made through their SIVs, that is, until consumers started defaulting, then the core of the financial system, the banks themselves, imploded. By contrast the dot com bubble resulted from artificially inflated investments but did not bring about a banking crisis, because the banks were not primary holders of the bad debt.
While the crisis started in the US, foreign banks were left holding the bag too. European investors went for the lowest quality highest yielding nonconforming mortgage backed securities (MBS) owning 29% of them. In essence, European banks such as Deutsche Bank and Credit Suisse were simply an extension of Wall Street. China played it safer investing primarily in bonds backed by Fannie May & Freddy Mac. Europe’s large banks carried far more debt relative to their assets than American banks. Banks in Iceland and Ireland had debts 700% of their countries GDP as they funneled money throughout Europe. The Eurozone with its central bank the ECB served the function of a national central bank but without the associated governance and no clear policy to handle bank failures in constituent countries. Any solutions would have to be ad hoc and politically decided which usually meant deadlock.
When in 2008 banks began to fail, governments scrambled to bail them out. In Europe some countries didn’t have the resources or the will to shore up their banks, and Germany bluntly objected to collective action. Thus there was a piecemeal approach to dealing with the systemic problem of globally interconnected banks. European countries had connected their financial system but not their political institutions leading to disarray. In the US President Bush bucked his party and let Treasury Secretary Paulson and Fed Chair Ben Bernanke address the problem. It did take the failure of Lehman Brothers before they finally realized a complete breakdown of the banking system was at stake. Using guarantees for and the purchase of illiquid assets called Quantitative Easing (QE), direct investment of capital, arranging buyouts of failing banks and the TARP program Paulson, Bernanke and New York Fed Chair Geithner stopped what otherwise would have been a total collapse. Interestingly it was Democratic votes in Congress that supported Bush in getting TARP passed. This was the point where the Republican Party as a whole split its right wing constituency from its Wall Street constituency. If right wing Republicans had prevailed in their righteous notions that those who overextended themselves deserved what they got, let them fail, the subsequent collapse of the financial system could have resulted in a depression.
In the years prior to 2008 West European money flowed into Eastern Europe as the EU, the Eurozone and NATO expanded. Putin felt threatened and plush with oil and gas money he pushed back. The evidence things had changed was in the small country of Georgia which wanted to be in NATO. Its aspirations and those of Ukraine were actively encouraged by the West. In 2008, Russia fomented internal revolt in Georgia and when the Georgian Army put it down, Putin sent Russian troops in. Putin quickly showed who was in charge challenging the West to a fight if NATO was expanded to Russia’s doorstep. Putin drew a red line around Georgia and more importantly Ukraine with a much larger economy. Putin even had Russia dump its $100 billion of Fannie May and Freddy Mac bonds in 2008 to exacerbate America’s financial crisis. Russia and Eastern Europe were hit hard by the world wide banking debacle of 2008. Russia had dollar reserves and Putin forced Oligarchs into coordinated policy, although he played favorites. For example, Oleg Deripaska, owner of aluminum giant Rusal, received $4.5 billion from VEB bank. VEB’s chairman was Putin. Former Soviet satellite countries had no reserves and had to turn to the IMF, World Bank and other sources as the ECB refused to help limited by German objections. The crisis and imputed inferior status caused countries like Hungary to turn to the nationalist right politically. Ukraine suffered badly in the financial crisis resulting in extreme political turmoil paving the way for the crisis with Russia five years later.
The Fed helped global European banks lest they dump their dollar denominated portfolios, flood the market, and face insolvency. Further the Fed swapped currencies with foreign central banks to keep the global market liquid in dollars. Despite Fed help inaction by European institutions meant their banks continued to carry toxic assets long after American banks had disposed of theirs. This inaction led to the Eurozone banking crisis in 2010. China was also hit hard but responded aggressively with a massive stimulus package stemming the crisis. In 2009 China’s economy showed little decline from 2008 to 2009 unlike the rest of the world. The government’s total control of banks made implementing policy easier. It was the actions of the US and China that were keeping the world economy afloat demonstrating in essence a G2 world. South Korea was hit even harder than China with exports falling off a cliff. It also engaged in a large carry trade, borrowing on short term dollar loans to finance long term Korean Won assets making money on the interest rate differentials and continuous Won appreciation vs. the dollar. When the dollar commercial paper market froze, Korea could no longer roll over its short term financing, essentially the same problem banks worldwide were facing. The US Fed included Korea in its currency swap program bailing it out. Southeast Asia emerging economies also suffered. They resorted to significant stimulus and received indirect help from the US via the Korea currency swap facility.
By 2010 the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were in trouble. Ireland and Greece were completely overwhelmed with bank debts far exceeding their resources. Italy was not as bad off as the others, but it was a far more important economy. ECB and member country actions in 2008 and 2009 had only helped prolong the crisis with half measures. The PIIGS needed debt restructuring or infusions of capital not more loans or temporary reprieves. But again Germany objected to joint EU action and the EU finally approved a joint ECB and IMF loan tied to a harsh austerity program for already impoverished Greece. Ireland was next. What Tooze calls the troika (the European Commission, the ECB and the IMF) again demanded austerity in return for loans. Ireland’s poor would suffer for a crisis created by the greed of banks and their investors. Tooze sums it up “Extend-and-pretend on a national basis merely turned a banking crisis into a fiscal crisis, which widened uncertainty while deflecting attention from the real issue.” By 2010 America had stabilized its banks, but its citizens were losing their homes at record rates and many could still not find work. In response the Fed unleashed QE2 purchasing more bonds. Interestingly, while European finance ministers called QE irresponsible expansionism, European banks more than American ones readily unloaded their US bond portfolios to the Fed. Deutsche Bank and Credit Suisse in particular had already dumped many of their toxic assets to the Fed in QE1. Thus thanks to the FED’s QE European banks built up their cash dollar balances, deleveraged and increased their stability while EU governments did little but complain.
True to Keynesian economics, the austerity program forced on Greece sent it into a downward spiral nearing 25% unemployment (50% for young people) and leaving those still working with reduced incomes. Hundreds of thousands in a nation of ten million relied on food banks and soup kitchens. Rapidly falling GDP and tax revenues left Greece unable to pay its debt. Ireland suffered similarly and its banks were also headed towards insolvency. Unlike the Fed the ECB took the position it had no mandate to fight unemployment, only to maintain price stability. Thus its only concern was enabling banks to pay their debts, not to help put people back to work. This narrow view undermined its efforts. Spending cuts and increased taxes reduced demand devastating the economies of Greece and Ireland and in turn their banks. The failure of EU policies in these countries made investors question the future of those that might be next in line. Investor money flowed out of suspect countries threatening contagion. If Italy were to fall to the status of Greece, the whole Eurozone would unravel and all of its banks put at risk. Such an event would reverberate throughout the world. The crisis was also leading to political unrest and the rise of nationalist parties in Greece and beyond.
As 2011 rolled into 2012, the EU’s situation became desperate. Germany now became much more open to significant debt restructuring. Germany and France used their influence to help get prime ministers both in Greece and Italy changed to more cooperative ones. Both were American trained economists. Italy PM Monti, Greece PM Papademos, the new head of the ECB Draghi, and Merkel’s favored economic advisor Issing, had all worked at Goldman Sachs and shared similar views. Draghi had attended MIT at the same time as Fed chief Bernanke, Papademos, and Mervyn King head of the Bank of England.
The next shoe to drop was Spain in 2012 when its housing bubble popped. Spain with a population of 45 million compared to Greece’s 10 million and Ireland’s 4.5 million had to be dealt with. Again Germany held back, although it now agreed to an EU growth fund stimulus as opposed to austerity. Germany also agreed to a permanent fund to back Eurozone debt for countries that complied with set guidelines, but it still would not commit to maintaining the Eurozone, no matter what. Then, Draghi did just that. With an off the cuff remark he told investors that the ECB would do whatever it takes to support the Euro. Eurogroup chief Juncker quickly backed up Draghi. Merkel, French President Hollande, and Italian PM Monti then chimed in. Now the crisis eased as investors believed that the ECB was committed to supporting the Euro just as the Fed was the dollar. What had worked in America is that investors believed the Fed would do whatever was necessary to back US government debt and its banking system.
In America since the 1990s bubbles had propelled the economy only to bust begging the question whether the economy could grow without them. Those that profited from these financial excesses were almost exclusively the 1%. Income inequality steadily increased. In 2011 the Republicans took control of Congress. The conservative rich had funded the Tea Party and other right wing groups that not only took a hard line against any more stimulus but wanted government largely eliminated. Without more stimulus the economy could only recover slowly extending the pain of those who had lost their homes and jobs. Worse the Republicans wanted austerity which could have brought a real depression. Republican opposition led to a dysfunctional government shutdown in 2013 and compromise budgets that unsettled markets and forestalled a robust recovery. When in 2013 the Fed discussed tapering its bond purchases markets began to dive. The Fed quickly turned around initiating QE3 and making permanent its currency swap program with foreign banks showing its commitment and stabilizing markets.
In 2012 The EU had struck an Association Agreement with Ukraine. By 2013 there were talks of military and technology cooperation. The EU also pursued such agreements with Moldova, Georgia, Armenia and Belarus. Russia wanted these former Soviet republics in its own economic union. Putin did not take kindly to the EU’s encroachment. In severe financial straits like all of Eastern Europe, Ukraine asked both the EU and Russia for help. The EU offered some help. Russia offered far more if Ukraine would join its economic union. Ukrainian Prime Minister Yanukovych took Russia’s deal and anti-Russia activists took to Ukraine’s streets chasing Yanukovych out of the country. The new government took the EU-IMF deal and Russia took a piece of Ukraine. Ukraine then got more but still insufficient financial help from the West. The EU and the US imposed limited sanctions on Russia which were increased after the downing of a Malaysian airliner by a Russian military group.
In EU parliamentary elections in 2014 Merkel did well in Germany, but there were big gains for the right wing in the UK and France. Membership in the EU was being seriously questioned. In 2015 half of Greece’s population was living off the pensions of senior citizens which were below the poverty level to begin with. Homelessness was rampant. The young and well-educated were leaving in droves. Draghi responded by initiating QE. The ECB’s purchase of bonds eased the situation. Unfortunately this only allowed “extend and pretend” to continue. After prolonged intense negotiations primarily between Greece and Germany, a new package of loans was agreed to but without the necessary debt restructuring that would actually solve the problem. Portugal with 60% youth unemployment and Spain were suffering badly as well. As political turmoil unfolded in Greece so did it in other stressed out EU countries. In Greece and Portugal left wing parties aligned with right wing ones to break the status quo. In the UK the Conservative Party won a majority. In Poland the Law and Justice Party won the presidency.
The financial crisis changed Britain’s relationship with the EU. The deep recession plus increasing immigration made many question EU membership. While other EU countries were looking for an ever tightening relationship, Prime Minister Cameron wanted a looser more flexible relationship for Britain. He wanted to reform the EU, not leave it. He wanted to restore and expand the City of London’s pre-crisis stature as a global banking hub. He envisioned an EU deal that would make the City of London the recognized financial linchpin for money flowing between the EU and both the US and China. But the idea of Brexit took on a life of its own, an all-out attack on globalism, the opposite of where Cameron started. The UK referendum vote for Brexit shocked the City of London and energized nationalist parties from France, to Netherlands and across Europe. Financial and political instability marched on hand in hand.
The US election of Trump in 2016, an outgrowth of the forces unleashed in 2008, further destabilized the world. Trump’s tariffs and isolationist policies threatened world trade. His tax “reform” exacerbated income inequality and created huge deficits at a time of prosperity. Republicans since Reagan have returned money to their well-off supporters through tax cuts, raising deficits to create a crisis to be followed by spending cuts targeting programs that primarily benefit middle and lower income Americans. Widespread deregulation encourages business and financial practices once again to get out of hand. Trump’s brinkmanship and constant disparagement means the cooperation that was essential in 2008 may no longer be there. As one who knew firsthand how hard it was to achieve consensus, former Treasury Secretary Paulson said “What would have happened if a divisive character such as Trump were president during the 2008 financial crisis?”
The real key to the 2008 financial crisis was not just that subprime mortgages and other low grade debt were bundled and labelled AAA by rating agencies paid by the owners of the securities. The real key was that large amounts of these overvalued collateralized debt obligations (CDO) were owned by banks. With sleight of hand the banks offloaded them to Structured Investment Vehicles (SIV) that had only a fraction of the capital reserve requirements the banks had to meet, yet the banks were still responsible. The banks then used the SIV’s holdings to back lower interest rate short term securities called asset-backed commercial paper (ABCP) they sold to money market funds and others wanting short term investments. The banks through their SIVs would make the difference between the higher long term interest rate and lower short term rate. Thus the lower the debt quality of the CDOs the more the banks made through their SIVs, that is, until consumers started defaulting, then the core of the financial system, the banks themselves, imploded. By contrast the dot com bubble resulted from artificially inflated investments but did not bring about a banking crisis, because the banks were not primary holders of the bad debt.
While the crisis started in the US, foreign banks were left holding the bag too. European investors went for the lowest quality highest yielding nonconforming mortgage backed securities (MBS) owning 29% of them. In essence, European banks such as Deutsche Bank and Credit Suisse were simply an extension of Wall Street. China played it safer investing primarily in bonds backed by Fannie May & Freddy Mac. Europe’s large banks carried far more debt relative to their assets than American banks. Banks in Iceland and Ireland had debts 700% of their countries GDP as they funneled money throughout Europe. The Eurozone with its central bank the ECB served the function of a national central bank but without the associated governance and no clear policy to handle bank failures in constituent countries. Any solutions would have to be ad hoc and politically decided which usually meant deadlock.
When in 2008 banks began to fail, governments scrambled to bail them out. In Europe some countries didn’t have the resources or the will to shore up their banks, and Germany bluntly objected to collective action. Thus there was a piecemeal approach to dealing with the systemic problem of globally interconnected banks. European countries had connected their financial system but not their political institutions leading to disarray. In the US President Bush bucked his party and let Treasury Secretary Paulson and Fed Chair Ben Bernanke address the problem. It did take the failure of Lehman Brothers before they finally realized a complete breakdown of the banking system was at stake. Using guarantees for and the purchase of illiquid assets called Quantitative Easing (QE), direct investment of capital, arranging buyouts of failing banks and the TARP program Paulson, Bernanke and New York Fed Chair Geithner stopped what otherwise would have been a total collapse. Interestingly it was Democratic votes in Congress that supported Bush in getting TARP passed. This was the point where the Republican Party as a whole split its right wing constituency from its Wall Street constituency. If right wing Republicans had prevailed in their righteous notions that those who overextended themselves deserved what they got, let them fail, the subsequent collapse of the financial system could have resulted in a depression.
In the years prior to 2008 West European money flowed into Eastern Europe as the EU, the Eurozone and NATO expanded. Putin felt threatened and plush with oil and gas money he pushed back. The evidence things had changed was in the small country of Georgia which wanted to be in NATO. Its aspirations and those of Ukraine were actively encouraged by the West. In 2008, Russia fomented internal revolt in Georgia and when the Georgian Army put it down, Putin sent Russian troops in. Putin quickly showed who was in charge challenging the West to a fight if NATO was expanded to Russia’s doorstep. Putin drew a red line around Georgia and more importantly Ukraine with a much larger economy. Putin even had Russia dump its $100 billion of Fannie May and Freddy Mac bonds in 2008 to exacerbate America’s financial crisis. Russia and Eastern Europe were hit hard by the world wide banking debacle of 2008. Russia had dollar reserves and Putin forced Oligarchs into coordinated policy, although he played favorites. For example, Oleg Deripaska, owner of aluminum giant Rusal, received $4.5 billion from VEB bank. VEB’s chairman was Putin. Former Soviet satellite countries had no reserves and had to turn to the IMF, World Bank and other sources as the ECB refused to help limited by German objections. The crisis and imputed inferior status caused countries like Hungary to turn to the nationalist right politically. Ukraine suffered badly in the financial crisis resulting in extreme political turmoil paving the way for the crisis with Russia five years later.
The Fed helped global European banks lest they dump their dollar denominated portfolios, flood the market, and face insolvency. Further the Fed swapped currencies with foreign central banks to keep the global market liquid in dollars. Despite Fed help inaction by European institutions meant their banks continued to carry toxic assets long after American banks had disposed of theirs. This inaction led to the Eurozone banking crisis in 2010. China was also hit hard but responded aggressively with a massive stimulus package stemming the crisis. In 2009 China’s economy showed little decline from 2008 to 2009 unlike the rest of the world. The government’s total control of banks made implementing policy easier. It was the actions of the US and China that were keeping the world economy afloat demonstrating in essence a G2 world. South Korea was hit even harder than China with exports falling off a cliff. It also engaged in a large carry trade, borrowing on short term dollar loans to finance long term Korean Won assets making money on the interest rate differentials and continuous Won appreciation vs. the dollar. When the dollar commercial paper market froze, Korea could no longer roll over its short term financing, essentially the same problem banks worldwide were facing. The US Fed included Korea in its currency swap program bailing it out. Southeast Asia emerging economies also suffered. They resorted to significant stimulus and received indirect help from the US via the Korea currency swap facility.
By 2010 the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were in trouble. Ireland and Greece were completely overwhelmed with bank debts far exceeding their resources. Italy was not as bad off as the others, but it was a far more important economy. ECB and member country actions in 2008 and 2009 had only helped prolong the crisis with half measures. The PIIGS needed debt restructuring or infusions of capital not more loans or temporary reprieves. But again Germany objected to joint EU action and the EU finally approved a joint ECB and IMF loan tied to a harsh austerity program for already impoverished Greece. Ireland was next. What Tooze calls the troika (the European Commission, the ECB and the IMF) again demanded austerity in return for loans. Ireland’s poor would suffer for a crisis created by the greed of banks and their investors. Tooze sums it up “Extend-and-pretend on a national basis merely turned a banking crisis into a fiscal crisis, which widened uncertainty while deflecting attention from the real issue.” By 2010 America had stabilized its banks, but its citizens were losing their homes at record rates and many could still not find work. In response the Fed unleashed QE2 purchasing more bonds. Interestingly, while European finance ministers called QE irresponsible expansionism, European banks more than American ones readily unloaded their US bond portfolios to the Fed. Deutsche Bank and Credit Suisse in particular had already dumped many of their toxic assets to the Fed in QE1. Thus thanks to the FED’s QE European banks built up their cash dollar balances, deleveraged and increased their stability while EU governments did little but complain.
True to Keynesian economics, the austerity program forced on Greece sent it into a downward spiral nearing 25% unemployment (50% for young people) and leaving those still working with reduced incomes. Hundreds of thousands in a nation of ten million relied on food banks and soup kitchens. Rapidly falling GDP and tax revenues left Greece unable to pay its debt. Ireland suffered similarly and its banks were also headed towards insolvency. Unlike the Fed the ECB took the position it had no mandate to fight unemployment, only to maintain price stability. Thus its only concern was enabling banks to pay their debts, not to help put people back to work. This narrow view undermined its efforts. Spending cuts and increased taxes reduced demand devastating the economies of Greece and Ireland and in turn their banks. The failure of EU policies in these countries made investors question the future of those that might be next in line. Investor money flowed out of suspect countries threatening contagion. If Italy were to fall to the status of Greece, the whole Eurozone would unravel and all of its banks put at risk. Such an event would reverberate throughout the world. The crisis was also leading to political unrest and the rise of nationalist parties in Greece and beyond.
As 2011 rolled into 2012, the EU’s situation became desperate. Germany now became much more open to significant debt restructuring. Germany and France used their influence to help get prime ministers both in Greece and Italy changed to more cooperative ones. Both were American trained economists. Italy PM Monti, Greece PM Papademos, the new head of the ECB Draghi, and Merkel’s favored economic advisor Issing, had all worked at Goldman Sachs and shared similar views. Draghi had attended MIT at the same time as Fed chief Bernanke, Papademos, and Mervyn King head of the Bank of England.
The next shoe to drop was Spain in 2012 when its housing bubble popped. Spain with a population of 45 million compared to Greece’s 10 million and Ireland’s 4.5 million had to be dealt with. Again Germany held back, although it now agreed to an EU growth fund stimulus as opposed to austerity. Germany also agreed to a permanent fund to back Eurozone debt for countries that complied with set guidelines, but it still would not commit to maintaining the Eurozone, no matter what. Then, Draghi did just that. With an off the cuff remark he told investors that the ECB would do whatever it takes to support the Euro. Eurogroup chief Juncker quickly backed up Draghi. Merkel, French President Hollande, and Italian PM Monti then chimed in. Now the crisis eased as investors believed that the ECB was committed to supporting the Euro just as the Fed was the dollar. What had worked in America is that investors believed the Fed would do whatever was necessary to back US government debt and its banking system.
In America since the 1990s bubbles had propelled the economy only to bust begging the question whether the economy could grow without them. Those that profited from these financial excesses were almost exclusively the 1%. Income inequality steadily increased. In 2011 the Republicans took control of Congress. The conservative rich had funded the Tea Party and other right wing groups that not only took a hard line against any more stimulus but wanted government largely eliminated. Without more stimulus the economy could only recover slowly extending the pain of those who had lost their homes and jobs. Worse the Republicans wanted austerity which could have brought a real depression. Republican opposition led to a dysfunctional government shutdown in 2013 and compromise budgets that unsettled markets and forestalled a robust recovery. When in 2013 the Fed discussed tapering its bond purchases markets began to dive. The Fed quickly turned around initiating QE3 and making permanent its currency swap program with foreign banks showing its commitment and stabilizing markets.
In 2012 The EU had struck an Association Agreement with Ukraine. By 2013 there were talks of military and technology cooperation. The EU also pursued such agreements with Moldova, Georgia, Armenia and Belarus. Russia wanted these former Soviet republics in its own economic union. Putin did not take kindly to the EU’s encroachment. In severe financial straits like all of Eastern Europe, Ukraine asked both the EU and Russia for help. The EU offered some help. Russia offered far more if Ukraine would join its economic union. Ukrainian Prime Minister Yanukovych took Russia’s deal and anti-Russia activists took to Ukraine’s streets chasing Yanukovych out of the country. The new government took the EU-IMF deal and Russia took a piece of Ukraine. Ukraine then got more but still insufficient financial help from the West. The EU and the US imposed limited sanctions on Russia which were increased after the downing of a Malaysian airliner by a Russian military group.
In EU parliamentary elections in 2014 Merkel did well in Germany, but there were big gains for the right wing in the UK and France. Membership in the EU was being seriously questioned. In 2015 half of Greece’s population was living off the pensions of senior citizens which were below the poverty level to begin with. Homelessness was rampant. The young and well-educated were leaving in droves. Draghi responded by initiating QE. The ECB’s purchase of bonds eased the situation. Unfortunately this only allowed “extend and pretend” to continue. After prolonged intense negotiations primarily between Greece and Germany, a new package of loans was agreed to but without the necessary debt restructuring that would actually solve the problem. Portugal with 60% youth unemployment and Spain were suffering badly as well. As political turmoil unfolded in Greece so did it in other stressed out EU countries. In Greece and Portugal left wing parties aligned with right wing ones to break the status quo. In the UK the Conservative Party won a majority. In Poland the Law and Justice Party won the presidency.
The financial crisis changed Britain’s relationship with the EU. The deep recession plus increasing immigration made many question EU membership. While other EU countries were looking for an ever tightening relationship, Prime Minister Cameron wanted a looser more flexible relationship for Britain. He wanted to reform the EU, not leave it. He wanted to restore and expand the City of London’s pre-crisis stature as a global banking hub. He envisioned an EU deal that would make the City of London the recognized financial linchpin for money flowing between the EU and both the US and China. But the idea of Brexit took on a life of its own, an all-out attack on globalism, the opposite of where Cameron started. The UK referendum vote for Brexit shocked the City of London and energized nationalist parties from France, to Netherlands and across Europe. Financial and political instability marched on hand in hand.
The US election of Trump in 2016, an outgrowth of the forces unleashed in 2008, further destabilized the world. Trump’s tariffs and isolationist policies threatened world trade. His tax “reform” exacerbated income inequality and created huge deficits at a time of prosperity. Republicans since Reagan have returned money to their well-off supporters through tax cuts, raising deficits to create a crisis to be followed by spending cuts targeting programs that primarily benefit middle and lower income Americans. Widespread deregulation encourages business and financial practices once again to get out of hand. Trump’s brinkmanship and constant disparagement means the cooperation that was essential in 2008 may no longer be there. As one who knew firsthand how hard it was to achieve consensus, former Treasury Secretary Paulson said “What would have happened if a divisive character such as Trump were president during the 2008 financial crisis?”
July 3, 2022
Interesting and holistic view on the build up and aftermath of the 2008 financial crisis, deftly combining geopolitics, macroeconomic developments and corporate trends in a wider narrative
How he voted did not matter, (Alan) Greenspan declared, because we are fortunate that, thanks to globalization, policy decisions in the US have largely been replaced by global market forces. National security aside, it hardly makes any difference who is the next president, the world is governed by market forces
Adam Tooze shows 2008 not just as a financial crisis, but as an inflection point from a globalizing world, dominated by free market homogenous thinking under the Aegis of the West to a multipolar world with populism, inequality, illiberalism and voter rebellions and fatigue nearly everywhere. The insights are interesting, but certainly closer to the current age speculation and personal opinion start weighing in more, while the account of the 2008 financial crisis is very well sketched.
In general it is crazy how much we lived through since the early 2000’s, from 9/11 onwards. The author’s note that at least this time 10 year after a financial crisis the situation is not as worse as in 1939, seems optimistic with a pandemic and war again on the European continent.
Build up to the 2008 financial crisis
- The first securitisation being done by an US state backed company, Ginny Mae in the 70’s.
- Splitting origination and holders of loans leading to a lack of understanding of credit risk.
- Love it, a Chicago Booth professor of whom I read a book (Raghuram G. Rajan) who is the sole critic on Alan Greenspan at the brink of the credit crisis of 2007-2008
- Quarter of all mortgages of the US being held by foreign investors, with the lowest quality RMBS being financed over 1/3 by European banks
- European banks UBS, Deutsche and Barclays hitting 50/1 leverage
- Bazel II "regulation" leading to 22% reduction in own funds
- AIG credit default swaps leading to a $16b reduction in required capital for the counterparts
- Regulatory drive to the bottom, headed by London
- Interesting that the Maastricht treaty and the stability pact is seen as effective by the author
- How hard it is to slow down a boom/bubble is the general message of Crashed: How a Decade of Financial Crises Changed the World
- RBS, BNP Paribas and Deutsche Bank being the largest banks in term of assets in 2007, nowadays that is unthinkable, what a fall European banks have made due to softer, less coordinated responses to the 2008 crisis in the EU.
- Russian shock to the economy after the fall of the Soviet Union, with default and Dollarisation of the economy in the late 90’s
- Eastern Europe production being taken over for 50% by Western European investors
Crisis response
- AIG making more losses on its derivatives ($125b) than it earned on its products during the 20 years before
- Take capital from the US government. Or realise that you are sitting across of your regulator and that they will declare tomorrow that you are undercapitalised
- More than 2 trillion mismatch in European bank financing, leading to a enormous shortage of dollars, with the Bank of England having only a few billion of dollars versus the enormous London banking sector.
- Between 40% and 50% of Fed liquidity actions going to foreign banks
- Bank of England, ECB, Bank of Japan and Swiss Central Bank gaining an unlimited access to USD from the Fed and in December 2008 representing 35% of the Fed balance sheet but being repaid in full
- China responding to slow down of the economy with large social investments, for instance raising healthcare insurance from 30% of the population to 90% and building high speed rail lines. Investment equalling 50% of GDP and realising a 9% growth in 2009
- South Korean Won depreciating by 60% versus the dollar, hitting USD lenders in the country
- Only 1/3 of the US budget is discretionary due to automatic stabilisation measures in the budget, with Defence spending taking up a large chunk of the "discretionary" part
- In 2005 68% of mortgages in Detroit were subprime
- The Fed absorbing duration mismatch on its balance sheet, leading to enormous risks to be returned to the market when tapering starts
- Bank of Japan offering dollar swap lines to India, Thailand, Singapore and South Korea, backed by its own swap line with the Fed
Eurozone spillover
- Elections can not be allowed to change economic policies - Finance minister Schauble of Germany
- 248 laws being passed by Greece after the Troika takeover, 3 per workday
- 60% of Eurozone rise in unemployment being attributable to Spain
- Passing the hot potato, and misguided belief in austerity dominate part 3, about the Eurozone crisis
- The brunt of economic decline being centred in the middle and lower class, leading to resentment against the elite all over the world
- China offering to lease farmland as large as Belgium to finance Ukraine’s corrupt regime before 2014
- For us you belong to the sphere of influence of Berlin, in which we will not interfere - Finance minister of the USA to Greece
The EU will be unsellable - project Fear tagline, in the Brexit campaign
Conclusions
A lot of the book is about the (rightly) rise of disenfranchisement and disappointment about the neoliberal market mantra, but what has the rise of nationalists and populist done to help the ordinary citizen? Is the only half of French electorate turning up to vote in the national parliamentary elections 2022 a sign of general lack of belief in democracy as a mechanism as a whole?
Political choice and agency are very much topics touched by the book, but hard to get a real grasp on.
In general one gets the feel that economics is constantly walking from crisises to overabundance, again and again.
How he voted did not matter, (Alan) Greenspan declared, because we are fortunate that, thanks to globalization, policy decisions in the US have largely been replaced by global market forces. National security aside, it hardly makes any difference who is the next president, the world is governed by market forces
Adam Tooze shows 2008 not just as a financial crisis, but as an inflection point from a globalizing world, dominated by free market homogenous thinking under the Aegis of the West to a multipolar world with populism, inequality, illiberalism and voter rebellions and fatigue nearly everywhere. The insights are interesting, but certainly closer to the current age speculation and personal opinion start weighing in more, while the account of the 2008 financial crisis is very well sketched.
In general it is crazy how much we lived through since the early 2000’s, from 9/11 onwards. The author’s note that at least this time 10 year after a financial crisis the situation is not as worse as in 1939, seems optimistic with a pandemic and war again on the European continent.
Build up to the 2008 financial crisis
- The first securitisation being done by an US state backed company, Ginny Mae in the 70’s.
- Splitting origination and holders of loans leading to a lack of understanding of credit risk.
- Love it, a Chicago Booth professor of whom I read a book (Raghuram G. Rajan) who is the sole critic on Alan Greenspan at the brink of the credit crisis of 2007-2008
- Quarter of all mortgages of the US being held by foreign investors, with the lowest quality RMBS being financed over 1/3 by European banks
- European banks UBS, Deutsche and Barclays hitting 50/1 leverage
- Bazel II "regulation" leading to 22% reduction in own funds
- AIG credit default swaps leading to a $16b reduction in required capital for the counterparts
- Regulatory drive to the bottom, headed by London
- Interesting that the Maastricht treaty and the stability pact is seen as effective by the author
- How hard it is to slow down a boom/bubble is the general message of Crashed: How a Decade of Financial Crises Changed the World
- RBS, BNP Paribas and Deutsche Bank being the largest banks in term of assets in 2007, nowadays that is unthinkable, what a fall European banks have made due to softer, less coordinated responses to the 2008 crisis in the EU.
- Russian shock to the economy after the fall of the Soviet Union, with default and Dollarisation of the economy in the late 90’s
- Eastern Europe production being taken over for 50% by Western European investors
Crisis response
- AIG making more losses on its derivatives ($125b) than it earned on its products during the 20 years before
- Take capital from the US government. Or realise that you are sitting across of your regulator and that they will declare tomorrow that you are undercapitalised
- More than 2 trillion mismatch in European bank financing, leading to a enormous shortage of dollars, with the Bank of England having only a few billion of dollars versus the enormous London banking sector.
- Between 40% and 50% of Fed liquidity actions going to foreign banks
- Bank of England, ECB, Bank of Japan and Swiss Central Bank gaining an unlimited access to USD from the Fed and in December 2008 representing 35% of the Fed balance sheet but being repaid in full
- China responding to slow down of the economy with large social investments, for instance raising healthcare insurance from 30% of the population to 90% and building high speed rail lines. Investment equalling 50% of GDP and realising a 9% growth in 2009
- South Korean Won depreciating by 60% versus the dollar, hitting USD lenders in the country
- Only 1/3 of the US budget is discretionary due to automatic stabilisation measures in the budget, with Defence spending taking up a large chunk of the "discretionary" part
- In 2005 68% of mortgages in Detroit were subprime
- The Fed absorbing duration mismatch on its balance sheet, leading to enormous risks to be returned to the market when tapering starts
- Bank of Japan offering dollar swap lines to India, Thailand, Singapore and South Korea, backed by its own swap line with the Fed
Eurozone spillover
- Elections can not be allowed to change economic policies - Finance minister Schauble of Germany
- 248 laws being passed by Greece after the Troika takeover, 3 per workday
- 60% of Eurozone rise in unemployment being attributable to Spain
- Passing the hot potato, and misguided belief in austerity dominate part 3, about the Eurozone crisis
- The brunt of economic decline being centred in the middle and lower class, leading to resentment against the elite all over the world
- China offering to lease farmland as large as Belgium to finance Ukraine’s corrupt regime before 2014
- For us you belong to the sphere of influence of Berlin, in which we will not interfere - Finance minister of the USA to Greece
The EU will be unsellable - project Fear tagline, in the Brexit campaign
Conclusions
A lot of the book is about the (rightly) rise of disenfranchisement and disappointment about the neoliberal market mantra, but what has the rise of nationalists and populist done to help the ordinary citizen? Is the only half of French electorate turning up to vote in the national parliamentary elections 2022 a sign of general lack of belief in democracy as a mechanism as a whole?
Political choice and agency are very much topics touched by the book, but hard to get a real grasp on.
In general one gets the feel that economics is constantly walking from crisises to overabundance, again and again.
August 20, 2018
Adam Tooze is a historian of WWI and Nazi Germany. Recently, however, he’s spent the past few years focusing on the Global Financial Crises and its aftermath, with regular updates on his excellent blog at adamtooze.com. Crashed is the long-awaited product of that research, a globetrotting, expansive history of the GFC and its reverberations and aftershocks the world over.
And indeed, as a history of the crises it’s first rate. Tooze is particularly strong in unpicking the role of historical contingency, how the actions taken by various political actors in governing the vast, complex, interconnected systems of global capitalism, actually had real effects and made real differences.
Straight off the bat he rightly dispenses with standard macroeconomics accounts that hone in on trade balances and national income accounting, where surplus and deficit are seen as epiphenomenon of internal credit relations, unit labour costs and national competitiveness. These accounts of world trade would have great consequences, as they led many prominent economists and commentators to predict the wrong crisis, a crisis of Sino-American relations, where China would eventually refuse to continue purchasing US Treasury bonds and securities, and the dollar would tumble. And indeed, the perspective of imbalances still holds a great deal of purchase in standard accounts of the EU crisis, and is used to justify the harsh treatment meted out to the Eurozone’s periphery.
What actually happened was a crisis of trans-atlantic finance and the implosion of bank balance sheets. And to explain this we need to look, Tooze argues, not at national income accounting, but macro-financial statistics – the flow of dollars and euros from bank to bank, country to country, financial institution to financial institution. What we find is alarming, because for all the talk of national varieties of capitalism, freewheeling Anglo-Saxons vs patient and productive Germans, we see that German and French banks were just as financialised, and just as imbricated, in the meltdown as their American counterparts. Indeed, German banks were some of the most exposed and most dangerous, their US branches had invested heavily in the US mortgage boom with dollars leveraged from US money-markets. Compared with their American counterparts, they were laughably undercapitalised given the risk exposure of their portfolio. But this fact would be entirely absent from traditional macroeconomic measures and accounts. (It’s this aspect of the crisis that the late, great Marxist IR theorist Peter Gowan so astutely identified not long after the meltdown began. He was way ahead of the curve on this and his contributions are greatly missed https://newleftreview.org/II/55/peter...)
But Merkel and Sarkozy would initially dismiss the crisis as a US problem, a meltdown that had nothing to do with them. And it was only the FED’s dramatic intervention in extending half a trillion dollars in currency swap lines to the UK, the EU and Asian central banks, ensuring that their banking systems did not collapse through a shortage of dollars, that averted a full scale breakdown.
From here, the narrative moves at a brisk pace as we follow the full scale of measures that countries did or didn’t introduce as the crisis worked itself out. TARP, the Chinese mega-stimulus, debates at the G20, Russia corralling oligarchs into line, the unfolding of the Eurozone debt crisis as private sector bailouts became a matter of public finances, honing in on the absurd and sadistic torture of Greece for the sake of French and German bank balance sheets. It concludes with the Ukraine crisis, the humiliation of SYRIZA, the rise of Trump and the long brewing emerging markets crisis that will soon unfold with full force.
It’s of the Eurozone’s response that Tooze is most contemptuous. In failing to ‘Go Big’ in response to the meltdown and co-ordinate an adequate, EU wide fiscal response, Merkel and Sarkozy are essentially guilty of economic vandalism, and this is true even from the perspective of ensuring the rude health of capitalism and capitalist enterprise. EU banks remain fragile and undercapitalised, and compared with the laughably lax regulations and stress tests imposed by the ECB, the compromised and incoherent Dodd-Frank act looks like a bold achievement in fiscal regulation and rectitude. A decade of austerity and ‘extend and pretend’ has seen EU corporations outmaneuvered and less able to compete against US and Chinese multinationals, and wild dreams of the EU as a counter-hegemonic anchor, and indeed competitor, for world power have rudely awoken to the doldrums of stagnation, catastrophic youth unemployment and social disintegration.
All good so far, and yet for an account of the crisis, it’s strangely lacking. This is an account of the crisis relayed through Tim Geithner or Gordon Brown’s memoirs, Obama’s speeches and Paul Krugman op-eds. It’s focused and brisk and well-written, but also strangely sterile. We rarely leave the realm of high-politics, and when ordinary people do make an appearance it’s through the statistics of mortgage foreclosures or measures of unemployment and income. The anger that most of us feel or the pain that we’ve gone through rarely penetrates the narrative. And when it does so, it’s fairly limp.
For all his emphasis on contingency, Tooze holds his tongue, or has little to say, about better or fairer responses to the crisis. Except perhaps his sympathy for Christina Romer’s push for an Obama stimulus twice the size of the one actually enacted that would have included distressed mortgage holders, or a strained frustration that Merkel and the ECB didn’t respond as forcefully as the US. He questions whether Bernanke and Geithner comparing themselves to firefighters or bomb disposal experts à la The Hurt Locker is apropos, but although he points out that the bailouts were elitist, kept the broken system ticking over to fight another day, and enriched a small minority of those lucky enough to benefit from capital gains, he doesn’t strain himself to dispel it. Indeed, some of them come across as unlikely heroes.
Some of the most repugnant and mendacious people, who enjoyed a great deal of levity and power, have immiserated millions of people worldwide, leading to untold misery, dashed hopes, ruined life chances and in many cases, an early death. Every single one of them has gotten off scot-free, even, it would seem, from the harsh judgement of history’s chroniclers. And around the world, everywhere you look, the far-right is on the march. What should we expect from a history of the greatest economic catastrophe in our lifetimes? A little more boldness, please.
And indeed, as a history of the crises it’s first rate. Tooze is particularly strong in unpicking the role of historical contingency, how the actions taken by various political actors in governing the vast, complex, interconnected systems of global capitalism, actually had real effects and made real differences.
Straight off the bat he rightly dispenses with standard macroeconomics accounts that hone in on trade balances and national income accounting, where surplus and deficit are seen as epiphenomenon of internal credit relations, unit labour costs and national competitiveness. These accounts of world trade would have great consequences, as they led many prominent economists and commentators to predict the wrong crisis, a crisis of Sino-American relations, where China would eventually refuse to continue purchasing US Treasury bonds and securities, and the dollar would tumble. And indeed, the perspective of imbalances still holds a great deal of purchase in standard accounts of the EU crisis, and is used to justify the harsh treatment meted out to the Eurozone’s periphery.
What actually happened was a crisis of trans-atlantic finance and the implosion of bank balance sheets. And to explain this we need to look, Tooze argues, not at national income accounting, but macro-financial statistics – the flow of dollars and euros from bank to bank, country to country, financial institution to financial institution. What we find is alarming, because for all the talk of national varieties of capitalism, freewheeling Anglo-Saxons vs patient and productive Germans, we see that German and French banks were just as financialised, and just as imbricated, in the meltdown as their American counterparts. Indeed, German banks were some of the most exposed and most dangerous, their US branches had invested heavily in the US mortgage boom with dollars leveraged from US money-markets. Compared with their American counterparts, they were laughably undercapitalised given the risk exposure of their portfolio. But this fact would be entirely absent from traditional macroeconomic measures and accounts. (It’s this aspect of the crisis that the late, great Marxist IR theorist Peter Gowan so astutely identified not long after the meltdown began. He was way ahead of the curve on this and his contributions are greatly missed https://newleftreview.org/II/55/peter...)
But Merkel and Sarkozy would initially dismiss the crisis as a US problem, a meltdown that had nothing to do with them. And it was only the FED’s dramatic intervention in extending half a trillion dollars in currency swap lines to the UK, the EU and Asian central banks, ensuring that their banking systems did not collapse through a shortage of dollars, that averted a full scale breakdown.
From here, the narrative moves at a brisk pace as we follow the full scale of measures that countries did or didn’t introduce as the crisis worked itself out. TARP, the Chinese mega-stimulus, debates at the G20, Russia corralling oligarchs into line, the unfolding of the Eurozone debt crisis as private sector bailouts became a matter of public finances, honing in on the absurd and sadistic torture of Greece for the sake of French and German bank balance sheets. It concludes with the Ukraine crisis, the humiliation of SYRIZA, the rise of Trump and the long brewing emerging markets crisis that will soon unfold with full force.
It’s of the Eurozone’s response that Tooze is most contemptuous. In failing to ‘Go Big’ in response to the meltdown and co-ordinate an adequate, EU wide fiscal response, Merkel and Sarkozy are essentially guilty of economic vandalism, and this is true even from the perspective of ensuring the rude health of capitalism and capitalist enterprise. EU banks remain fragile and undercapitalised, and compared with the laughably lax regulations and stress tests imposed by the ECB, the compromised and incoherent Dodd-Frank act looks like a bold achievement in fiscal regulation and rectitude. A decade of austerity and ‘extend and pretend’ has seen EU corporations outmaneuvered and less able to compete against US and Chinese multinationals, and wild dreams of the EU as a counter-hegemonic anchor, and indeed competitor, for world power have rudely awoken to the doldrums of stagnation, catastrophic youth unemployment and social disintegration.
All good so far, and yet for an account of the crisis, it’s strangely lacking. This is an account of the crisis relayed through Tim Geithner or Gordon Brown’s memoirs, Obama’s speeches and Paul Krugman op-eds. It’s focused and brisk and well-written, but also strangely sterile. We rarely leave the realm of high-politics, and when ordinary people do make an appearance it’s through the statistics of mortgage foreclosures or measures of unemployment and income. The anger that most of us feel or the pain that we’ve gone through rarely penetrates the narrative. And when it does so, it’s fairly limp.
For all his emphasis on contingency, Tooze holds his tongue, or has little to say, about better or fairer responses to the crisis. Except perhaps his sympathy for Christina Romer’s push for an Obama stimulus twice the size of the one actually enacted that would have included distressed mortgage holders, or a strained frustration that Merkel and the ECB didn’t respond as forcefully as the US. He questions whether Bernanke and Geithner comparing themselves to firefighters or bomb disposal experts à la The Hurt Locker is apropos, but although he points out that the bailouts were elitist, kept the broken system ticking over to fight another day, and enriched a small minority of those lucky enough to benefit from capital gains, he doesn’t strain himself to dispel it. Indeed, some of them come across as unlikely heroes.
Some of the most repugnant and mendacious people, who enjoyed a great deal of levity and power, have immiserated millions of people worldwide, leading to untold misery, dashed hopes, ruined life chances and in many cases, an early death. Every single one of them has gotten off scot-free, even, it would seem, from the harsh judgement of history’s chroniclers. And around the world, everywhere you look, the far-right is on the march. What should we expect from a history of the greatest economic catastrophe in our lifetimes? A little more boldness, please.
October 18, 2018
Crashed has been timed to coincide with the ten-year anniversary of the financial crisis of 2008.
Most books about the crisis have been written by
1. protagonists with a record to defend, such as Hank Paulson, Tim Geithner, Ben Bernanke, Neil Barofsky, Mervyn King, Adair Turner and Paul Tucker
2. economists who watched from the sidelines, such as Joseph Stiglitz, Paul Krugman, Bob Shiller, Atif Mian & Amir Sufi, Hans-Werner Sinn, John Kay, Bob Reich, Greta Krippner (genius!) and Simon Johnson
3. journalists who had reported on it, such as Andrew Ross Sorkin, Bethany McLean, David Dayen and the always incisive Martin Sandbu
4. people who fought in the trenches: practitioners such as the anonymous author of “Diary of a Very Bad Year”, the very eponymous George Soros, and the troubled genius that is David Stockman
Some wrote about the crisis in advance, such as the rather monothematic (but regardless 100% correct) Richard “balance sheet recession” Koo, some wrote in real time, like Simon “I saw your kind when I was at the IMF” Johnson did in the Atlantic, but most of these authors wrote in retrospect.
I’ve read them all. Some are better and some are worse, but all these authors are satisfied to cover one or two angles of the crisis, rather than the whole thing. None of them attempts to provide with a theme that could cover all of the causes and all the ramifications, from how housing went crazy in the US to how Europe lost its way to how the authorities may have done more harm than good and how we ended up where we are.
With a single exception, that is:
Alan Blinder did just that in his rather comprehensive (and uniquely readable) “After the Music Stopped.”
The problem with Blinder’s account is that, much as he acknowledges many factors that drove the crisis, much as he provides the most accessible account to a layman, much as he has (and succeeds in sharing) a deep understanding of finance, he holds the belief that a single event, the Lehman bankruptcy is what took us from a mere crisis to a disaster. Which simply cannot be true. In the words of Christopher Hitchens “If a great city or a great state should fall as the result of an apparent accident, then there would be a general reason why it required only an accident to make it fall.”
Enter Adam Tooze.
A historian!
Not to spoil it for you, but the conclusion to this 600+ page opus is that “politics drives economics.” Not the other way round, which is what we’ve always been led to believe! I don’t agree with everything Adam Tooze has to say, nor do I think he’s fully qualified to write this book. But of his main conclusion I am now 100% convinced, and Adam Tooze is whom I have to thank for this epiphany / realization / new conviction.
On at least one measure, therefore, “Crashed” is now the best book about the great financial crisis of 2008.
In short, an amateur has taught us a lesson here.
I don’t call Adam Tooze an amateur to disparage him. It really shows here that he did not live the crisis like I did from my trading desk and all those authors from their positions in government or on the sidelines. Among other things:
• he’s wrong about Mitsubishi and Morgan Stanley, I distinctly remember the Japanese almost lost everything. They decidedly did not have guarantees!
• he’s wrong to date QE on March 19, 2009: Bernanke blew a huge hole in my P&L in December of 2008. By March of ’09, if anything, it was “buy the rumor, sell the fact” on QE.
• he glosses over the significance of the 2011-announced LTROs, arguably the biggest European “save” of all: Southern European banks were finding it impossible to roll billions and billions of 3-yr debt they’d issued mid crisis; not only that, but they were massive holders of BTp and Bono junk, hence the sudden stop, hence MF Global, hence the LTRO; he fails to mention most of this, let alone make the connections!
• on p. 241, I came across the following gem: “Everyone wanted safety. Treasury prices were rising, yields soaring, so too was the dollar.” It does not work that way, does it?
And yet, he’s written a book that’s well worth reading, for the following three reasons:
1. He makes a decent fist of looking at the crisis globally: US, Europe, EM, China and Russia
2. He’s not afraid to make some very strong judgements that go against the grain
3. He lays it all out so well that even if you disagree with his conclusions, by dint of having read his book you will be transported to a place you could not have reached on your own.
His first controversial insight is that the crisis caught the great and the good napping. The Stephen Roaches of our world could not get enough of telling us about the dangers lurking in the Chimerica structure’s imbalances and our leaders (from Larry Summers to a young Illinois senator called Barack Obama) could not get enough of telling the US to borrow less and the Chinese to spend more, when of course the danger was lurking at home.
His second controversial insight is that Paulson 1. made an explicit choice to look principled and teach everybody a lesson and let Lehman go, 2. was driven to this decision by a miscalculation regarding the impact the Lehman bankruptcy would have and 3. was quick to reverse gears and go down on his knees and ask Congress for the necessary funds to clean up his mess after he realized he’d miscalculated.
Three cheers for Adam Tooze!
His third controversial insight is that the biggest financial mess was in Europe, rather than the US. The boldest and stupidest trade of all bold and stupid trades entailed the crème de la crème of the European banking establishment holding trillions of dollar-denominated questionable US assets, which they funded by issuing short-term dollar liabilities. He calls out Steinbrueck and Sarkozy for being showboaters and liars in calling the crisis American, basically, and pays tribute to the Fed that stepped in with gigantic dollar swap lines to the ECB and the SNB, who covertly passed on stupendous amounts of dollar funding to the BNPs, Deutsches and UBSs of this world.
On the other hand, you distinctly get the impression that somebody told all this to Adam Tooze, that he did not dig it out on his own. His “deep throat” has left out some big stuff.
So nobody seems to have informed the author that a trillion dollar swapline is three orders of magnitude smaller than the quadrillion dollars of derivatives (that’s a million billion dollars of derivatives for those sitting in the back) that the authorities could have wiped out by going “Swedish” on the banking system and thereby making all those arrows start and end in the same place. He talks about how the banks were forced to beg for billions and how that was all for show because the losses were in the single-digit trillions, but somebody should show him the 100-odd trillion with a T of derivatives each of Bank of America Merrill Lynch, Barclays etc. had on their books that nobody did anything to remove when there was a genuine opportunity to do so.
Nobody other than the Swiss, that is: again, nobody seems to have informed the author that the SNB found an amazing way to shrink UBS and CSFB: they quite simply told them “any amount you’re up on a derivative you now need to treat as an asset” and “any amount you’re down you need to treat as a liability.” And that was that! Until last year there were fantastic jobs to be had killing the derivatives books of those behemoths :-) Deutsche, on the other hand, is still very much in the news…
The author does seem to comprehend that a “hero” in year 2005 was not a guy who had funds, but a guy who could “source product.” However, Tooze cannot connect the dots too well from there:
1. He somehow gets it into his head that your objective as a maker of CDO is to seek crappy product, in order to maximize the difference between what the meat’s worth and what you sell the sausage for! No, not really: all you want is to charge the borrower the rate that you charge to crappy borrowers, but you don’t care at all if he’s a good borrower or not. If it turns out he can pay, that’s a small bonus, actually. Indeed, some of the biggest fraud perpetrated was against African-Americans who were high-credit borrowers but were pushed into costlier subprime anyway.
2. More importantly, the biggest implication of this fact is that it was incumbent upon America to police the creation of assets and that this was something the US singularly failed to accomplish. Steinbrueck and Sarkozy were not all that off-piste to say the crisis of their banks was American in origin. The US is where the lax lending rules were to be found.
Much as I’m ecstatic that the current go-to book about the crisis boldly states that Paulson was a hypocrite, basically, the author gets a B- from me on all his revelations. He isn’t knowledgeable enough, bottom line. Sorry…
Fortunately, his account is not the biggest contribution!
From reading “Crashed” I took away two big messages; one intended by the author and one probably unintended!
The first message Adam Tooze managed to hammer into my head is that, once they had picked up their socks and dusted themselves off following the Lehman bankruptcy, (to use Obama’s parlance) the American authorities, from the President, the Fed and the Treasury all the way to the courts and the diplomatic service, resolved to fully restore the status quo: “no more bankruptcies anywhere, ever” became the mantra and the entire might of the state was put behind that goal!
• No more banking bankruptcies, US or otherwise
• No losses to Chinese investors in bad American paper
• No losses to anybody else who holds paper either: bondholders’ rights trump homeowners’
• No European Government defaults
• No Grexit
• No breaking of ranks even on the method: you, the rest of the world, had better also print
Tooze does not argue that this was some type of plan. When you read his account, rather, you understand that there’s no turning back from Shock and Awe. So there wasn’t one!
You look at it that way and you understand there was no way the subprime borrower was ever going to get any help to stay in his home. The moment his money was pledged to the Chinese, his goose was cooked. Similarly, and Tooze says this explicitly, my country’s government was never going to default to the French and German banks that held its paper, because “the system” came first. I’ve always blamed Trichet for this, but with the wisdom I’ve now acquired I must now acknowledge he was but a first line of defense. And that the “hegemon” pushing this agenda was indeed the US, with Obama himself putting in the important phone calls.
The second major takeaway I took from reading Crashed is a dividend of its “universal” approach to setting the scene. The author takes you on a tour of the US, Europe, Eastern Europe, China and Russia. And you sit down, you do the graph and you come to a realization: a single country is connected to every node of the graph:
• The ECB was set up on the model of the Bundesbank
• German banks were up to their gills in American paper
• German investors of all stripes were up to their gills in BTp, Bono and GGB paper
• German industry had set up production across Poland and Hungary and the Czech Republic
• The former German Chancellor sits on the board of the Russian gas pipeline
• The current German Chancellor traded blows with Putin in their days in East Berlin
• Germany is by some margin the biggest exporter to China
I don’t know why I’d never made all those connections. So Angela Merkel is a “villain” in this book, but not at all from my angle. The way I see it, under Angela Merkel:
• German Landesbanken were forced to sell all their mortgage junk right away
• German investors, uniquely among their European peers, were forced to hold on to their GGBs till the bitter end, in a show of solidarity they never got any credit for
• The BuBa and the Laender were browbeaten into passing on banking supervision to the ECB
• Germany accepted more refugees than everybody else put together
• Real sanctions were imposed on Russia post the Ukraine / Crimean fiasco, with the French, the Italians and swathes of German business firmly in opposition.
• Europe made direct loans to a large number of insolvent nations, a policy that was extremely unpopular with the German public!
Yes, there are things that Merkel could have done better. But she was literally in the eye of the storm and is amazing enough a politician that she managed to steer through three elections and always deliver the goods with both her country and Europe in mind. I read this book and it reinforced my belief that no politician in history could possibly have played her awful hand as well as she did.
The book closes with two very strong chapters: one on Trump and the concluding chapter which lays out the author’s main thesis: politics trumps economics. Amen.
A couple last observations / grumbles from me:
Grumble #1:
“Crashed” was advertised as the book that draws the line from the bailouts to Brexit and Trump. It really isn’t.
Grumble #2:
I hope somebody somewhere writes a book / an article / a Tweet / whatever that exposes Draghi’s “whatever it takes” moment for what it actually was: one half of a bargain whereby:
(i) on one hand Germany allowed the ECB to lend money to Southern European governments via the printing press
(ii) on the other hand (under the false pretenses that this is to do with NPLs, rather than the suppression of hard money creation south of some parallel) no loan will be given ever again by a bank in Italy, Portugal or Greece.
Tooze does not grasp this at all and has been fed the story that Target 2 blew up when northern investors withdrew. What’s really happened is Germany regrets allowing Southern banks to create hard Euros and it won’t happen again. They will fund the governments instead, where at least you have some clue what happened to the money 😊
Grumble #3
My country's "young, charismatic, radical-left" prime minister is no different from any of his predecessors. Stop romanticising him!
Anyway, enough from me. Go buy the book, for Blinder’s reign as the best author about the crisis has ended.
Step forward, Adam Tooze!
Most books about the crisis have been written by
1. protagonists with a record to defend, such as Hank Paulson, Tim Geithner, Ben Bernanke, Neil Barofsky, Mervyn King, Adair Turner and Paul Tucker
2. economists who watched from the sidelines, such as Joseph Stiglitz, Paul Krugman, Bob Shiller, Atif Mian & Amir Sufi, Hans-Werner Sinn, John Kay, Bob Reich, Greta Krippner (genius!) and Simon Johnson
3. journalists who had reported on it, such as Andrew Ross Sorkin, Bethany McLean, David Dayen and the always incisive Martin Sandbu
4. people who fought in the trenches: practitioners such as the anonymous author of “Diary of a Very Bad Year”, the very eponymous George Soros, and the troubled genius that is David Stockman
Some wrote about the crisis in advance, such as the rather monothematic (but regardless 100% correct) Richard “balance sheet recession” Koo, some wrote in real time, like Simon “I saw your kind when I was at the IMF” Johnson did in the Atlantic, but most of these authors wrote in retrospect.
I’ve read them all. Some are better and some are worse, but all these authors are satisfied to cover one or two angles of the crisis, rather than the whole thing. None of them attempts to provide with a theme that could cover all of the causes and all the ramifications, from how housing went crazy in the US to how Europe lost its way to how the authorities may have done more harm than good and how we ended up where we are.
With a single exception, that is:
Alan Blinder did just that in his rather comprehensive (and uniquely readable) “After the Music Stopped.”
The problem with Blinder’s account is that, much as he acknowledges many factors that drove the crisis, much as he provides the most accessible account to a layman, much as he has (and succeeds in sharing) a deep understanding of finance, he holds the belief that a single event, the Lehman bankruptcy is what took us from a mere crisis to a disaster. Which simply cannot be true. In the words of Christopher Hitchens “If a great city or a great state should fall as the result of an apparent accident, then there would be a general reason why it required only an accident to make it fall.”
Enter Adam Tooze.
A historian!
Not to spoil it for you, but the conclusion to this 600+ page opus is that “politics drives economics.” Not the other way round, which is what we’ve always been led to believe! I don’t agree with everything Adam Tooze has to say, nor do I think he’s fully qualified to write this book. But of his main conclusion I am now 100% convinced, and Adam Tooze is whom I have to thank for this epiphany / realization / new conviction.
On at least one measure, therefore, “Crashed” is now the best book about the great financial crisis of 2008.
In short, an amateur has taught us a lesson here.
I don’t call Adam Tooze an amateur to disparage him. It really shows here that he did not live the crisis like I did from my trading desk and all those authors from their positions in government or on the sidelines. Among other things:
• he’s wrong about Mitsubishi and Morgan Stanley, I distinctly remember the Japanese almost lost everything. They decidedly did not have guarantees!
• he’s wrong to date QE on March 19, 2009: Bernanke blew a huge hole in my P&L in December of 2008. By March of ’09, if anything, it was “buy the rumor, sell the fact” on QE.
• he glosses over the significance of the 2011-announced LTROs, arguably the biggest European “save” of all: Southern European banks were finding it impossible to roll billions and billions of 3-yr debt they’d issued mid crisis; not only that, but they were massive holders of BTp and Bono junk, hence the sudden stop, hence MF Global, hence the LTRO; he fails to mention most of this, let alone make the connections!
• on p. 241, I came across the following gem: “Everyone wanted safety. Treasury prices were rising, yields soaring, so too was the dollar.” It does not work that way, does it?
And yet, he’s written a book that’s well worth reading, for the following three reasons:
1. He makes a decent fist of looking at the crisis globally: US, Europe, EM, China and Russia
2. He’s not afraid to make some very strong judgements that go against the grain
3. He lays it all out so well that even if you disagree with his conclusions, by dint of having read his book you will be transported to a place you could not have reached on your own.
His first controversial insight is that the crisis caught the great and the good napping. The Stephen Roaches of our world could not get enough of telling us about the dangers lurking in the Chimerica structure’s imbalances and our leaders (from Larry Summers to a young Illinois senator called Barack Obama) could not get enough of telling the US to borrow less and the Chinese to spend more, when of course the danger was lurking at home.
His second controversial insight is that Paulson 1. made an explicit choice to look principled and teach everybody a lesson and let Lehman go, 2. was driven to this decision by a miscalculation regarding the impact the Lehman bankruptcy would have and 3. was quick to reverse gears and go down on his knees and ask Congress for the necessary funds to clean up his mess after he realized he’d miscalculated.
Three cheers for Adam Tooze!
His third controversial insight is that the biggest financial mess was in Europe, rather than the US. The boldest and stupidest trade of all bold and stupid trades entailed the crème de la crème of the European banking establishment holding trillions of dollar-denominated questionable US assets, which they funded by issuing short-term dollar liabilities. He calls out Steinbrueck and Sarkozy for being showboaters and liars in calling the crisis American, basically, and pays tribute to the Fed that stepped in with gigantic dollar swap lines to the ECB and the SNB, who covertly passed on stupendous amounts of dollar funding to the BNPs, Deutsches and UBSs of this world.
On the other hand, you distinctly get the impression that somebody told all this to Adam Tooze, that he did not dig it out on his own. His “deep throat” has left out some big stuff.
So nobody seems to have informed the author that a trillion dollar swapline is three orders of magnitude smaller than the quadrillion dollars of derivatives (that’s a million billion dollars of derivatives for those sitting in the back) that the authorities could have wiped out by going “Swedish” on the banking system and thereby making all those arrows start and end in the same place. He talks about how the banks were forced to beg for billions and how that was all for show because the losses were in the single-digit trillions, but somebody should show him the 100-odd trillion with a T of derivatives each of Bank of America Merrill Lynch, Barclays etc. had on their books that nobody did anything to remove when there was a genuine opportunity to do so.
Nobody other than the Swiss, that is: again, nobody seems to have informed the author that the SNB found an amazing way to shrink UBS and CSFB: they quite simply told them “any amount you’re up on a derivative you now need to treat as an asset” and “any amount you’re down you need to treat as a liability.” And that was that! Until last year there were fantastic jobs to be had killing the derivatives books of those behemoths :-) Deutsche, on the other hand, is still very much in the news…
The author does seem to comprehend that a “hero” in year 2005 was not a guy who had funds, but a guy who could “source product.” However, Tooze cannot connect the dots too well from there:
1. He somehow gets it into his head that your objective as a maker of CDO is to seek crappy product, in order to maximize the difference between what the meat’s worth and what you sell the sausage for! No, not really: all you want is to charge the borrower the rate that you charge to crappy borrowers, but you don’t care at all if he’s a good borrower or not. If it turns out he can pay, that’s a small bonus, actually. Indeed, some of the biggest fraud perpetrated was against African-Americans who were high-credit borrowers but were pushed into costlier subprime anyway.
2. More importantly, the biggest implication of this fact is that it was incumbent upon America to police the creation of assets and that this was something the US singularly failed to accomplish. Steinbrueck and Sarkozy were not all that off-piste to say the crisis of their banks was American in origin. The US is where the lax lending rules were to be found.
Much as I’m ecstatic that the current go-to book about the crisis boldly states that Paulson was a hypocrite, basically, the author gets a B- from me on all his revelations. He isn’t knowledgeable enough, bottom line. Sorry…
Fortunately, his account is not the biggest contribution!
From reading “Crashed” I took away two big messages; one intended by the author and one probably unintended!
The first message Adam Tooze managed to hammer into my head is that, once they had picked up their socks and dusted themselves off following the Lehman bankruptcy, (to use Obama’s parlance) the American authorities, from the President, the Fed and the Treasury all the way to the courts and the diplomatic service, resolved to fully restore the status quo: “no more bankruptcies anywhere, ever” became the mantra and the entire might of the state was put behind that goal!
• No more banking bankruptcies, US or otherwise
• No losses to Chinese investors in bad American paper
• No losses to anybody else who holds paper either: bondholders’ rights trump homeowners’
• No European Government defaults
• No Grexit
• No breaking of ranks even on the method: you, the rest of the world, had better also print
Tooze does not argue that this was some type of plan. When you read his account, rather, you understand that there’s no turning back from Shock and Awe. So there wasn’t one!
You look at it that way and you understand there was no way the subprime borrower was ever going to get any help to stay in his home. The moment his money was pledged to the Chinese, his goose was cooked. Similarly, and Tooze says this explicitly, my country’s government was never going to default to the French and German banks that held its paper, because “the system” came first. I’ve always blamed Trichet for this, but with the wisdom I’ve now acquired I must now acknowledge he was but a first line of defense. And that the “hegemon” pushing this agenda was indeed the US, with Obama himself putting in the important phone calls.
The second major takeaway I took from reading Crashed is a dividend of its “universal” approach to setting the scene. The author takes you on a tour of the US, Europe, Eastern Europe, China and Russia. And you sit down, you do the graph and you come to a realization: a single country is connected to every node of the graph:
• The ECB was set up on the model of the Bundesbank
• German banks were up to their gills in American paper
• German investors of all stripes were up to their gills in BTp, Bono and GGB paper
• German industry had set up production across Poland and Hungary and the Czech Republic
• The former German Chancellor sits on the board of the Russian gas pipeline
• The current German Chancellor traded blows with Putin in their days in East Berlin
• Germany is by some margin the biggest exporter to China
I don’t know why I’d never made all those connections. So Angela Merkel is a “villain” in this book, but not at all from my angle. The way I see it, under Angela Merkel:
• German Landesbanken were forced to sell all their mortgage junk right away
• German investors, uniquely among their European peers, were forced to hold on to their GGBs till the bitter end, in a show of solidarity they never got any credit for
• The BuBa and the Laender were browbeaten into passing on banking supervision to the ECB
• Germany accepted more refugees than everybody else put together
• Real sanctions were imposed on Russia post the Ukraine / Crimean fiasco, with the French, the Italians and swathes of German business firmly in opposition.
• Europe made direct loans to a large number of insolvent nations, a policy that was extremely unpopular with the German public!
Yes, there are things that Merkel could have done better. But she was literally in the eye of the storm and is amazing enough a politician that she managed to steer through three elections and always deliver the goods with both her country and Europe in mind. I read this book and it reinforced my belief that no politician in history could possibly have played her awful hand as well as she did.
The book closes with two very strong chapters: one on Trump and the concluding chapter which lays out the author’s main thesis: politics trumps economics. Amen.
A couple last observations / grumbles from me:
Grumble #1:
“Crashed” was advertised as the book that draws the line from the bailouts to Brexit and Trump. It really isn’t.
Grumble #2:
I hope somebody somewhere writes a book / an article / a Tweet / whatever that exposes Draghi’s “whatever it takes” moment for what it actually was: one half of a bargain whereby:
(i) on one hand Germany allowed the ECB to lend money to Southern European governments via the printing press
(ii) on the other hand (under the false pretenses that this is to do with NPLs, rather than the suppression of hard money creation south of some parallel) no loan will be given ever again by a bank in Italy, Portugal or Greece.
Tooze does not grasp this at all and has been fed the story that Target 2 blew up when northern investors withdrew. What’s really happened is Germany regrets allowing Southern banks to create hard Euros and it won’t happen again. They will fund the governments instead, where at least you have some clue what happened to the money 😊
Grumble #3
My country's "young, charismatic, radical-left" prime minister is no different from any of his predecessors. Stop romanticising him!
Anyway, enough from me. Go buy the book, for Blinder’s reign as the best author about the crisis has ended.
Step forward, Adam Tooze!
August 6, 2022
This volume does a great job explaining the financial meltdown that began in 2007. I particularly found the author's discussion of liquidity, or rather the lack of liquidity, to be of interest. The first half of this book is strong and, I believe, sets the historical standard for the crisis from 2007-2012. The second half, however, reads as a general survey, presenting little insight to those who follow world affairs. For example, the author, it seems, dwells unrelentingly on that chain-smoking, unemployed, alcoholic cousin at the Thanksgiving table, Greece. I think it was Eric Hobsbawn who commented that writing history so close in time to actual events is dicey business; Mr. Tooze proves it so.
This book lacks any feel for life on the front lines during the crisis. To satisfy that deficiency, I offer up no less notable an observer than . . . me. I wrote the following in August 2017:
The Financial Meltdown (2008-2009): An Education
Gifted authors have well documented the 2008-2009 financial crisis and its aftermath. More good stuff is surely to come. As a contribution to the record, what follows are the modest, personal reflections of an unimportant former investment banker who had a bleacher seat view of events.
The Prelude
All seemed well in those pre-crash years. For those who lived through the dot-com bubble, the period immediately following seemed relatively calm. From a distance the financial markets showed little cause for concern, reflected in bond yields and general equity valuations. The 10-year Treasury began 2003 at 4.05% and ended 2007 at 4.10%. The S&P 500 had moved from a 2003 low of ~830 to a 2007 high of ~1560. Despite the gains, the stock market did not then seem overvalued. The S&P 500 forward price-earnings ratio was ~15x in 2007, compared to a 1999 high of ~25x. We had seemingly learned our lesson: in the end, a dollar must be worth a dollar. What pain we endured to learn that clicks and page views were not proper valuation metrics. The financial world was a safe place again, right?
Alice and The White Rabbit
But there was one nagging annoyance: Alice in Wonderland at the workplace. Since the first bank was founded, bankers held relationships with customers who in turn did business with the bank. It was obvious who played the role of banker and that of customer. Beginning in the early 2000s, a white rabbit appeared in investment banks. The power structure of the large banks changed. Groups who held questionable relationships with hitherto unknown entities assumed greater control of securities and banking business lines. Traditionalists, who covered companies like P&G, 3M or IBM were perplexed. Enormous amounts of money were being generated and yet it wasn’t apparent exactly how. The white rabbit was the structured products industry.
When formed in the 1980s, that industry, though complex, was relatively easy to understand. A financial institution aggregated mortgages or credit card debt, then sold a package of securities that contained those assets to fixed income investors. It seemed an understandable and reasonable business model. By the early 2000s, securitization had become extremely opaque. Terms like CLO, CBO, CDO, Super Senior or equity tranche were among the trade’s argot.
Unlike the centuries-old relationships between bankers and customers, the structured products teams were working with newly-formed, little-known, entities that managed large asset pools. The pool managers evolved as something of a cottage industry in response to accounting and regulatory changes that made it prohibitively costly for banks to hold certain assets on their own balance sheets. What these managers did was a mystery to those of us in the bleachers. A whole lot of attention was being paid to what seemed like “two persons and a Bloomberg terminal”-type operations.
The white rabbit continued hopping, milling with a few other Lewis Carroll characters. And then in 2007, began the gradual, slow-motion, melt-down. We traditionalists had no clue of what was to unfold. Yes, we reached the final chapter of Alice’s adventures. The white rabbit hopped away. What word best describes its footprints? Carnage? Ruin? Calamity? Was it Warren Buffet who remarked that only when the tide goes out do we see who is swimming unclothed? For when the tide went out, we then saw how the structured products business was engineered.
What did we see? An unholy alliance among government, rating agencies, investors, and banks.
The Actors:
Government
It is no surprise that the 2008/2009 melt-down began with government. Government had set the stage through decades of public policy for what followed, fostering home ownership and minimizing borrowing costs for homeowners. As expected, firms advantaged themselves through government behavior. Wall Street is very good at profiting from cracks in government policy. Through time, those cracks became chasms.
Rating agencies
The rating agencies are for-profit entities that constantly seek new ways to grow revenues. Rating structured product securities was an important growth element to those firms. It is only somewhat less surprising that the rating agencies could be buffaloed - anyone who has worked on Wall Street knows the reason for this. They proved themselves to be (unwitting?) pigeons in this poker game. They also suffered relatively few consequences, compared to their contribution, in the wake of the crisis.
Institutional investors
Institutional investors relied upon the banks and the rating agencies to affirm the quality of their purchases. It was somewhat surprising that investors would be so ignorant of the underlying risks they were bearing, relying far too heavily on the rating agencies and bankers. Aren’t institutional investors paid to assess risk independently? Well, it turns out that’s not how it works. If the rating agencies were to rate Imelda Marcos’s shoes AAA and we had a Bloomberg terminal, we could easily sell old Imelda’s shoes off to the highest bidder. This is only a mild exaggeration, sadly. To be fair, fixed income investors are known for doing their homework with non-investment grade securities (below BBB-). Most of the structured product securities were sold as investment grade (BBB- and higher), however. It was something of a shock to realize that fixed income investors put so much faith in the rating agencies and so little thought into their decisions.
The banks
Finally, there were the banks. Large banks employ large staffs of risk managers. Their job is to . . . manage risk. This works as expected in ordinary times. When large sums are being earned, though, let’s just say those risk managers can be a bit malleable. Further, the sheer size of profits awed CEOs into fawning support - best not to ask too many questions. Operating in this system, the structured products bankers were the classic actors in the principal-agent problem.
The Drama
The excruciating slow pace of decline
The downturn in the financial markets began with events in early 2007. Nearly two years passed from that time to the S&P 500’s bottom. If you were an investor in the S&P 500, you bore a 56% loss from peak to trough. Investors in Bank of America, AIG and Lehman saw losses of 94%, 99.5% and 100%. The US government bond market became the safe haven for investors. From mid-2007 to the end of 2008, the iShares 20+ Year TBond ETF moved from ~$84 to ~$122, a 50% increase in price for a risk-free asset.
Why did it take so long for the market to incorporate information into prices? In this era of instant information, shouldn’t security prices have immediately reacted to the possible consequences of the structured products excesses? The answer was no. Why not? A few thoughts come to mind: (1) Structured products themselves were opaque. Who issued them, who owned them and what they contained were not obvious to those in the bleachers. (2) Because Wall Street’s structured products groups generated so much revenue, there was a powerful institutional bias toward maintaining the status quo. (3) Governments created the Band-Aid du jour to mend each newly-opened wound, thus slowing and prolonging the crisis. (4) Rather than immediately re-rating the financial system, the rating agencies produced a sort of rolling thunder, issuing one downgrade after another over an extended time period. (5) Regulatory forbearance occurred globally, where the true effects of economic outcomes were prevented from being recognized publicly. If an institution were to fail a financial regulatory test, such as a risk-based capital measure, the regulator changed, or temporarily ignored, the test’s thresholds.
Extraordinary government responses
Governments, behaving in unprecedented fashion, lowered interest rates to zero or negative levels and then left them at those levels. Since the dawn of civilization, it has been an unquestioned rule that the lender of 10 goats shall receive at least 11 goats upon repayment. No longer. Governments also took unprecedented action when they provided liquidity against certain asset classes, like mortgage backed securities, direct investment into financial institutions (effectively nationalizing major banks), and indirect backing to funding for various financial firms.
Though the crisis in total was measured in years, individual situations arose in real-time, requiring immediate government response. With imperiled entities like Lehman and Bear Stearns, there was no time for reflection. Given the realities of trading, action was often needed before market openings. The response times governments faced were measured in hours rather than months, weeks or even days. The results were seemingly random. Each of common stock, bond and preferred stock owners were treated differently depending on the crisis of the moment.
Institution............../.Common.../Preferred/.Bonds....../.Clients
FHMA+FHLMC......./.Loss........../.Loss......../.Saved....../.Saved
Lehman+WAMU...../.Loss........../.Loss......../.Impaired/.Saved
AIG+BofA+Citi......../.Impaired../.Saved....../.Saved....../.Saved
Bear+Merrill.........../.Impaired../.Saved....../.Saved....../.Saved
Goldman+MS........../.Saved......./.Saved....../.Saved....../.Saved
Afterwards
Mockery of technocracy
For all the planning from technocrats in government, the crisis proved a mockery. Decisions were made on the fly. Inconsistencies abounded. Why were Lehman and WAMU allowed to go down when all other major institutions were saved? The simple way to handle a crisis was to throw the full weight of the government behind any large failing enterprise. Thus begat the phrase too big to fail.
Investors are now conditioned to recognize the willingness of governments to support the integrity of large financial institutions, skewing the risk/reward dynamic for securities of those entities. Why should the senior notes of a large bank be viewed differently than an equivalent risk senior note of a brewer? And if banks are just extensions of the federal government, then perhaps they should be owned and operated as such?
Authority bias
We want to believe those in the know badly, so badly we’ll pay for access to those authorities. The crisis exposed a tremendous amount of authority bias. For the authorities know no more about the future than the person on the street. The authority does have access to a larger set of real-time data, presumably. Perhaps they have a better appreciation for risk, yet that does not lead to a better understanding of the future. The crisis demonstrated the limited value added from notable financial institutions, advisors and managers, none of whom foresaw the oncoming crisis or its extent.
The unquoted value of cash
When the markets began to sell-off heavily, why didn’t investors immediately respond? Financial prices, it turns out, do not fully reveal emotions. There is a non-quoted value of holding cash, what economists refer to as liquidity preference. Fear is the culprit. Some called it the fear of catching a falling knife. If a security were trading for $100 on day 1, $80 on day 2, $60 on day 3, why even think of investing on day 4? You could invest at $40, only to see your investment worth $20 one day later.
It was well known on Wall Street that private equity investors were told by their limited partners not to place a call for cash, even though the LPs would have been legally obligated to deliver cash. It was also known that there were instances of large institutions being denied access to revolving credit facilities even though the banks had a similar legal obligation.
Holding a dollar was worth much more than a dollar, it seemed. There was no corresponding price quote, however. That’s why there is a paradox in investing. Market declines are the time to be investing, not shying from investing. We see the value of securities. The value of holding cash is intangible.
Failure to let market forces reach equilibrium
Because governments intervened to prevent Adam Smith’s invisible hand from exerting its proper influence, a set of consequences, some intended, some unintended, followed. This begs the question, what would have happened had government not responded with such accommodations? Several financial institutions would likely have gone bankrupt including most large securities firms. Depositors at several banks would have experienced losses to at least some of their deposits above FDIC limits. Fixed income investors in many surviving financial institutions would have seen the value of their securities significantly reduced. Money market investors would have suffered losses, an unthinkable outcome prior to the crisis. Collateralization requirements in structures like derivatives would have forced counterparty losses. In short, the system and many, many Americans would have been instantly hurt badly. Would it have been best, though, to let investors and managements that took risk bear the consequences of that risk? Regulators would have then upheld the rules of the road for all. After the pain, wouldn’t the system have reached equilibrium and sparked a rebuilding? Wouldn’t the world have relearned an important lesson about risk and return?
As it was, government intervention took the hurt and spread it over many years. Many investors and managements that took risk avoided the consequences of that risk due to government action. We preserved the financial system. At what cost? In substance, government action has taken from savers and taxpayers and given to those borrowing institutions many of which should have failed. This action has played out over a decade so, like inflation, the impact is hidden from direct view. To a bank, the cost of goods sold is represented by their cost to borrow money. Borrowing costs for banks have been at record lows now for nearly a decade, much in an attempt to salve wounds. Is this really what is meant when we speak of American capitalism?
Central banks have now set a new boundary level for financial stimulus with zero or negative interest rates, trillions of dollars in government supplied liquidity, and inconsistent treatment of security holders in imperiled institutions. What happens in the next crisis when central banks ease, but not as far as the old boundary? What if they provide liquidity but not as much as before? What message does that send? Perhaps central banks will be forced to exceed the prior boundaries lest they not be taken seriously?
Hints of things to come?
Government protections and regulations enacted following the Great Depression created the impression that banking panics were a thing of the past. Not true it turns out. The loss of confidence in the financial system was an unanticipated and unforeseen surprise to all. It serves to remind us that despite all the efforts to insulate the financial system, panic cannot be prevented.
Looking at developing countries in crisis, we get an idea of just how far governments can go to control financial panic: bank deposit freezes/confiscations (Brazil), cash withdrawal limits (Greece), bank bail-ins (Cyprus), retirement account confiscation (Argentina), currency exchange controls, just to name a few. Will these tactics used by less developed countries now become policy in the developed world under crisis? What will it mean to hold cash in that world?
Conditions precedent for another major dislocation?
Given that nearly 75 years passed between the last two panics, there’s good reason to believe another panic is unlikely anytime soon. Yet we know that the massive government interventions of the past decade have seriously impaired price discovery in the markets. Clearly, the removal of government subsidies will have an impact. The conditions are set, therefore, for a significant market downturn even without a panic. What could serve as the spark? Will Europe be forced to break apart or to federalize? Will China’s financial system collapse? Is there a black swan lurking in the US financial system? It’s far more likely a downturn will come from something unseen or ignored today. Given the sheer size of government intervention, it’s also more likely to be later rather than sooner.
It’s comforting to hear market warnings from so many managers/pundits. We can be certain, with 99.97% confidence, that they are in error. There are too many sophisticated investors calling for a market correction for it to happen now and it just makes too much good sense. It’s when those investors surrender to the market that we should worry. Make no mistake, the mammoth government subsidies will produce major market dislocations at some time. The laws of nature tell us so. We don’t know when. No one does. Someone will, however, make a timely call on the market’s demise, for as they say, even the broken clock is right twice a day.
This book lacks any feel for life on the front lines during the crisis. To satisfy that deficiency, I offer up no less notable an observer than . . . me. I wrote the following in August 2017:
The Financial Meltdown (2008-2009): An Education
Gifted authors have well documented the 2008-2009 financial crisis and its aftermath. More good stuff is surely to come. As a contribution to the record, what follows are the modest, personal reflections of an unimportant former investment banker who had a bleacher seat view of events.
The Prelude
All seemed well in those pre-crash years. For those who lived through the dot-com bubble, the period immediately following seemed relatively calm. From a distance the financial markets showed little cause for concern, reflected in bond yields and general equity valuations. The 10-year Treasury began 2003 at 4.05% and ended 2007 at 4.10%. The S&P 500 had moved from a 2003 low of ~830 to a 2007 high of ~1560. Despite the gains, the stock market did not then seem overvalued. The S&P 500 forward price-earnings ratio was ~15x in 2007, compared to a 1999 high of ~25x. We had seemingly learned our lesson: in the end, a dollar must be worth a dollar. What pain we endured to learn that clicks and page views were not proper valuation metrics. The financial world was a safe place again, right?
Alice and The White Rabbit
But there was one nagging annoyance: Alice in Wonderland at the workplace. Since the first bank was founded, bankers held relationships with customers who in turn did business with the bank. It was obvious who played the role of banker and that of customer. Beginning in the early 2000s, a white rabbit appeared in investment banks. The power structure of the large banks changed. Groups who held questionable relationships with hitherto unknown entities assumed greater control of securities and banking business lines. Traditionalists, who covered companies like P&G, 3M or IBM were perplexed. Enormous amounts of money were being generated and yet it wasn’t apparent exactly how. The white rabbit was the structured products industry.
When formed in the 1980s, that industry, though complex, was relatively easy to understand. A financial institution aggregated mortgages or credit card debt, then sold a package of securities that contained those assets to fixed income investors. It seemed an understandable and reasonable business model. By the early 2000s, securitization had become extremely opaque. Terms like CLO, CBO, CDO, Super Senior or equity tranche were among the trade’s argot.
Unlike the centuries-old relationships between bankers and customers, the structured products teams were working with newly-formed, little-known, entities that managed large asset pools. The pool managers evolved as something of a cottage industry in response to accounting and regulatory changes that made it prohibitively costly for banks to hold certain assets on their own balance sheets. What these managers did was a mystery to those of us in the bleachers. A whole lot of attention was being paid to what seemed like “two persons and a Bloomberg terminal”-type operations.
The white rabbit continued hopping, milling with a few other Lewis Carroll characters. And then in 2007, began the gradual, slow-motion, melt-down. We traditionalists had no clue of what was to unfold. Yes, we reached the final chapter of Alice’s adventures. The white rabbit hopped away. What word best describes its footprints? Carnage? Ruin? Calamity? Was it Warren Buffet who remarked that only when the tide goes out do we see who is swimming unclothed? For when the tide went out, we then saw how the structured products business was engineered.
What did we see? An unholy alliance among government, rating agencies, investors, and banks.
The Actors:
Government
It is no surprise that the 2008/2009 melt-down began with government. Government had set the stage through decades of public policy for what followed, fostering home ownership and minimizing borrowing costs for homeowners. As expected, firms advantaged themselves through government behavior. Wall Street is very good at profiting from cracks in government policy. Through time, those cracks became chasms.
Rating agencies
The rating agencies are for-profit entities that constantly seek new ways to grow revenues. Rating structured product securities was an important growth element to those firms. It is only somewhat less surprising that the rating agencies could be buffaloed - anyone who has worked on Wall Street knows the reason for this. They proved themselves to be (unwitting?) pigeons in this poker game. They also suffered relatively few consequences, compared to their contribution, in the wake of the crisis.
Institutional investors
Institutional investors relied upon the banks and the rating agencies to affirm the quality of their purchases. It was somewhat surprising that investors would be so ignorant of the underlying risks they were bearing, relying far too heavily on the rating agencies and bankers. Aren’t institutional investors paid to assess risk independently? Well, it turns out that’s not how it works. If the rating agencies were to rate Imelda Marcos’s shoes AAA and we had a Bloomberg terminal, we could easily sell old Imelda’s shoes off to the highest bidder. This is only a mild exaggeration, sadly. To be fair, fixed income investors are known for doing their homework with non-investment grade securities (below BBB-). Most of the structured product securities were sold as investment grade (BBB- and higher), however. It was something of a shock to realize that fixed income investors put so much faith in the rating agencies and so little thought into their decisions.
The banks
Finally, there were the banks. Large banks employ large staffs of risk managers. Their job is to . . . manage risk. This works as expected in ordinary times. When large sums are being earned, though, let’s just say those risk managers can be a bit malleable. Further, the sheer size of profits awed CEOs into fawning support - best not to ask too many questions. Operating in this system, the structured products bankers were the classic actors in the principal-agent problem.
The Drama
The excruciating slow pace of decline
The downturn in the financial markets began with events in early 2007. Nearly two years passed from that time to the S&P 500’s bottom. If you were an investor in the S&P 500, you bore a 56% loss from peak to trough. Investors in Bank of America, AIG and Lehman saw losses of 94%, 99.5% and 100%. The US government bond market became the safe haven for investors. From mid-2007 to the end of 2008, the iShares 20+ Year TBond ETF moved from ~$84 to ~$122, a 50% increase in price for a risk-free asset.
Why did it take so long for the market to incorporate information into prices? In this era of instant information, shouldn’t security prices have immediately reacted to the possible consequences of the structured products excesses? The answer was no. Why not? A few thoughts come to mind: (1) Structured products themselves were opaque. Who issued them, who owned them and what they contained were not obvious to those in the bleachers. (2) Because Wall Street’s structured products groups generated so much revenue, there was a powerful institutional bias toward maintaining the status quo. (3) Governments created the Band-Aid du jour to mend each newly-opened wound, thus slowing and prolonging the crisis. (4) Rather than immediately re-rating the financial system, the rating agencies produced a sort of rolling thunder, issuing one downgrade after another over an extended time period. (5) Regulatory forbearance occurred globally, where the true effects of economic outcomes were prevented from being recognized publicly. If an institution were to fail a financial regulatory test, such as a risk-based capital measure, the regulator changed, or temporarily ignored, the test’s thresholds.
Extraordinary government responses
Governments, behaving in unprecedented fashion, lowered interest rates to zero or negative levels and then left them at those levels. Since the dawn of civilization, it has been an unquestioned rule that the lender of 10 goats shall receive at least 11 goats upon repayment. No longer. Governments also took unprecedented action when they provided liquidity against certain asset classes, like mortgage backed securities, direct investment into financial institutions (effectively nationalizing major banks), and indirect backing to funding for various financial firms.
Though the crisis in total was measured in years, individual situations arose in real-time, requiring immediate government response. With imperiled entities like Lehman and Bear Stearns, there was no time for reflection. Given the realities of trading, action was often needed before market openings. The response times governments faced were measured in hours rather than months, weeks or even days. The results were seemingly random. Each of common stock, bond and preferred stock owners were treated differently depending on the crisis of the moment.
Institution............../.Common.../Preferred/.Bonds....../.Clients
FHMA+FHLMC......./.Loss........../.Loss......../.Saved....../.Saved
Lehman+WAMU...../.Loss........../.Loss......../.Impaired/.Saved
AIG+BofA+Citi......../.Impaired../.Saved....../.Saved....../.Saved
Bear+Merrill.........../.Impaired../.Saved....../.Saved....../.Saved
Goldman+MS........../.Saved......./.Saved....../.Saved....../.Saved
Afterwards
Mockery of technocracy
For all the planning from technocrats in government, the crisis proved a mockery. Decisions were made on the fly. Inconsistencies abounded. Why were Lehman and WAMU allowed to go down when all other major institutions were saved? The simple way to handle a crisis was to throw the full weight of the government behind any large failing enterprise. Thus begat the phrase too big to fail.
Investors are now conditioned to recognize the willingness of governments to support the integrity of large financial institutions, skewing the risk/reward dynamic for securities of those entities. Why should the senior notes of a large bank be viewed differently than an equivalent risk senior note of a brewer? And if banks are just extensions of the federal government, then perhaps they should be owned and operated as such?
Authority bias
We want to believe those in the know badly, so badly we’ll pay for access to those authorities. The crisis exposed a tremendous amount of authority bias. For the authorities know no more about the future than the person on the street. The authority does have access to a larger set of real-time data, presumably. Perhaps they have a better appreciation for risk, yet that does not lead to a better understanding of the future. The crisis demonstrated the limited value added from notable financial institutions, advisors and managers, none of whom foresaw the oncoming crisis or its extent.
The unquoted value of cash
When the markets began to sell-off heavily, why didn’t investors immediately respond? Financial prices, it turns out, do not fully reveal emotions. There is a non-quoted value of holding cash, what economists refer to as liquidity preference. Fear is the culprit. Some called it the fear of catching a falling knife. If a security were trading for $100 on day 1, $80 on day 2, $60 on day 3, why even think of investing on day 4? You could invest at $40, only to see your investment worth $20 one day later.
It was well known on Wall Street that private equity investors were told by their limited partners not to place a call for cash, even though the LPs would have been legally obligated to deliver cash. It was also known that there were instances of large institutions being denied access to revolving credit facilities even though the banks had a similar legal obligation.
Holding a dollar was worth much more than a dollar, it seemed. There was no corresponding price quote, however. That’s why there is a paradox in investing. Market declines are the time to be investing, not shying from investing. We see the value of securities. The value of holding cash is intangible.
Failure to let market forces reach equilibrium
Because governments intervened to prevent Adam Smith’s invisible hand from exerting its proper influence, a set of consequences, some intended, some unintended, followed. This begs the question, what would have happened had government not responded with such accommodations? Several financial institutions would likely have gone bankrupt including most large securities firms. Depositors at several banks would have experienced losses to at least some of their deposits above FDIC limits. Fixed income investors in many surviving financial institutions would have seen the value of their securities significantly reduced. Money market investors would have suffered losses, an unthinkable outcome prior to the crisis. Collateralization requirements in structures like derivatives would have forced counterparty losses. In short, the system and many, many Americans would have been instantly hurt badly. Would it have been best, though, to let investors and managements that took risk bear the consequences of that risk? Regulators would have then upheld the rules of the road for all. After the pain, wouldn’t the system have reached equilibrium and sparked a rebuilding? Wouldn’t the world have relearned an important lesson about risk and return?
As it was, government intervention took the hurt and spread it over many years. Many investors and managements that took risk avoided the consequences of that risk due to government action. We preserved the financial system. At what cost? In substance, government action has taken from savers and taxpayers and given to those borrowing institutions many of which should have failed. This action has played out over a decade so, like inflation, the impact is hidden from direct view. To a bank, the cost of goods sold is represented by their cost to borrow money. Borrowing costs for banks have been at record lows now for nearly a decade, much in an attempt to salve wounds. Is this really what is meant when we speak of American capitalism?
Central banks have now set a new boundary level for financial stimulus with zero or negative interest rates, trillions of dollars in government supplied liquidity, and inconsistent treatment of security holders in imperiled institutions. What happens in the next crisis when central banks ease, but not as far as the old boundary? What if they provide liquidity but not as much as before? What message does that send? Perhaps central banks will be forced to exceed the prior boundaries lest they not be taken seriously?
Hints of things to come?
Government protections and regulations enacted following the Great Depression created the impression that banking panics were a thing of the past. Not true it turns out. The loss of confidence in the financial system was an unanticipated and unforeseen surprise to all. It serves to remind us that despite all the efforts to insulate the financial system, panic cannot be prevented.
Looking at developing countries in crisis, we get an idea of just how far governments can go to control financial panic: bank deposit freezes/confiscations (Brazil), cash withdrawal limits (Greece), bank bail-ins (Cyprus), retirement account confiscation (Argentina), currency exchange controls, just to name a few. Will these tactics used by less developed countries now become policy in the developed world under crisis? What will it mean to hold cash in that world?
Conditions precedent for another major dislocation?
Given that nearly 75 years passed between the last two panics, there’s good reason to believe another panic is unlikely anytime soon. Yet we know that the massive government interventions of the past decade have seriously impaired price discovery in the markets. Clearly, the removal of government subsidies will have an impact. The conditions are set, therefore, for a significant market downturn even without a panic. What could serve as the spark? Will Europe be forced to break apart or to federalize? Will China’s financial system collapse? Is there a black swan lurking in the US financial system? It’s far more likely a downturn will come from something unseen or ignored today. Given the sheer size of government intervention, it’s also more likely to be later rather than sooner.
It’s comforting to hear market warnings from so many managers/pundits. We can be certain, with 99.97% confidence, that they are in error. There are too many sophisticated investors calling for a market correction for it to happen now and it just makes too much good sense. It’s when those investors surrender to the market that we should worry. Make no mistake, the mammoth government subsidies will produce major market dislocations at some time. The laws of nature tell us so. We don’t know when. No one does. Someone will, however, make a timely call on the market’s demise, for as they say, even the broken clock is right twice a day.
August 19, 2018
This is not an easy book to follow but it is a necessary one in order to avoid being misled by bloviators of substance free self appointed spewers of financial misinformation. It deals intelligently with an incredibly complicated set of worldwide connections (financial, geo-political and sociological) and delves into one of the defining moments of our time period, the financial crisis and its aftermath.
If one reads a book about WW II, one should know the date September 1, 1939 as the date when it started and that way the narrative of the story telling never gets away from the reading of the book. Similarly, if one wants to understand our present times one must know the date September 15, 2008, the day that the ATMs almost did not deliver $20 bills and the day that the commercial paper almost ‘broke the buck’ if the government had not intervened. The day the world’s financial system almost collapsed. This book tells that day’s story, what led up to it and what happened after.
There’s a movie and a book that are cited by the author, ‘The Big Short’. They captured the craziness that led to the ‘great recession’. This book, ‘Crashed’, fills in the details and the aftermath and explains in a detailed and erudite fashion (unfortunately, this book does read complexly and I would even venture to say that the person who wrote the review on this book in the New York Times was not able to fully understand this book, but he definitely understood enough of why this book is important and relayed enough such that I knew I wanted to read this book. Even if a reader doesn’t know the difference between a ‘swap and a ‘repo’ or ‘reverse repo’ a reader will get the gist of the book).
The author explains the world before September 15, 2008 and what led to it, then highlights the FED and what America did right, and then looks at the pre and post 2011 period and the self inflicted chaos that Europe and Asia foisted on themselves when they wrongly dealt with the systemic problem inherent in the financial system. The world and its parts are globally connected and made of many moving parts. NATO matters and Putin was an authoritarian thrower of monkey wrenches even in those days and wanted to create chaos mainly against America and in order to try to expand his hegemony at any cost even if it meant unilaterally selling MBSs in order to hurt America just for its own sake, and China did smart things and then did stupid things.
Confidence fairies (bond vigilantes) and austerity hawks (lovers of misery for others, but never for themselves) riled against all the solutions that worked and mindlessly echoed empty slogans such as ‘don’t debase the dollar’ and ‘runaway inflation is the real threat’ and ‘balance the budget to restore prosperity’ in their substance fact free universe while preaching against every single reasonable action while being wrong about everything. The author does specifically quote from Fox News, Brietbart News and Steve Bannon, Glenn Beck and Niall Ferguson (sp?) as gloom and doom substance free and fact free mongers who had nothing but fear and feelings as their guidepost as they spouted those empty slogans. That kind of substance free critic never gets proved wrong since they have no solutions but only offer substance free criticism void of data or academic rigor. They can never fail. They can only be failed by imaginary others, and they never let facts get in the way of the false version of reality they create, because in the end they need FUD (fear, uncertainty and doubt) in order to maintain ignorance so they can ultimately keep people afraid and try to convince you to hate the same people they hate. This book is an antidote to that stupidity.
A major theme of the book is that blame for the crisis was put on ‘politicians, workers and welfare recipients’ and not on the real culprits ‘bankers and financial institutions’. As stated in this book, at the start of the crisis Fox News and other right wing outlets blamed the Community Reinvestment Act (CRA) for the crisis for allowing minorities to have subpar loans thus in their twisted world view causing the complete melt down of the housing market. This book will provide data, facts, and a narrative shooting down such irresponsible statements. The bankers and the financial institutions (with the assistance of the rating agencies) almost destroyed the financial stability of the world and their enablers in the media put the blame on politicians and regulators, workers and welfare recipients (remember, they used to say 47% of Americans don’t pay taxes as if that was the cause of the rich bankers and financial institutions stealing and purposely creating a financial bubble. The only honest thing Greenspan ever said was ‘I’m shocked, I can’t believe it. The bankers lied to me’).
We live in a complex world within a web of interlocking connections. Simpletons love to get on TV and spout their idle chatter on subjects that they know nothing about all the while thinking that the more they talk about the subject means the more they know, when in reality it’s the converse, the more they talk the less informed they are.
Reality is complex, and the financial world and its interactions are not easily comprehended. The hateful want us to remain ignorant of the connections and it is easy for them to shout ‘fake news’ and spout substance free idle chatter on my TV in order to control us through fear. The truth is out there but it sometimes takes effort to find it and understand it.
It’s not easy to understand what happened. It is easy to be misled. A book like this one goes a long way towards immunizing us from the virus of substance free deceivers.
If one reads a book about WW II, one should know the date September 1, 1939 as the date when it started and that way the narrative of the story telling never gets away from the reading of the book. Similarly, if one wants to understand our present times one must know the date September 15, 2008, the day that the ATMs almost did not deliver $20 bills and the day that the commercial paper almost ‘broke the buck’ if the government had not intervened. The day the world’s financial system almost collapsed. This book tells that day’s story, what led up to it and what happened after.
There’s a movie and a book that are cited by the author, ‘The Big Short’. They captured the craziness that led to the ‘great recession’. This book, ‘Crashed’, fills in the details and the aftermath and explains in a detailed and erudite fashion (unfortunately, this book does read complexly and I would even venture to say that the person who wrote the review on this book in the New York Times was not able to fully understand this book, but he definitely understood enough of why this book is important and relayed enough such that I knew I wanted to read this book. Even if a reader doesn’t know the difference between a ‘swap and a ‘repo’ or ‘reverse repo’ a reader will get the gist of the book).
The author explains the world before September 15, 2008 and what led to it, then highlights the FED and what America did right, and then looks at the pre and post 2011 period and the self inflicted chaos that Europe and Asia foisted on themselves when they wrongly dealt with the systemic problem inherent in the financial system. The world and its parts are globally connected and made of many moving parts. NATO matters and Putin was an authoritarian thrower of monkey wrenches even in those days and wanted to create chaos mainly against America and in order to try to expand his hegemony at any cost even if it meant unilaterally selling MBSs in order to hurt America just for its own sake, and China did smart things and then did stupid things.
Confidence fairies (bond vigilantes) and austerity hawks (lovers of misery for others, but never for themselves) riled against all the solutions that worked and mindlessly echoed empty slogans such as ‘don’t debase the dollar’ and ‘runaway inflation is the real threat’ and ‘balance the budget to restore prosperity’ in their substance fact free universe while preaching against every single reasonable action while being wrong about everything. The author does specifically quote from Fox News, Brietbart News and Steve Bannon, Glenn Beck and Niall Ferguson (sp?) as gloom and doom substance free and fact free mongers who had nothing but fear and feelings as their guidepost as they spouted those empty slogans. That kind of substance free critic never gets proved wrong since they have no solutions but only offer substance free criticism void of data or academic rigor. They can never fail. They can only be failed by imaginary others, and they never let facts get in the way of the false version of reality they create, because in the end they need FUD (fear, uncertainty and doubt) in order to maintain ignorance so they can ultimately keep people afraid and try to convince you to hate the same people they hate. This book is an antidote to that stupidity.
A major theme of the book is that blame for the crisis was put on ‘politicians, workers and welfare recipients’ and not on the real culprits ‘bankers and financial institutions’. As stated in this book, at the start of the crisis Fox News and other right wing outlets blamed the Community Reinvestment Act (CRA) for the crisis for allowing minorities to have subpar loans thus in their twisted world view causing the complete melt down of the housing market. This book will provide data, facts, and a narrative shooting down such irresponsible statements. The bankers and the financial institutions (with the assistance of the rating agencies) almost destroyed the financial stability of the world and their enablers in the media put the blame on politicians and regulators, workers and welfare recipients (remember, they used to say 47% of Americans don’t pay taxes as if that was the cause of the rich bankers and financial institutions stealing and purposely creating a financial bubble. The only honest thing Greenspan ever said was ‘I’m shocked, I can’t believe it. The bankers lied to me’).
We live in a complex world within a web of interlocking connections. Simpletons love to get on TV and spout their idle chatter on subjects that they know nothing about all the while thinking that the more they talk about the subject means the more they know, when in reality it’s the converse, the more they talk the less informed they are.
Reality is complex, and the financial world and its interactions are not easily comprehended. The hateful want us to remain ignorant of the connections and it is easy for them to shout ‘fake news’ and spout substance free idle chatter on my TV in order to control us through fear. The truth is out there but it sometimes takes effort to find it and understand it.
It’s not easy to understand what happened. It is easy to be misled. A book like this one goes a long way towards immunizing us from the virus of substance free deceivers.
September 18, 2023
Is there any route to international and domestic order? Can we achieve perpetual stability and peace? Does law offer the answer? Or must we rely on the balance of terror and the judgment of technicians and generals?
Tooze dazzles in this hefty, heady, tome - beginning with the 2007-8 Credit Collapse and ending with the Trump Administration. This is history of the highest order. The author keeps all the plates spinning as he ventures across global markets, looking for fissures in the networks. Merkel and Brexit are just two astonishing of the subjects explored. The analysis is heavy on technical jargon but it is the human foibles which emerge amidst the complacency and the arrogance. Multinational organizations subvert democratic institutions when matters become dire. Proles in general and particularly white people become anxious and often resentful. Certain events are only eluded, the Arab Spring and the Snowden revelations are mentioned but the impact of both is largely left unrepresented, except where the uprisings across Middle East and North Africa unsettled Putin regarding his sense of security amidst public dissent.
Tooze dazzles in this hefty, heady, tome - beginning with the 2007-8 Credit Collapse and ending with the Trump Administration. This is history of the highest order. The author keeps all the plates spinning as he ventures across global markets, looking for fissures in the networks. Merkel and Brexit are just two astonishing of the subjects explored. The analysis is heavy on technical jargon but it is the human foibles which emerge amidst the complacency and the arrogance. Multinational organizations subvert democratic institutions when matters become dire. Proles in general and particularly white people become anxious and often resentful. Certain events are only eluded, the Arab Spring and the Snowden revelations are mentioned but the impact of both is largely left unrepresented, except where the uprisings across Middle East and North Africa unsettled Putin regarding his sense of security amidst public dissent.
August 17, 2018
This book feels like being post-prandially cornered in your living room by a somewhat inebriated and chatty guest that goes on and on telling in no particular order unfocused anecdotes and grand ideas he gathered from other people or read about, throwing in some political commentary to boot. Although the author sometimes, out of the blue, makes some apt statement, he seems to lack the ability to discern between what is really important and what is not, and to order his thoughts. Having myself traded through several major financial crises, written a textbook, and taught seminars on the subject, I find this offering not wholly uninteresting but quite underwhelming.
November 13, 2023
To the student of contemporary political economy, this brick is, dare I say, indispensable. To the rest of us, perhaps not so much, and I did find myself flagging and sagging under all the information contained within...this book is surely *the* definitive guide to 2008–2016 in geo-economic terms, exhaustive to the point of exhaustion on this reader's part.
I'm also kind of used to the leaden style that usually accompanies books such as this (there must be some kind of law laid down somewhere in the founding documents of modern social science), but I can happily report that, in terms of form, Adam Tooze can write a sentence (for an economic historian, at least!), and successfully communicates the growing sense of urgency that the recent past was marked by. Indeed, given that, for the layperson, the immediate causes and aftermath of 2008-09 were more than adequately covered elsewhere, you could almost skip ahead to past halfway, when the heretofore under-reported Eurozone crisis really starts to ramp up (with 2015 as that crisis' climacteric)—and Tooze's book along with it, where the tone and cadences take on an almost breathless sense of foreboding (again: almost!).
The four stars, then, are because it is perhaps, at present and for now, the "authoritative" study of its time (i.e. subject to intense scholarly scrutiny and debate), not because of how much I liked its company. That varied from a 2-2.5 star first half, to a 4, even 5 star experience towards the end, especially when Tooze analyses the phenomena of 2010-15 Germany, say, or Greece, or Brexit, or Trump. Then I almost wished it wouldn't end...almost.
I've lingered some time in these silent seas of poli-econ, green and red (makes...brown?)...
Time to get back to some fiction, lest I drown.
I'm also kind of used to the leaden style that usually accompanies books such as this (there must be some kind of law laid down somewhere in the founding documents of modern social science), but I can happily report that, in terms of form, Adam Tooze can write a sentence (for an economic historian, at least!), and successfully communicates the growing sense of urgency that the recent past was marked by. Indeed, given that, for the layperson, the immediate causes and aftermath of 2008-09 were more than adequately covered elsewhere, you could almost skip ahead to past halfway, when the heretofore under-reported Eurozone crisis really starts to ramp up (with 2015 as that crisis' climacteric)—and Tooze's book along with it, where the tone and cadences take on an almost breathless sense of foreboding (again: almost!).
The four stars, then, are because it is perhaps, at present and for now, the "authoritative" study of its time (i.e. subject to intense scholarly scrutiny and debate), not because of how much I liked its company. That varied from a 2-2.5 star first half, to a 4, even 5 star experience towards the end, especially when Tooze analyses the phenomena of 2010-15 Germany, say, or Greece, or Brexit, or Trump. Then I almost wished it wouldn't end...almost.
I've lingered some time in these silent seas of poli-econ, green and red (makes...brown?)...
Time to get back to some fiction, lest I drown.
December 17, 2018
Financial crisis leads to sovereign debt crisis which leads to the rise of populism which paves the way for a Trump election.
There have been hundreds of books written about the financial crisis, but Tooze's new work is the first I have come across that illustrates the path that lead us to where we are today. In the age of global integration, financial markets and political policy walk hand-in-hand, and Tooze does a nice job of showing us how the markets have shaped the course of events for the last decade.
It's not a particularly cheerful read, but it is valuable and informative. Recommend it for those who want to understand how we got here, rather than just gnash their teeth and complain about it.
There have been hundreds of books written about the financial crisis, but Tooze's new work is the first I have come across that illustrates the path that lead us to where we are today. In the age of global integration, financial markets and political policy walk hand-in-hand, and Tooze does a nice job of showing us how the markets have shaped the course of events for the last decade.
It's not a particularly cheerful read, but it is valuable and informative. Recommend it for those who want to understand how we got here, rather than just gnash their teeth and complain about it.
February 27, 2023
This was a massively informative book about the 2007-2008 financial crisis and all its political implications, causes and consequences. The author does not analyze all that much, this is mainly a presentation of facts. Some of it is new, but most of it is not. I don't think enough has changed, at least not in terms of regulation and this all-consuming belief that the market will fix everything by itself. It will not. It's grossly unfair that subprime loan takers lost their homes in the millions, whereas banks and billionaires were saved by governments. In the United States it's every poor man for himself, whereas socialism applies for the richest. Don't worry, the author does not spend a lot of time on this, he prefers dry, die-hard facts.
June 18, 2019
This is an undoubtedly brilliant account of the 2008 financial crises, both laying out the causes and the long term economic and political consequences of the events. But it's a highly technical account and a bit too dense for what I feel like consuming at this time.
October 15, 2019
Crashed: How a Decade of Financial Crises Changed the World, by Adam Tooze is an epic look at the financial crisis of 2008 and its aftermath up to the present day. Tooze examines both the 2008 crisis in its origins within the sketchy Mortgage Baked Securities (MBS) trade, and the growth of Asset Backed Commercial Paper (ABCP) and the influence of the repo market in US securities trading. The trade in MBS had some inherent flaws, due to the creation of tranche's of bad debt that was mixed with solid real estate debt, given a AAA credit rating by ratings agencies. This high rating on bad debt was due to the the mixing of debt, its backing in commercial paper, and various insurance guarantees that sought to reduce risk and ensure a high rating. Coupled with a climate of Wall Street deregulation within the US and international governments, the increase in international banking and portfolio diversification, and increasing power within the financial community over politics, the 2008 crisis would have a major impact. It shook the fabric of confidence in Capitalism, and to this day has encouraged the growth of populist nationalism, spelling doom for traditional centrist parties, and leading to major policy upheavals across the globe, from Brexit, to Trump's pivot homeward, to the Russian conflicts in Ukraine and Georgia, and the growth of illiberal democracy in Hungary, Poland and Turkey, and the Eurozone Debt Crisis itself.
The previous decade has seen major financial upheaval in the Western world. Tooze notes the use of military doctrine in the US as they settled the financial crisis of 2008, partially nationalized numerous institutions, and increased the power of the Fed to act outside democratic traditions, in the name of banking and financial stability. These powers were not permanent, the Fed began to be questioned by populists on both the right and left, culminating in the Trump election. However, the established business interests in the United States have gained much in the way of power and clout, if not in social acceptance. Wall Street has come out ahead in the financial crisis, although things looked dicey in 2008. Banks are larger than ever, interests rates are currently rising, financial regulation from 2008 is slowly being peeled back, and so forth. Even so, Tooze does have a healthy dose of respect for how quickly the US was able to recover from the financial crisis. Although things continue to be tough in the United States, and foreclosures on homes did not peak until years after 2008, the US was able to stabilize its economy and avoid massive social disruption due to its proactive response to the crisis. The use of debt recapitalization, the Quantitative Easing (QE) program run by the Fed, and the bipartisan response from both political parties (at the time) led to a stabilization of the economy, and the avoidance of massive austerity programs and social unrest, as was experienced in Europe. Tooze is critical of the new Trump administration, and the growth of serious partisanism in the US. The Tea Party faction of the Republican Party, for example, held US debt hostage in 2013, and the following shutdown in 2018-2019 (past the publication of this book) show that political parties in the states are so at odds that they are willing to see the government shut down, and funding to social programs cease, just to score points politically. Another issue noted by Tooze is the continuing deregulation of the banking sector and Wall Street. This creates a dangerous precedent where many of the issues that lead to the 2008 crisis are returning to the for - lax regulation, rampant executive bonus schemes, the use of ABCP as a safe alternative to US treasuries, and so on.
In the Eurozone the crisis was much more protracted. The Europeans often blame American banking instability and lack of fiscal prudence for the crisis. The crisis did, after all, originate in the US with a US real estate collapse. However, the two main issues with Europe were not America's fault. Banks in Europe were massively overexposed to US ABCP. Due to the use of the US dollar as a reserve currency globally, and a lack of Euro financial regulation (within the EU), banks dealt ABCP in place of US securities as ABCP had a slightly higher return and were hot items on various markets globally. The Eurozone had a higher amount of financial trade with the United States that China did at the time, the butt of many financial rags analysis at the time. This overexposure and alck of European wide financial regulation led to some very silly figures - Ireland for example had banking debt at 7x its GDP. Greece, Spain, Portugal and Italy (dubbed the PIIGS) were also experiencing financial bubbles. Spain and Ireland were experiencing massive real estate booms. Greece and Portugal were poorer EU nations trying to modernize their economies and raise their social mobility and stability. Italy was over leveraged, although not massively, but this did not matter in the face of the financial recession. Suddenly US ABCP were trading at less and less value, and banks were making less and less money off their short sell tactics on the repo markets. This led to many billions of dollars being erased off the books of European banks. It also led to banks in Europe being deemed too risky to deal with. This effected national economies on a grand scale. Ireland toyed with bankruptcy. Greece and Portugal were slowly being recognized as risky investments, affecting their ability to interact with the global market. Spain's real estate bubble collapsed. And Italy began to buckle under the strain. Other European nations were affected too. The UK suffered from a major lose of banking confidence. France's banks were exposed to some bad debt. Switzerland struggled. The European Central Bank (ECB) could not contain it. It was hampered both by its inability to meddle in national sovereignty, and German financial culture. This second bit was a major source of Europe's prolonged crisis. Germany's economy was hot up to and after the crisis. Exports were booming and German banks were doing business across Europe. Germany's good credit was largely keeping the Euro over inflated - Greek bonds were considered as safe as German bonds due to their denomination in Euros. And Germany did not want to foot the bill for others financial "misguidance". Germany espoused a type of tough fiscal prudence - tightening the belt, keeping expenses balanced, and fiscal austerity for the bad actors. This of course did not apply to Germany, which was booming from its export orientated power. Greek sovereign debt? Too bad, German taxpayers won't pay. Angela Merkel strongly resisted any effort to coordinate a financial rescue - instead opting to limit exposure and contagion by imposing harsh terms on the Greek, Portuguese, Spanish and Italian governments. Greek and Italy effectively had their governments removed by the Troika (EU, ECB, IMF) and replaced by technocrats without elections. Wages, benefits, and jobs were slashed to a high degree. The level of austerity was so absurd and ineffective, that Greece's economy was still considered toxic, not due to its bad debt, but to its completely frail economy. The German's went on a rampage of punishment, which did no one good, save for staving off the rise of Germany's far-right AFD and Merkel's survival in the Bundestag. The ECB subscribed largely to this way of thinking. In the US the crisis was largely solved through the use of Fed driven recapitalization schemes, the purchasing of bad bank debt, and large amounts of money promised to restore market confidence. In Europe, the crisis dragged on because the ECB and the EU could not agree on a program of ECB Eurobond issuance. This would infringe on precious national sovereignty, and Germany might be held to account for its exploitative and self-centered economic policies. Eventually, Merkel came around, but only after serious social unrest in Greece, and the election of Far Left parties in Portugal and Greece which subtly (in Portugal) or overtly (in Greece) challenged the Troika. This group came to be seen as monsters for their unflinchingly cold fiscal austerity. Youth unemployment hit record levels in Greece and Spain, and the Italian public lost faith in their technocratic centrists, soon voting in a far right league of parties still in power today. Europe's crisis has left a tainted legacy. The Far Right are on the rise across the Eurozone, with elections in Italy turning in a far right party, and electoral success for nationalists in France, the Netherlands, Austria and more. The UK was largely disappointed with the EU during the crisis. David Cameron and the conservatives sought an exemption from financial transfer taxes for the City of London. When this was denied, they petulantly sought Brexit - an ongoing crisis that may result in the final nail in the City's coffin.
In Eastern Europe the crisis also led to serious upheaval. Debt crisis struck outside the Eurozone - Hungary, Poland, the Baltic's (in the Euro-area) and other nations struggled with debt, and sought IMF emergency packages which led to the usual short sighted fiscal austerity. These nations began to rebel. Hungary elected a far right populist turning Hungary into an illiberal democracy (Orban's words). Poland elected the PiS and began to crack down on judicial and legislative independence. Georgia and Ukraine - seeking greater integration into the EU and Atlanticist world, were forgotten. Russia, scorned by the world in the early 2000's, went hard autocrat and began invasions of first Georgia, then Ukraine in territorial seizures that are unknown in the modern world. Georgia was slapped down, and Ukraine continues to struggle with political decay, separatism, and warfare. The Eurozone was heavily leveraged in Eastern Europe, with many banks heavily investing to modernize the former Soviet worlds economics, and buy up valuable assets on the cheap. This exposure particularly effected banks in Sweden, France, Italy and the Netherlands - and the policy decisions were as varied as the countries involved.
The legacy of crisis from the Great Recession (so dubbed) continues to this day. China continues to exert more clout on the international stage, and is beginning to further reject Western Liberalism as an ideal. Many other countries (Hungary, the US, Poland, Turkey, and more) seem to be following suit. Hard to blame them. The 2008 crisis had no consequences for those that designed its shoddy system. They walked away with massive bonuses. Many of the politicians that worked on the crisis in the US and Europe now work for major financial institutions like Goldman Sachs. This is a prime example of industry capture, and is the main reason behind growing unrest with systems of globalization, free trade, Liberalism, and so on. Traditionally the avenue of the Left, a transcendence of politics has occurred, with the Democratic left in the states largely supporting copratist government protection of big business at the expense of the tax paying poor, with the Tea Party-nationalist right taking over as the main party of anti-globalization. Funny how things change huh?
Tooze's book is fantastic and highly readable. He engages in technical analysis as a way to record history. This fits his thesis, which is politics and economics are intertwined. Clearly, from his account of the crisis, one can see how political motivations (the survival of Merkel's CDP in Germany, the conflict between a growing partisan split in US parties and their inability to resolve conflict effectively etc.) has effected economic decisions (saving the Greek people from crippling austerity, growing the power of the far right, etc.). Discontent continues to be prevalent as we continue to note the predatory nature of the relationship between government and market, and its exploitative effect on individuals and nations across the world. As inequality continues to grow, and we struggle with concepts of secular stagnation, precarious work, roboticization of jobs and so on, Capitals control over every aspect of our lives becomes increasingly clear, and increasingly more unstable. Tooze ponders what would happen if Trump's administration is hit by a financial crisis, noting that it would be much more difficult to come to a bipartisan decision, and that splits within the Republican party could be disastrous. Whatever the case, this is a fantastic read and worthy of the attention of any reader interested in the crisis as history and politics.
The previous decade has seen major financial upheaval in the Western world. Tooze notes the use of military doctrine in the US as they settled the financial crisis of 2008, partially nationalized numerous institutions, and increased the power of the Fed to act outside democratic traditions, in the name of banking and financial stability. These powers were not permanent, the Fed began to be questioned by populists on both the right and left, culminating in the Trump election. However, the established business interests in the United States have gained much in the way of power and clout, if not in social acceptance. Wall Street has come out ahead in the financial crisis, although things looked dicey in 2008. Banks are larger than ever, interests rates are currently rising, financial regulation from 2008 is slowly being peeled back, and so forth. Even so, Tooze does have a healthy dose of respect for how quickly the US was able to recover from the financial crisis. Although things continue to be tough in the United States, and foreclosures on homes did not peak until years after 2008, the US was able to stabilize its economy and avoid massive social disruption due to its proactive response to the crisis. The use of debt recapitalization, the Quantitative Easing (QE) program run by the Fed, and the bipartisan response from both political parties (at the time) led to a stabilization of the economy, and the avoidance of massive austerity programs and social unrest, as was experienced in Europe. Tooze is critical of the new Trump administration, and the growth of serious partisanism in the US. The Tea Party faction of the Republican Party, for example, held US debt hostage in 2013, and the following shutdown in 2018-2019 (past the publication of this book) show that political parties in the states are so at odds that they are willing to see the government shut down, and funding to social programs cease, just to score points politically. Another issue noted by Tooze is the continuing deregulation of the banking sector and Wall Street. This creates a dangerous precedent where many of the issues that lead to the 2008 crisis are returning to the for - lax regulation, rampant executive bonus schemes, the use of ABCP as a safe alternative to US treasuries, and so on.
In the Eurozone the crisis was much more protracted. The Europeans often blame American banking instability and lack of fiscal prudence for the crisis. The crisis did, after all, originate in the US with a US real estate collapse. However, the two main issues with Europe were not America's fault. Banks in Europe were massively overexposed to US ABCP. Due to the use of the US dollar as a reserve currency globally, and a lack of Euro financial regulation (within the EU), banks dealt ABCP in place of US securities as ABCP had a slightly higher return and were hot items on various markets globally. The Eurozone had a higher amount of financial trade with the United States that China did at the time, the butt of many financial rags analysis at the time. This overexposure and alck of European wide financial regulation led to some very silly figures - Ireland for example had banking debt at 7x its GDP. Greece, Spain, Portugal and Italy (dubbed the PIIGS) were also experiencing financial bubbles. Spain and Ireland were experiencing massive real estate booms. Greece and Portugal were poorer EU nations trying to modernize their economies and raise their social mobility and stability. Italy was over leveraged, although not massively, but this did not matter in the face of the financial recession. Suddenly US ABCP were trading at less and less value, and banks were making less and less money off their short sell tactics on the repo markets. This led to many billions of dollars being erased off the books of European banks. It also led to banks in Europe being deemed too risky to deal with. This effected national economies on a grand scale. Ireland toyed with bankruptcy. Greece and Portugal were slowly being recognized as risky investments, affecting their ability to interact with the global market. Spain's real estate bubble collapsed. And Italy began to buckle under the strain. Other European nations were affected too. The UK suffered from a major lose of banking confidence. France's banks were exposed to some bad debt. Switzerland struggled. The European Central Bank (ECB) could not contain it. It was hampered both by its inability to meddle in national sovereignty, and German financial culture. This second bit was a major source of Europe's prolonged crisis. Germany's economy was hot up to and after the crisis. Exports were booming and German banks were doing business across Europe. Germany's good credit was largely keeping the Euro over inflated - Greek bonds were considered as safe as German bonds due to their denomination in Euros. And Germany did not want to foot the bill for others financial "misguidance". Germany espoused a type of tough fiscal prudence - tightening the belt, keeping expenses balanced, and fiscal austerity for the bad actors. This of course did not apply to Germany, which was booming from its export orientated power. Greek sovereign debt? Too bad, German taxpayers won't pay. Angela Merkel strongly resisted any effort to coordinate a financial rescue - instead opting to limit exposure and contagion by imposing harsh terms on the Greek, Portuguese, Spanish and Italian governments. Greek and Italy effectively had their governments removed by the Troika (EU, ECB, IMF) and replaced by technocrats without elections. Wages, benefits, and jobs were slashed to a high degree. The level of austerity was so absurd and ineffective, that Greece's economy was still considered toxic, not due to its bad debt, but to its completely frail economy. The German's went on a rampage of punishment, which did no one good, save for staving off the rise of Germany's far-right AFD and Merkel's survival in the Bundestag. The ECB subscribed largely to this way of thinking. In the US the crisis was largely solved through the use of Fed driven recapitalization schemes, the purchasing of bad bank debt, and large amounts of money promised to restore market confidence. In Europe, the crisis dragged on because the ECB and the EU could not agree on a program of ECB Eurobond issuance. This would infringe on precious national sovereignty, and Germany might be held to account for its exploitative and self-centered economic policies. Eventually, Merkel came around, but only after serious social unrest in Greece, and the election of Far Left parties in Portugal and Greece which subtly (in Portugal) or overtly (in Greece) challenged the Troika. This group came to be seen as monsters for their unflinchingly cold fiscal austerity. Youth unemployment hit record levels in Greece and Spain, and the Italian public lost faith in their technocratic centrists, soon voting in a far right league of parties still in power today. Europe's crisis has left a tainted legacy. The Far Right are on the rise across the Eurozone, with elections in Italy turning in a far right party, and electoral success for nationalists in France, the Netherlands, Austria and more. The UK was largely disappointed with the EU during the crisis. David Cameron and the conservatives sought an exemption from financial transfer taxes for the City of London. When this was denied, they petulantly sought Brexit - an ongoing crisis that may result in the final nail in the City's coffin.
In Eastern Europe the crisis also led to serious upheaval. Debt crisis struck outside the Eurozone - Hungary, Poland, the Baltic's (in the Euro-area) and other nations struggled with debt, and sought IMF emergency packages which led to the usual short sighted fiscal austerity. These nations began to rebel. Hungary elected a far right populist turning Hungary into an illiberal democracy (Orban's words). Poland elected the PiS and began to crack down on judicial and legislative independence. Georgia and Ukraine - seeking greater integration into the EU and Atlanticist world, were forgotten. Russia, scorned by the world in the early 2000's, went hard autocrat and began invasions of first Georgia, then Ukraine in territorial seizures that are unknown in the modern world. Georgia was slapped down, and Ukraine continues to struggle with political decay, separatism, and warfare. The Eurozone was heavily leveraged in Eastern Europe, with many banks heavily investing to modernize the former Soviet worlds economics, and buy up valuable assets on the cheap. This exposure particularly effected banks in Sweden, France, Italy and the Netherlands - and the policy decisions were as varied as the countries involved.
The legacy of crisis from the Great Recession (so dubbed) continues to this day. China continues to exert more clout on the international stage, and is beginning to further reject Western Liberalism as an ideal. Many other countries (Hungary, the US, Poland, Turkey, and more) seem to be following suit. Hard to blame them. The 2008 crisis had no consequences for those that designed its shoddy system. They walked away with massive bonuses. Many of the politicians that worked on the crisis in the US and Europe now work for major financial institutions like Goldman Sachs. This is a prime example of industry capture, and is the main reason behind growing unrest with systems of globalization, free trade, Liberalism, and so on. Traditionally the avenue of the Left, a transcendence of politics has occurred, with the Democratic left in the states largely supporting copratist government protection of big business at the expense of the tax paying poor, with the Tea Party-nationalist right taking over as the main party of anti-globalization. Funny how things change huh?
Tooze's book is fantastic and highly readable. He engages in technical analysis as a way to record history. This fits his thesis, which is politics and economics are intertwined. Clearly, from his account of the crisis, one can see how political motivations (the survival of Merkel's CDP in Germany, the conflict between a growing partisan split in US parties and their inability to resolve conflict effectively etc.) has effected economic decisions (saving the Greek people from crippling austerity, growing the power of the far right, etc.). Discontent continues to be prevalent as we continue to note the predatory nature of the relationship between government and market, and its exploitative effect on individuals and nations across the world. As inequality continues to grow, and we struggle with concepts of secular stagnation, precarious work, roboticization of jobs and so on, Capitals control over every aspect of our lives becomes increasingly clear, and increasingly more unstable. Tooze ponders what would happen if Trump's administration is hit by a financial crisis, noting that it would be much more difficult to come to a bipartisan decision, and that splits within the Republican party could be disastrous. Whatever the case, this is a fantastic read and worthy of the attention of any reader interested in the crisis as history and politics.
May 21, 2019
This book requires full reader's attention and is not an easy read. Author is very knowledgeable on the topic, he did very good research and in eloquent way presented facts related to 2008 financial crisis. The strength of this book lies in its global approach to the problem, not focusing only on the US (likely because autor is a Brit). The interconnections among different markets are well described. The political background to financial decisions was well presented.
However, I have to admit that this book overwhelmed me at times. I think I reached for it at the wrong moment, I may come back to it in the future. I felt like I lacked some basic data and knowledge to understand all presented nuances in depth. I don't have any grounded financial background and I think having it would allow me to gain more from reading this book.
This book requires time. Some financial background would be helpful. It is very good and comprehensive for prepared mind.
However, I have to admit that this book overwhelmed me at times. I think I reached for it at the wrong moment, I may come back to it in the future. I felt like I lacked some basic data and knowledge to understand all presented nuances in depth. I don't have any grounded financial background and I think having it would allow me to gain more from reading this book.
This book requires time. Some financial background would be helpful. It is very good and comprehensive for prepared mind.
June 27, 2020
It took me four months to finish this book. But it is worth it. Excellent book on the period between 2007 and 2017.
Read
February 21, 2023DNF. I say this as someone who has a bachelor's degree in finance, this book is a slog of financial/banking jargon. And sure, the author is clearly very knowledgeable, and makes a lot of good points, and discusses important topics...but I do not have the patience to spend several minutes analyzing every paragraph to figure out what's what. This is just too technically dense to be an engaging read for me.
November 14, 2021
What a thriller, can barely imagine how it must've felt living through this decade. Found myself pausing the book and looking up GDP numbers of countries like Greece and Italy, in the hope that it turned out okay, just to relieve some tension. I probably heavily underrated the importance of international money flows prior to this book. At least my impression after reading Crashed is that affordable access to loans from major international banks, which relies on favourable credit ratings, can make or break a country's economic growth and with that the power and approval of its government.
More than once I was surprised that Tooze focusses relatively little on concrete economic activity in his analysis. For example when looking into Greece, I don't remember him saying much about on-the-ground changes in what people work on. I figured that all increases in loans and imposed austerity needed to be somehow translated into more profitable economic activity. Otherwise the fundamental issues would stay unresolved, right?
General factors that contributed to the crises that I noted down while reading the book:
Incompetence of investment firms:
-- failure to realize strongly correlated risks in their assets
-- failure to realize that subprime mortgages were rated mostly by credit agencies who are more lenient
-- running highly leveraged risks
Incompetence of governments:
-- failure of acknowledging the interdependence of international banks
-- race to the bottom dynamics between US and Europe regarding loosing regulation for big investment banks, allowing highly speculative investment strategies
-- general lack of understanding of what is going on (e.g. quotes from Sarkozy and German finance minister Peer Steinbrück picture them very overconfident and significantly out of their depth)
-- politicians having to pander to the public (e.g. even though the initial economic stimulus in the US was very successful and should've been expanded, this wasn't done at least in part due to lack of public support)
-- Germany comes away really really badly in the book, mostly for it's constant pushing for austerity and unwillingness to expand its financial involvement in the EU... it's hard for me to evaluate this, but the basic story that economic crises do not demand austerity but the opposite, economic stimulus, seems very plausible to me. I wonder if the negative evaluation of Germany's role is consensus in the field of economics.
Incompetence of economists
-- prior 2008, discussing the possibility of a severe recession was apparently punished and sidetracked severely by the economic elites (e.g. Tooze tells a pretty unfavourable anecdote about Larry Summers)
Complexity of international finance , you really get the impression that this whole topic is just really complicated and deserves better political decision makers than what we're throwing at it right now
Corruption , e.g. Tooze often mentions key politicians being heavily involved with international banks, Citi Bank being heavily involved with the Democrats, as a relevant factor in decisions
I really liked the book, it's well written and I think I understand many topics better now. But as a complete stranger to the topic, I didn't understand many aspects, and Tooze doesn't explain some technical terms, so for people like me I probably would recommend either reading it slowly and looking up unknown terms or ideas, and maybe reading a few introductory articles to international finance beforehand.
„Though we might wish otherwise, the world economy is not run by medium-sized “Mittelstand” entrepreneurs but by a few thousand massive corporations, with interlocking shareholdings controlled by a tiny group of asset managers.“
More than once I was surprised that Tooze focusses relatively little on concrete economic activity in his analysis. For example when looking into Greece, I don't remember him saying much about on-the-ground changes in what people work on. I figured that all increases in loans and imposed austerity needed to be somehow translated into more profitable economic activity. Otherwise the fundamental issues would stay unresolved, right?
General factors that contributed to the crises that I noted down while reading the book:
Incompetence of investment firms:
-- failure to realize strongly correlated risks in their assets
-- failure to realize that subprime mortgages were rated mostly by credit agencies who are more lenient
-- running highly leveraged risks
Incompetence of governments:
-- failure of acknowledging the interdependence of international banks
-- race to the bottom dynamics between US and Europe regarding loosing regulation for big investment banks, allowing highly speculative investment strategies
-- general lack of understanding of what is going on (e.g. quotes from Sarkozy and German finance minister Peer Steinbrück picture them very overconfident and significantly out of their depth)
-- politicians having to pander to the public (e.g. even though the initial economic stimulus in the US was very successful and should've been expanded, this wasn't done at least in part due to lack of public support)
-- Germany comes away really really badly in the book, mostly for it's constant pushing for austerity and unwillingness to expand its financial involvement in the EU... it's hard for me to evaluate this, but the basic story that economic crises do not demand austerity but the opposite, economic stimulus, seems very plausible to me. I wonder if the negative evaluation of Germany's role is consensus in the field of economics.
Incompetence of economists
-- prior 2008, discussing the possibility of a severe recession was apparently punished and sidetracked severely by the economic elites (e.g. Tooze tells a pretty unfavourable anecdote about Larry Summers)
Complexity of international finance , you really get the impression that this whole topic is just really complicated and deserves better political decision makers than what we're throwing at it right now
Corruption , e.g. Tooze often mentions key politicians being heavily involved with international banks, Citi Bank being heavily involved with the Democrats, as a relevant factor in decisions
I really liked the book, it's well written and I think I understand many topics better now. But as a complete stranger to the topic, I didn't understand many aspects, and Tooze doesn't explain some technical terms, so for people like me I probably would recommend either reading it slowly and looking up unknown terms or ideas, and maybe reading a few introductory articles to international finance beforehand.
June 19, 2020
It's the politics, stupid!
Il messaggio finale di questo esteso ed approfondito saggio potrebbe essere infatti questo: ogni scelta in materia economica è comunque sempre una scelta politica - il famigerato acronimo thatcheriano TINA (There is No Alternative) è la mistificazione di chi copre la propria volontà politica con false necessità tecniche.
La crisi del 2008 e le sue ripercussioni sull'Eurozona e sulla finanza globale nascono da precise decisioni di politica economica e monetaria: Tooze è chiaro e coerente nella sua analisi, mettendo in evidenza il perchè dell'emergere delle crisi e il come sono state gestite. L'impianto è squisitamente keynesiano, ma con la onestà intellettuale di indicare le motivazioni di scelte fallaci (viste a posteriori) come la deregolamentazione regolatoria in finanza e l'ossessione dell'austerità.
Lettura scorrevole e affrontabile anche in lingua originale da parte di chi (come il sottoscritto) ha scarse competenze economiche e finanziarie: certo, ci vuole pazienza e attenzioni per non perdersi nella giungla dei prodotti finanziari complessi (CDO, CDS, MBS, RePo e via così...). Ma lo stile è agile, ricco anche di uscite ironiche e qualche retroscenismo salace (specie per le vicende europee) che alleggeriscono il peso delle questioni monetarie e finanziarie.
Grazie ad alcuni punti davvero interessanti e poco conosciuti la lettura è stata per me soddisfacente ad appassionante:
- è stata la enorme domanda di fondi sicuri sui quali investire la prima responsabile della generazione dei prodotti finanziari complessi basati su mutui
- i peggiori deregolatori sono stati gli inglesi della City prima e più di Wall Street: prova ne è stata l'impatto maggiormente devastante sulle megabanche europee che su quelle americane (al netto delle più esposte ed avventurose come Lehman o AIG)
- vi è stata una connessione diretta tra crisi subprime e deterioramento dei crediti sovrani nell'Eurozona, in cui gli stati nazionali hanno rischiato il fallimento per coprire le immense perdite delle banche (come in Irlanda o in Spagna) al punto da rendere le due crisi una cosa sola nell'analisi di Tooze
-l'austerità dei leader tedeschi ha avuto come prime vittime le stesse regioni tedesche alle quali fu imposto il pareggio di bilancio ben prima che diventasse uno spettro per gli altri stati europei: come dire che i tedeschi hanno imposto prima di tutto a se stessi un rigore economico quasi spietato - lo stesso rigore alla base della disastrosa gestione della vicenda greca
- il famoso falco tedesco Schauble era mosso (almeno al principio) dal credere nelle necessità di una maggiore e reale integrazione europea, afflato fiaccato dall'idea di Angela Merkel di un Europa basata su accordi governativi bilaterali (o al massimo, multilaterali).
Nei passaggi in cui le sue convinzioni keynesiane emergono, Tooze rende anche chiarissimo l'errore ideologico dei forzati dell'equilibrio dei conti nazionali: la fallacia del ragionamento di applicare alla scala globale i principi validi per una gestione economica di un capofamiglia ("il buon padre di famiglia che non fa debiti che i suoi figli non potranno ripagare").
Quindi, una lettura estremamente appagante ed utile per comprendere meglio cosa è avvenuto dieci anni fa - maggiormente interessante in questo momento in cui ci stiamo avventurando dentro un'altra crisi globale. Ad oggi sembra che la lezione sugli effetti della eccessiva austerità e fanatico rigore dei conti sia stata appresa e che ci sia un consenso globale (anche se sottovoce) sul fatto che solo un solido intervento statale possa permetterci di superare questa nuovo crisi globale. Sarebbe interessante sapere che ne pensano i profeti del "mercato che si autoregola e garantisce la crescita per tutti", ma (stranamente) di iper-liberisti se ne vedono sempre di meno in giro...
Il messaggio finale di questo esteso ed approfondito saggio potrebbe essere infatti questo: ogni scelta in materia economica è comunque sempre una scelta politica - il famigerato acronimo thatcheriano TINA (There is No Alternative) è la mistificazione di chi copre la propria volontà politica con false necessità tecniche.
La crisi del 2008 e le sue ripercussioni sull'Eurozona e sulla finanza globale nascono da precise decisioni di politica economica e monetaria: Tooze è chiaro e coerente nella sua analisi, mettendo in evidenza il perchè dell'emergere delle crisi e il come sono state gestite. L'impianto è squisitamente keynesiano, ma con la onestà intellettuale di indicare le motivazioni di scelte fallaci (viste a posteriori) come la deregolamentazione regolatoria in finanza e l'ossessione dell'austerità.
Lettura scorrevole e affrontabile anche in lingua originale da parte di chi (come il sottoscritto) ha scarse competenze economiche e finanziarie: certo, ci vuole pazienza e attenzioni per non perdersi nella giungla dei prodotti finanziari complessi (CDO, CDS, MBS, RePo e via così...). Ma lo stile è agile, ricco anche di uscite ironiche e qualche retroscenismo salace (specie per le vicende europee) che alleggeriscono il peso delle questioni monetarie e finanziarie.
Grazie ad alcuni punti davvero interessanti e poco conosciuti la lettura è stata per me soddisfacente ad appassionante:
- è stata la enorme domanda di fondi sicuri sui quali investire la prima responsabile della generazione dei prodotti finanziari complessi basati su mutui
- i peggiori deregolatori sono stati gli inglesi della City prima e più di Wall Street: prova ne è stata l'impatto maggiormente devastante sulle megabanche europee che su quelle americane (al netto delle più esposte ed avventurose come Lehman o AIG)
- vi è stata una connessione diretta tra crisi subprime e deterioramento dei crediti sovrani nell'Eurozona, in cui gli stati nazionali hanno rischiato il fallimento per coprire le immense perdite delle banche (come in Irlanda o in Spagna) al punto da rendere le due crisi una cosa sola nell'analisi di Tooze
-l'austerità dei leader tedeschi ha avuto come prime vittime le stesse regioni tedesche alle quali fu imposto il pareggio di bilancio ben prima che diventasse uno spettro per gli altri stati europei: come dire che i tedeschi hanno imposto prima di tutto a se stessi un rigore economico quasi spietato - lo stesso rigore alla base della disastrosa gestione della vicenda greca
- il famoso falco tedesco Schauble era mosso (almeno al principio) dal credere nelle necessità di una maggiore e reale integrazione europea, afflato fiaccato dall'idea di Angela Merkel di un Europa basata su accordi governativi bilaterali (o al massimo, multilaterali).
Nei passaggi in cui le sue convinzioni keynesiane emergono, Tooze rende anche chiarissimo l'errore ideologico dei forzati dell'equilibrio dei conti nazionali: la fallacia del ragionamento di applicare alla scala globale i principi validi per una gestione economica di un capofamiglia ("il buon padre di famiglia che non fa debiti che i suoi figli non potranno ripagare").
Quindi, una lettura estremamente appagante ed utile per comprendere meglio cosa è avvenuto dieci anni fa - maggiormente interessante in questo momento in cui ci stiamo avventurando dentro un'altra crisi globale. Ad oggi sembra che la lezione sugli effetti della eccessiva austerità e fanatico rigore dei conti sia stata appresa e che ci sia un consenso globale (anche se sottovoce) sul fatto che solo un solido intervento statale possa permetterci di superare questa nuovo crisi globale. Sarebbe interessante sapere che ne pensano i profeti del "mercato che si autoregola e garantisce la crescita per tutti", ma (stranamente) di iper-liberisti se ne vedono sempre di meno in giro...
April 14, 2020
This is a very impressive and exhaustive book, especially given the recentness of the events and relative lack of publicly available sources.Tooze offers a clear, materialist and mostly political history of the crisis, while also taking pains to explain financial and economic concepts. Provided you take the time in chapter two to understand the economic terminology, the book is not a particularly challenging read. The first part of the book deals with the pre-history of the crisis: mainly geopolitical events that shaped decision makers choices about how to respond to the crisis. The second part deals with the 2008/2009 crisis as it unfolded, the third about the Eurozone crisis in the following years, and the 4th the ‘aftermath’, changes in world politics since 2015.
Unless you are undertaking a research project on the crisis was a whole, i see very little reason to read this book cover to cover. The table of contents and index are your friends, as individual chapters are a good place to start if you are interested in beginning to learn about specific topics or periods of the crisis. The final quarter of the book, “aftershocks”, has the least clear connection to the crisis itself and given this was published in 2018 you wouldn’t lose much from skipping it entirely.
If there is an over-arching argument to the book it is that ‘simple answers’ about ‘who is to blame’ for the crisis are insufficient or reductive. The point of the book is to meticulously explain what cased the crisis: influence big banks and speculators, political agency of world leaders, short-sighted government policy often governed by ideology, coincidences of geopolitical mis/calculation and so on. The same goes for explaining the varied responses to the crisis. At times this can seem like a somewhat eclectic mix of cause and effect, where at different times it is unclear or unjustified by Tooze why in one place an individual politician’s agency shaped the events, in another an organization's ideology and in another 'structural' factors.
For example, in explaining the crisis in the eurozone Tooze says that while the outcome of the response was influenced and drawn out by German fiscal conservativism, the real fault for Europe’s slow and protracted response lies with overlapping sources of power and democratic decision-making institutions which make it structurally difficult to take swift decisive action. Basically: the response to the crisis in Europe was hindered by lethargy and democratic stalemate, not merely by the malicious influence of german finance. The US fed comes away looking more competent than the eurozone simply because of its ability to respond swiftly, even if the action taken was mainly in the interest of banks and not homeowners.
Unless you are undertaking a research project on the crisis was a whole, i see very little reason to read this book cover to cover. The table of contents and index are your friends, as individual chapters are a good place to start if you are interested in beginning to learn about specific topics or periods of the crisis. The final quarter of the book, “aftershocks”, has the least clear connection to the crisis itself and given this was published in 2018 you wouldn’t lose much from skipping it entirely.
If there is an over-arching argument to the book it is that ‘simple answers’ about ‘who is to blame’ for the crisis are insufficient or reductive. The point of the book is to meticulously explain what cased the crisis: influence big banks and speculators, political agency of world leaders, short-sighted government policy often governed by ideology, coincidences of geopolitical mis/calculation and so on. The same goes for explaining the varied responses to the crisis. At times this can seem like a somewhat eclectic mix of cause and effect, where at different times it is unclear or unjustified by Tooze why in one place an individual politician’s agency shaped the events, in another an organization's ideology and in another 'structural' factors.
For example, in explaining the crisis in the eurozone Tooze says that while the outcome of the response was influenced and drawn out by German fiscal conservativism, the real fault for Europe’s slow and protracted response lies with overlapping sources of power and democratic decision-making institutions which make it structurally difficult to take swift decisive action. Basically: the response to the crisis in Europe was hindered by lethargy and democratic stalemate, not merely by the malicious influence of german finance. The US fed comes away looking more competent than the eurozone simply because of its ability to respond swiftly, even if the action taken was mainly in the interest of banks and not homeowners.
October 15, 2020
Although I'm somewhat ashamed of myself for how long it took me to finish reading it, the same cannot be said for my decision to read Crashed in the first place. As its title might suggest, this is not just a wonky and technical account of the 2007-08 Global Financial Crisis and its aftershocks. Crashed is rather a much more ambitious project, tracing how the economic, political, and geostrategic implications of the financial crisis have shaped the history of every corner of this planet in the last decade. Constructing a coherent global narrative that covers the subprime mortgage crisis in the American real estate market, the contagion of the crisis through trans-Atlantic and trans-Pacific financial markets, the macroeconomic consequences of the resulting global recession and ad-hoc firefighting attempts by central bankers and treasury officials, the political drama in the US, the Eurozone, the UK, China, and Russia, and the geopolitical rivalries in Eastern Europe and Asia is not a trivial task, but Adam Tooze is not an ordinary historian either. Highly acclaimed for his study of the Nazi war machine (The Wages of Destruction: The Making and Breaking of the Nazi Economy) and the rise of American power in the aftermath of World War I (The Deluge: The Great War, America and the Remaking of the Global Order, 1916-1931), Tooze displays a remarkable depth of knowledge in every subject matter that he takes on in the book. In narrating the history of a decade shaped by multiple financial crises, he has done something extremely valuable: He has written the most insightful book (that I'm aware of) on the underlying interests and points of contention that shape global politics today.
March 13, 2022
I am so glad I listened to this audiobook, even though it is dauntingly bloody long. A clear, concise (this man needs to 28 hours to explain global financial systems and their messes concisely) adventure from the housing bubble to the crash and the assurances that the market will fix everything to a surprise Republican government bailout, alienating working class Republicans from sober, business Republicans (this will have ramifications later), and a blow to the rest of the world who had invested heavily in stable US dollars, backed by shady mortgage lending. The difference between the US financial crumpling and the European bank failures several years later is that Germany refused to about-face its free market principles and bail out tomato Europe. Also, every time England goes through a crisis safely and effectively, it puts itself on austerity footing and ends up with a weird demagogue in charge. Five stars, ten million stars, mandatory good citizenship read.
June 3, 2019
This is a good book but is suffering from author’s urge to include every single historical event in the book. As a result it’s bloated to become a long, never-ending read. Additionally the author insists on including current events that haven’t been unfolded fully. For example we really don’t know what the impact of Brexit is going to be. Or it is too early to judge the outcome of Trump’s presidency. A better book would have stayed away from including these events. I would have enjoyed this more if I were getting an advanced degree in history of the financial markets. The author also includes minute by minute account of events during the 2008 meltdown and I am not sure I really care about that. And these anecdotes really obscure the big picture. Overall it is not a bad book, but it isn’t a book that I’d be comfortable recommending to everyone. Has it’s own audience.
December 2, 2018
Honesty, a very good and scary book. Want to understand where we are today? Read this. Despite its length, it is not a slog. It will make you think.
September 14, 2022
This book was hard to read — it is a historically complex and conceptually dense, and I think it would likely be difficult for anyone who isn't a financier or as didactic as Adam Tooze. Nevertheless, I think it was important for me to read, I thoroughly enjoyed it, and I'm proud that I was able to finish it.
Ever since I became a politically-aware young adult (probably ~2014-15), I've always felt something of a black hole in my political-economic/historical thinking. Most American history/social studies textbooks I was taught only dedicated a handful of pages to everything post-Nixon, and I experienced the election of 2000, 9/11, the beginning of the so-called "War on Terror", the elections of 2008/2012, the Great Recession, etc. through the eyes of a child.
This book did a great deal to illuminate the material realities and flows of global wealth from 2003 to 2017 that I wasn't really old enough to understand when I experienced them, and helped contextualize *just how close* the world came to financial disaster in 2008 (and 2010, and 2012, and by extension 2021). It illuminated for me the world of raw coercive geopolitical power hidden within the core of high finance, and helped clarify the origins of the multipolar world-system that has become evident in the Ukraine War and its effect (so far) to strengthen the EU, the so-called "New Cold War" with China, etc.
Overall, I loved Crashed — it was difficult and illuminating, and I feel smarter for having read all the way to the end.
Ever since I became a politically-aware young adult (probably ~2014-15), I've always felt something of a black hole in my political-economic/historical thinking. Most American history/social studies textbooks I was taught only dedicated a handful of pages to everything post-Nixon, and I experienced the election of 2000, 9/11, the beginning of the so-called "War on Terror", the elections of 2008/2012, the Great Recession, etc. through the eyes of a child.
This book did a great deal to illuminate the material realities and flows of global wealth from 2003 to 2017 that I wasn't really old enough to understand when I experienced them, and helped contextualize *just how close* the world came to financial disaster in 2008 (and 2010, and 2012, and by extension 2021). It illuminated for me the world of raw coercive geopolitical power hidden within the core of high finance, and helped clarify the origins of the multipolar world-system that has become evident in the Ukraine War and its effect (so far) to strengthen the EU, the so-called "New Cold War" with China, etc.
Overall, I loved Crashed — it was difficult and illuminating, and I feel smarter for having read all the way to the end.
May 22, 2022
The highlight of the book is the amazing, tense drama surrounding Syriza's attempt to negotiate with the Troika. Besides that I would consider this book to be part of the Anti-deutch canon, as after reading it you come out with an immense distaste for the German government and politics. The German ideological fetish for 0 deficits and debt have resulted in the sundering of much of Europe and countless deaths from austerity in the pursuit of uncertain benefits, except for Germany and German businesses. Tooze of course holds up America as a monetary example, willing to do anything and everything to ensure continued dollar liquidity as opposed to the slow, cruel and self defeating Europeans, but that's his provenance as an Atlanticist.
January 22, 2022
most outrageous whodunit ever written.
January 9, 2022
A post-mortem written after the body is cold but before it's really buried, about a decade or so of economic insanity. Does a great job of exploring debt, responses, negotiations, failures, etc. Lots of political areas of focus -- Greece, China, and Russia/Ukraine. Lots of brinksmanship and blackmail, actions taken not merely in spite of but in opposition to the wishes of taxpayers, etc.
Mostly is reporting/history, not economics, and thus very accessible. A lot of the issues aren't really "settled" from an economic perspective, and a lot of the facts aren't even widely known to start the discussion.
I was pretty familiar with the US side (the intra-governmental, international, and popular aspects), but not as familiar with the subsequent related but independent European problems.
Three interesting things which were unaddressed:
1) All of this is the backdrop behind the decade crypto was building
2) None of this really affected me as a US 30-40 year old who wasn't poor and wasn't leveraged; experiences for young Europeans probably far worse.
3) Hilarious coincidence that all of this ended roughly a year or two before Covid (didn't fully end in Europe, but had mostly ended un the US by mid-decade). China had much more serious issues.
Long book is long. It would probably be 5 otherwise. Author is also a general Euro-leftist, and goes into hand-wringing mode when anyone to the right of Merkel is mentioned (and dispenses the standard level of anti-Trump rhetoric). Audiobook also has not my favorite narrator.
Mostly is reporting/history, not economics, and thus very accessible. A lot of the issues aren't really "settled" from an economic perspective, and a lot of the facts aren't even widely known to start the discussion.
I was pretty familiar with the US side (the intra-governmental, international, and popular aspects), but not as familiar with the subsequent related but independent European problems.
Three interesting things which were unaddressed:
1) All of this is the backdrop behind the decade crypto was building
2) None of this really affected me as a US 30-40 year old who wasn't poor and wasn't leveraged; experiences for young Europeans probably far worse.
3) Hilarious coincidence that all of this ended roughly a year or two before Covid (didn't fully end in Europe, but had mostly ended un the US by mid-decade). China had much more serious issues.
Long book is long. It would probably be 5 otherwise. Author is also a general Euro-leftist, and goes into hand-wringing mode when anyone to the right of Merkel is mentioned (and dispenses the standard level of anti-Trump rhetoric). Audiobook also has not my favorite narrator.
January 3, 2023
I found this a very insightful read even though it is necessarily a bit dry and boring at times, due to the nature of the topic. What helped me was to use the audiobook to get through the parts that weren’t as interesting to me and find the most valuable insights to then reread in the book.
I was a kid during the financial crisis and can only recall few things about it. My perception of many geopolitical events has shifted substantially thanks to this book. I learned a great deal about monetary policy and macroeconomics.
One thing that was particularly salient to me was how my views on German policies in the last decade have changed:
Back in school, I remember getting this vibe that the German debt brake was a big mistake and stopping the country from making crucial infrastructure investments. My teachers were somewhat lefty which might have been the reason for this vibe. Here I got the impression that the debt brake was a good call and has stayed a sensible policy until today.
Another surprise was learning that Germany played the key role in EU politics in preventing wider fiscal integration and shared fiscal responsibility in bailouts etc. This seems like a big mistake because a Eurozone with shared monetary policy but little shared fiscal policy seems very difficult to handle in the longer term.
What slightly annoyed about the book is that the language is so superlative. It feels like almost everything is described as a crisis, tsunami, apocalypse or firestorm.
I was a kid during the financial crisis and can only recall few things about it. My perception of many geopolitical events has shifted substantially thanks to this book. I learned a great deal about monetary policy and macroeconomics.
One thing that was particularly salient to me was how my views on German policies in the last decade have changed:
Back in school, I remember getting this vibe that the German debt brake was a big mistake and stopping the country from making crucial infrastructure investments. My teachers were somewhat lefty which might have been the reason for this vibe. Here I got the impression that the debt brake was a good call and has stayed a sensible policy until today.
Another surprise was learning that Germany played the key role in EU politics in preventing wider fiscal integration and shared fiscal responsibility in bailouts etc. This seems like a big mistake because a Eurozone with shared monetary policy but little shared fiscal policy seems very difficult to handle in the longer term.
What slightly annoyed about the book is that the language is so superlative. It feels like almost everything is described as a crisis, tsunami, apocalypse or firestorm.
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