by Adam Tooze
Also by Adam Tooze
The Deluge
The Wages of Destruction
Statistics and the German State
VIKING
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Copyright © 2018 by Adam Tooze
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LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA
Names: Tooze, J. Adam, author.
Title: Crashed : how a decade of financial crises changed the world / Adam Tooze.
Description: New York : Viking, [2018] | Includes bibliographical references and index.
Identifiers: LCCN 2018025064 (print) | LCCN 2018026794 (ebook) | ISBN 9780525558804 (ebook) | ISBN 9780670024933 (hardcover)
Subjects: LCSH: Global financial crisis, 2008-2009. | Financial crises--Social aspects--History--21st century.
Classification: LCC HB3717 2008 (ebook) | LCC HB3717 2008 .T625 2018 (print) | DDC 332/.042--dc23
LC record available at https://lccn.loc.gov/2018025064
Graph illustrations by Daniel Lagin
While the author has made every effort to provide accurate telephone numbers, internet addresses, and other contact information at the time of publication, neither the publisher nor the author assumes any responsibility for errors or for changes that occur after publication. Further, the publisher does not have any control over and does not assume any responsibility for author or third-party websites or their content.
Version_1
For Dana
Contents
Also by Alan Tooze
Title Page
Copyright
Dedication
Acknowledgments
Introduction: The First Crisis of a Global Age
Part I
GATHERING STORM
1. The “Wrong Crisis”
2. Subprime
3. Transatlantic Finance
4. Eurozone
5. Multipolar World
Part II
THE GLOBAL CRISIS
6. “The Worst Financial Crisis in Global History”
7. Bailouts
8. “The Big Thing”: Global Liquidity
9. Europe’s Forgotten Crisis: Eastern Europe
10. The Wind from the East: China
11. G20
12. Stimulus
13. Fixing Finance
Part III
EUROZONE
14. Greece 2010: Extend and Pretend
15. A Time of Debt
16. G-Zero World
17. Doom Loop
18. Whatever It Takes
Part IV
AFTERSHOCKS
19. American Gothic
20. Taper Tantrum
21. “F*** the EU”: The Ukraine Crisis
22. #Thisisacoup
23. The Fear Projects
24. Trump
25. The Shape of Things to Come
Notes
Index
About the Author
Acknowledgments
This book was written with urgency and I am deeply grateful to those who have made it happen. Working with Sarah Chalfant and the Wylie Agency has been as smooth as ever. My editors Simon Winder and Wendy Wolf collaborated enthusiastically on the project. Melanie Tortoroli gave invaluable advice on early drafts. It is their work and that of the production team at Viking and Penguin that have carried this book across the line.
In getting the manuscript into shape I relied heavily on the careful editorial attention of Nick Monaco, Kevin James Schilling and Ella Plaut Taranto.
The project took shape as an undergraduate course taught at Yale and Columbia, where my teaching fellows included Ted Fertik, Gabe Winnant, Nick Mulder, Madeline Woker, David Lerer and Noelle Tutur. I am enormously grateful to all of them.
In addition, from an early stage, the manuscript was read and commented on by Ted Fertik, Grey Anderson, Stefan Eich, Anusar Farooqui, Nick Mulder, Hans Knundani and Nicholas Monaco. Wolfgang Proissel, Barnaby Raine and Dana Conley added their comments to particular chapters. These friends and interlocutors know individually and collectively how much I owe to them.
Pieces I cowrote with Stefan Eich and Danilo Scholz helped to further sharpen the argument.
In connection with the book I benefited enormously from conversations with an array of colleagues, witnesses and participants in the drama described here.
As part of the research I was privileged to interview Mario Monti, Giuliano Amato, Timothy Geithner and Giulio Tremonti. I am extremely grateful for the time they devoted to our conversations.
Through my role as director of the European Institute at Columbia I have been fortunate to try out arguments with Frans Timmermans, Pierre Moscovici, Pierre Vimont, Marco Buti and Moreno Bertoldi.
François Carrel-Billiard is my indispensable collaborator at the institute. It is a privilege to work with him.
Nathan Sheets and Patricia Mosser, veterans of the Fed, gave generously of their time.
Erik Berglof helped me to think through the East European crisis.
A dinner with Mervyn King arranged by Peter Garber proved very illuminating.
Perry Mehrling, Brad Setser, Mike Pyle, Clara Mattei, Martin Sandbu, Nicolas Véron, Cornel Ban, Gabriella Gabor, Shahin Vallée and Eric Monnet all offered invaluable input.
As ever, my old friends David Edgerton and Chris Clark provided an indispensable sounding board.
I have been fortunate to try the arguments of the book at workshops, conferences and seminars hosted in Berlin courtesy of the Hamburg Stiftung für Sozialgeschichte, at the Heidelberg Center for American Studies, the American Academy Berlin, Brown University, Stanford, the Eisenberg Institute University of Michigan, the European University Institute, NYU Florence, the New School, UCLA, the MaxPo conference, the German Historical Institute Paris, the FPLH workshop in London, as part of the Science Po public debt project and at the NYU Kandersteg workshop. I am grateful both to my hosts and other participants at all these events.
A memorial conference for Francesca Carnevali in Birmingham heard a version of the argument about Europe’s banks.
Presenting to a seminar of the Siemens Stiftung moderated by Knut Borchardt and attended by Jürgen Habermas was a particular honor.
Beyond the formal academy I have been extraordinarily fortunate to fall in with a brilliant and deeply informed crowd on Twitter and Facebook who have changed my understanding of how an intense, real-time debate can develop in the twenty-first century.
In the trajectory of my work this project marks a double departure. I have moved forward in time into the field of contemporary history. At the same time I have moved backward to reengage with a youthful preoccupation with economics. This double movement has reminded me of debts I owe to two teachers.
Alan Milward, my doctoral supervisor, was a brilliant but difficult man. Given my personal makeup, the engagement with him was particularly high risk. But I survived and Alan remains a towering figure in the field of modern European history. I don’t know whether he would have agreed with my take on the eurozone crisis, but I feel Alan’s presence.
Wynne Godley was
a mentor and teacher of a very different kind. Spontaneously warm and generous in spirit, he took me under his cape in my first year at King’s and introduced me, and a group of my contemporaries, to what, at the time, was a highly idiosyncratic brand of economics. In so doing he provided a model of intellectual warmth and vitality. And he confirmed doubts that had been gestating in me about the IS-LM model that was my first great love in economics. Wynne introduced me to the importance of looking “beyond the flows” and insisting on stock-flow consistency in macro models. I don’t think this book, written almost thirty years later, would have been the same without his early influence.
Writing a book is an emotional, intellectual and physical task. It is work I do at home and there I owe everything to my partner, Dana Conley, whose love and support energized and sustained this project from start to finish. To have such an engaged, deeply intelligent, courageous, vivacious and loving companion, so open to me and to my world, is a blessing beyond words.
Puppy Ruby—a marvelous gift from Dana—added joy, warmth, walks and endless distraction.
My daughter, Edie, has jolted dinner table conversation with a burst of political radicalism and sharp insights. When current events were robbing me of my senses, she offered precocious wisdom. Her energetic but grounded engagement with the world is a source of both inspiration and encouragement.
There is no doubt that these three forces are the keys to my current emotional stability. The fact that this book has not driven us apart but brought us closer together and given us things to talk about is my greatest personal satisfaction.
The fact that I can say all this is due in large part to the wise counsel of an outstanding psychoanalyst. He shall remain nameless. But everyone should be so lucky.
As Nicolas Véron put it to me one evening in Washington Square Park, making sense of what has happened since 2008 is a collective undertaking. As a historian, it has been an extraordinary privilege to be included in that collective. I hope this book in some small way repays the welcome I have received.
New York City
January 2018
Introduction
THE FIRST CRISIS OF A GLOBAL AGE
Tuesday, September 16, 2008, was the “day after Lehman.” It was the day global money markets seized up. At the Federal Reserve Board in Washington, DC, September 16 began with urgent plans to sluice hundreds of billions of dollars into the world’s central banks. On Wall Street all eyes were on AIG. Would the global insurance giant make it through the day, or would it follow the investment bank Lehman into oblivion? A shock wave was rippling outward. Within weeks its impact would be felt on factory floors and in dockyards, financial markets and commodity exchanges around the world. Meanwhile, in Midtown Manhattan, September 16, 2008, was the opening day of the sixty-third meeting of the UN General Assembly.
The UN building, on East Forty-second Street, is not where financial power is located in New York. Nor did the speakers at the plenary session that began on the morning of September 23 dwell on the technicalities of the banking crisis. But what they did insist on talking about was its wider meaning. The first head of government to speak was President Lula of Brazil, who energetically denounced the selfishness and speculative chaos that had triggered the crisis.1 The contrast with President George W. Bush, who followed him to the rostrum, was alarming. Bush seemed not so much a lame duck as a man out of touch with reality, haunted by the failed agenda of his eight-year presidency.2 The first half of his address spiraled obsessively around the specter of global terrorism. He then took solace in the favorite neoconservative theme of the advance of democracy, which he saw culminating in the “color revolutions” of Ukraine and Georgia. But that was back in 2003/2004. The devastating financial crisis raging just a short walk away on Wall Street merited only two brief paragraphs at the end of the president’s speech. The “turbulence” was, as far as Bush was concerned, an American challenge to be handled by the American government, not a matter for multilateral action.
Others disagreed. Gloria Macapagal Arroyo, president of the Philippines, spoke of America’s financial crisis as having unleashed a “terrible tsunami” of uncertainty. It was spreading around the globe, “not just here in Manhattan Island.” Since the first tremors had shaken the financial markets in 2007, the world had repeatedly reassured itself that the “worst had passed.” But, again and again, “the light at the end of the tunnel” had revealed itself as “an oncoming train hurtling forward with new shocks to the global financial system.”3 Whatever America’s efforts at stabilization were, they were not working.
One after another, the speakers at the UN connected the crisis to the question of global governance and ultimately to America’s position as the dominant world power. Speaking on behalf of a country that had recently lived through its own devastating financial crisis, Cristina Fernández de Kirchner of Argentina was not one to hide her Schadenfreude. For once, this was a crisis that could not be blamed on the periphery. This was a crisis that “emanated from the first economy of the world.” For decades, Latin America had been lectured that “the market would solve everything.” Now Wall Street was failing and President Bush was promising that the US Treasury would come to the rescue. But was the United States in a fit state to respond? “[T]he present intervention,” Fernández pointed out, was not just “the largest in memory,” it was being “made by a State with an incredible trade and fiscal deficit.”4 If this was to stand, then the “Washington Consensus” of fiscal and monetary discipline to which so much of the emerging world had been subjected was clearly dead. “It was a historic opportunity to review behaviour and policies.” Nor was it just Latin American resentment on display. The Europeans joined the chorus. “The world is no longer a unipolar world with one super-Power, nor is it a bipolar world with the East and the West. It’s a multipolar world now,”5 intoned Nicolas Sarkozy, speaking as both president of France and president of the European Council. “The 21st century world” could not be “governed with the institutions of the 20th century.” The Security Council and the G8 would need to be expanded. The world needed a new structure, a G13 or G14.6
It was not the first time that the question of global governance and America’s role in it had been posed at the United Nations in the new millennium. When the French president spoke at the UN against American unilateralism, no one could ignore the echoes of 2003, Iraq and the struggles over that disastrous war. It was a moment that had bitterly divided Europe and America, governments and citizens.7 It had revealed an alarming gulf in political culture between the two continents. Bush and his cohorts on the right wing of the Republican Party were not easy for bien-pensant, twenty-first-century citizens of the world to assimilate.8 For all their talk of the onward march of democracy, it wasn’t even clear that they had won the election that first gave them power in 2000. In cahoots with Tony Blair, they had misled the world over WMD. With their unabashed appeals to divine inspiration and their crusading zeal they flaunted their disregard for the conception of modernity in which both the EU and the UN liked to dress themselves—enlightened, transparent, liberal, cosmopolitan. That was, of course, its own kind of window dressing, its own kind of symbolic politics. But symbols matter. They are essential ingredients in the construction of both meaning and hegemony.
By 2008 the Bush administration had lost that battle. And the financial crisis clinched the impression of disaster. It was a stark historical denouement. In the space of only five years, both the foreign policy and the economic policy elite of the United States, the most powerful state on earth, had suffered humiliating failure. And, as if to compound the process of delegitimatization, in August 2008 American democracy made a mockery of itself too. As the world faced a financial crisis of global proportions, the Republicans chose as John McCain’s vice presidential running mate the patently unqualified governor of Alaska, Sarah Palin, whose childlike perception of international affairs made her the laughingstock of the world. And the w
orst of it was that a large part of the American electorate didn’t get the joke. They loved Palin.9 After years of talk about overthrowing Arab dictators, global opinion was beginning to wonder whose regime it was that was changing. As Bush the younger left the stage, the post–cold war order that his father had crafted was crumbling all around him.
Only weeks before the General Assembly opened in New York, the world had been given two demonstrations of the reality of multipolarity. On the one hand, China’s staggering Olympic display put to shame anything ever seen in the West, notably the dismal Atlanta games of 1996, which had been interrupted, it is worth recalling, by a pipe bombing perpetrated by an alt-right fanatic.10 If bread and circuses are the foundation of popular legitimacy, the Chinese regime, bolstered by its booming economy, was putting on quite the show. Meanwhile, as the fireworks flared in Beijing, the Russia military had meted out to Georgia, a tiny aspirant to NATO membership, a severe punishment beating.11 Sarkozy came to New York fresh from cease-fire talks on Europe’s eastern border. It was to be the first of a series of more or less open clashes between Russia and the West that would culminate in the violent dismemberment of Ukraine, another aspiring NATO member, and feverish speculation about Russia’s subversion of America’s 2016 presidential election.
The financial crisis of 2008 appeared as one more sign of America’s fading dominance. And that perspective is all too easily confirmed, when we return to the crisis from the distance of a decade, in the wake of the election of Donald Trump, the heir to Palin, as president. It is hard now to read the UN speeches in 2008 and their critique of American unilateralism without Trump’s truculent inaugural of January 20, 2017, ringing in one’s ears. On that overcast Friday, from the steps of the Capitol, the forty-fifth president summoned the image of America in crisis, its cities in disorder, its international standing in decline. This “carnage,” he declared, must end. How? Trump’s answer boomed out: He and his followers, that day, were issuing a “decree, to be heard in every city, in every foreign capital, and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first . . .”12 If America was indeed suffering a profound crisis, if it was no longer supreme, if it needed to be made “great again,” truths that for Trump were self-evident, then it would at least “decree” its own terms of engagement. This was the answer that the right wing in American politics would give to the challenges of the twenty-first century.