‘To declare an event is to become the son of that event’, wrote Alain Badiou in his Saint Paul. Crashed is such a declaration. Rich in illuminating detail, Adam Tooze’s book offers the most extensive chronicle to date of the great financial crisis—spanning not just the causes and the cataclysm itself but the global aftershocks of the past decade. Its author appears to have surveyed every relevant academic paper and official report to uncover the hidden connections between the economic and political vagaries of the period. But Tooze, a historian of Europe’s 20th century with a berth at Columbia, has more to offer than a gripping narrative. His delineation of the social, political and geopolitical fault-lines revealed by the crash provides a suggestive map of the historical terrain we have to navigate, contextualizing the 2010s as a moment of paradigm shift comparable to the 1930s and the 1970s.
If the immediate cause of the crisis was the bust of the us housing market, Tooze argues that its origins lie in the over-development of modern finance, itself a reaction to the ‘monetary disorders’ of the 1970s. After Nixon’s revocation of the Bretton Woods system, a cumulative dynamic of innovation and deregulation fuelled the growth of financial behemoths. As the tempestuous winds of global finance gained speed, a supercycle of instability blew up that culminated in the 2008 crash. His book provides perhaps the most detailed account available of what occurred at that point, for its signal virtue is the ability to illuminate the technical workings of financial markets and asset-backed commercial paper without losing sight of the political dynamics at stake. As Tooze writes: ‘Political choice, ideology and agency are everywhere across this narrative with highly consequential results, not merely as disturbing factors but as vital reactions to the huge volatility and contingency generated by the malfunctioning of the giant “systems” and “machines” and apparatuses of financial engineering.’
Crashed is, indeed, a highly political book. Tooze is concerned to allocate praise and blame, as well as setting various records straight. His first chapter details the ways in which those at the top of the American system were worrying about ‘the wrong crisis’—dependency on Chinese credit, or what Lawrence Summers called ‘the balance of financial terror’. Prior to the crisis, Tooze notes, there was ‘an almost total lack of recognition of the destabilizing forces unleashed by global finance’ on both sides of the Atlantic. us and European leaders believed that the key issues were ‘globalization, competitiveness and fiscal sustainability’—not banks or financial markets. Even when the crisis exploded, he argues, the role of the ‘global savings glut’ fuelled by China’s export machine still attracted much attention in the Anglophone financial press. European leaders, meanwhile, initially thinking themselves unaffected, portrayed liberalized Anglo-American finance as the villain. Yet eu initiatives had played an important role in setting private finance loose; in the early 2000s, the European Commission pressed for the German Landesbanken to be stripped of the state guarantees that lowered their funding costs, which drove them to take huge gambles on us real-estate investment.
Tooze is at pains to point out that both the China-blaming and the Anglo-Saxon-bashing stories were misleading. The main sources of the huge accumulation of financial fragilities lay elsewhere. Beyond the headline net trade and financial figures, he invites us to examine the scale of interdependencies in gross financial flows and the accumulating stock of claims between the banks. While China’s trade surplus with the us was some $200 billion when the crisis broke out, gross financial flows from Europe to the us were more like $6 trillion. The central axis of world finance was not Asian-American, Tooze argues, nor was it predominantly confined to the us. It was a ‘North Atlantic system’, with Wall Street and the City of London as its main nodes, and with ramifications all over the world.
The financial rout of 2008 revealed the huge cross-border balance-sheet interdependencies within this transatlantic-centred system. They were the reason why rising defaults on a marginal segment of the us domestic financial system provoked the brutal global liquidity freeze of 2008—and why, two years later, the troubles of a Greek economy that accounted for just 1 per cent of eu gdp rocked the European edifice to its very foundations. This was not a conventional bank run, when depositors rush to get hold of their cash, but rather a new kind of ‘mega-bank run’ between the financial institutions themselves. Crashed traces its unfolding. The initial stage of mounting anxiety about the quality of assets linked to us real estate affected important sources of the short-term funding—such as asset-backed commercial paper (abcp) and the repo markets—that kept the big banks’ highly leveraged systems in the air. To cover the gap between short-term assets and liabilities on their balance-sheets, they were forced to engage in fire sales of high-quality assets. Because of the devaluation of those assets, other financial players experienced a deterioration of their own balance-sheets, cutting them off from their usual source of wholesale funding, the money markets. Given the scale of leverage in the system and the dense degree of interconnections between financial institutions, it took only a few months before short-term funding had dried up altogether. By the autumn of 2008, following the collapse of Lehman Brothers, there was no more cash circulating in the system, which meant that virtually all financial institutions were on the verge of default, due to their dependence on refunding.