‘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.
Tooze’s overriding interest lies in assessing how well the ruling politicians and technocrats coped with the crisis. Here he illuminates very clearly the national political efforts involved in designing and implementing the new containment policies. As soon as the magnitude of the shock was recognized, central banks and governments coordinated their efforts internationally, deploying the usual lines of defence: lower interest rates, fiscal stimulus and aid to the financial sector in the form of unlimited liquidity (and in some cases, recapitalization and nationalization). But they also had to innovate, which opened up a completely new range of policymaking tools in the form of the provision of global liquidity and, above all, macroprudential supervision. Tooze recounts in detail the arguments and hesitations in this field, which were comparable to the discovery of new monetary and fiscal policies in the aftermath of the Great Depression. One especially striking aspect was the uneven and combined geographical character of this process. If speed and efficacy are characteristics of sovereign power, Crashed leaves one in no doubt that China and America led the global economy, while Europe—as Tooze hammers home again and again—was hobbled by dependency, irresolution and obsolete reflexes.
Tooze is awestruck by the Chinese programme. In November 2008, the prc’s state council launched the world’s first massive fiscal response to the crisis, supplemented by a full-scale mobilization of ccp forces. Including bank credit and deficit spending, this amounted to almost 20 per cent of gdp—‘an intervention comparable in scale to anything ever undertaken in the Mao era, or under Soviet communism’. The process leading to the rescue of the financial sector in the us was more chaotic and resulted in a less substantial stimulus. The deficit soared in 2009 to 12.5 per cent of gdp, half of which came from automatic stabilizers, with higher public spending and, above all, reduced tax collection. Europe lagged well behind, contributing only one-tenth of global stimulus in 2009–10, despite being the world’s largest economic zone. Tooze slams this diffident approach, excoriating the ‘stubborn, narrow-minded’ focus of the ecb and Merkel’s government on price stability and fiscal discipline, directly responsible for economic misery. As early as November 2008, Trichet’s ecb refused to provide East European economies with liquidity, forcing Hungary to ask for a humiliating emergency loan from the imf. This provoked a nationalist backlash that helped deliver a crushing electoral victory for Orbán’s Fidesz party in 2010. It was also an embarrassing admission that the eu would not be able to deal with its own problems, a point underlined at a later stage when it had to call in the imf to join the ecb and European Commission in the infamous Troika to deal with the sovereign-debt crisis. In April and July 2011, in what Tooze refers to as ‘one of the most misguided decisions in the history of monetary policy’, the ecb raised interest rates while stopping its purchases of sovereign bonds and hardening the terms for provision of liquidity. For Tooze, this was the real trigger for the Eurozone crisis. As he puts it, ‘a wall of money was moving against the Eurozone as a whole’, with speculators betting on a contagious default of peripheral countries, leading investors to cut funding to European banks across the board.