Crashed

by Adam Tooze

  The stark truth about Ben Bernanke’s “historic” policy of global liquidity support was that it involved handing trillions of dollars in loans to that coterie of banks, their shareholders and their outrageously remunerated senior staff. Indeed, as we shall see, we can itemize precisely who got what. To compound the embarrassment, though the Fed is a national central bank, at least half the liquidity support it provided went to banks not headquartered in the United States, but located overwhelmingly in Europe. If in intellectual terms the crisis was a crisis of macroeconomics, if in practical terms it was a crisis of the conventional tools of monetary policy, it was by the same token a deep crisis of modern politics. However unprecedented and effective the Fed’s actions might have been, even for those politicians whose support for globalization was unfailing, its practical implications were barely speakable. Though it is hardly a secret that we inhabit a world dominated by business oligopolies, during the crisis and its aftermath this reality and its implications for the priorities of government stood nakedly exposed. It is an unpalatable and explosive truth that democratic politics on both sides of the Atlantic has choked on.

  II

  It should not be surprising, given what has been said, that the Europeans were only too happy to forget the entanglement of their global banks in the transatlantic crisis. In 2008 the British had their own national catastrophe to digest. In the eurozone, led by France and Germany, the 2008 financial crisis has vanished down a memory hole, closed over by the “sovereign debt crisis” of 2010 and after.33 There is no appetite for acknowledging the dependence on the US Federal Reserve and little sense of obligation or deference either. In this respect too the Americans have lost their authority. The Europeans all too easily dismissed the American crisis fighting of 2008–2009 as yet another instance of the kind of improvisation and indiscipline that had got the world into trouble in the first place. It became the first stage in a transatlantic culture war over economic policy that culminated in the acrimonious debate about the crisis of the eurozone, which takes center stage in Part III of this book.

  Given that they were essentially interrelated crises and that the first was much larger in scale and dramatic in speed, the contrast between the relatively effective containment of the global meltdown in 2008, described in Part II, and the spiraling disaster of the eurozone, narrated in Part III, is painful. Around Greek debt the Europeans constructed their own crisis with its own narrative. It had the politics of sovereign debt at its heart. But, as senior economic officials of the EU will now publicly admit, this had no basis in economics.34 The sustainability of public debts may be a problem in the long term. Greece was insolvent. But excessive public debt was not the common denominator of the wider eurozone crisis. The common denominator was the dangerous fragility of an overleveraged financial system, excessively reliant on short-term market-based funding. The eurozone crisis was a massive aftershock of the earthquake in the North Atlantic financial system of 2008, working its way out with a time lag through the labyrinthine political framework of the EU.35 As one leading EU expert closely associated with the EU’s bailout programs has put it: “If we had taken the banks under central supervision then already [in 2008], we would have solved the problem at a stroke.”36 Instead the eurozone crisis expanded into a doom loop of private and public credit and a crisis of the European project as such.

  How do we account for the strange morphing of a crisis of lenders in 2008 into a crisis of borrowers after 2010? It is hard not to suspect sleight of hand. While Europe’s taxpayers were put through the mill, the banks and other lenders got paid out of money pumped into the bailout countries. It is a short step from there to concluding that the hidden logic of the eurozone crisis after 2010 was a repetition of the 2008 bank bailouts, but this time in disguise. For one sharp-tongued critic it was the greatest “bait and switch” in history.37 But the puzzle is that if this were so, if what was happening in the eurozone was a veiled rerun of 2008, then at least one might have expected to have seen American-style outcomes. As its protagonists were well aware, America’s crisis fighting exhibited massive inequity.38 People on welfare scraped by while bankers carried on their well-upholstered lives. But though the distribution of costs and benefits was outrageous, at least America’s crisis management worked. Since 2009 the US economy has grown continuously and, at least by the standards set by official statistics, it is now approaching full employment. By contrast, the eurozone, through willful policy choices, drove tens of millions of its citizens into the depths of a 1930s-style depression. It was one of the worst self-inflicted economic disasters on record. That tiny Greece, with an economy that amounts to 1–1.5 percent of EU GDP, should have been made the pivot for this disaster twists European history into the image of bitter caricature.

  It is a spectacle that ought to inspire outrage. Millions have suffered for no good reason. But for all our indignation we should give that point its full weight. The crucial words are “for no good reason.”39 In the response to the financial crisis of 2008–2009 there was a clear logic operating. It was a class logic, admittedly—“Protect Wall Street first, worry about Main Street later”—but at least it had a rationale and one operating on a grand scale. To impute that same logic to the management of the eurozone is to give Europe’s leaders too much credit. The story told here is not that of a successful political conjuring trick, in which EU elites neatly veiled their efforts to protect the interests of European big business. The story told here is of a train wreck, a shambles of conflicting visions, a dispiriting drama of missed opportunities, of failures of leadership and failures of collective action. If there are groups that benefited—a few bondholders who got paid, a bank that escaped painful restructuring—it was on a small scale, totally out of proportion to the enormous costs inflicted. This is not to say that the individual actors in the drama—Germany, France, the IMF—lacked logic. But they had to act together and the collective result was a disaster. They inflicted social and political harm from which the project of the EU may never recover. But amid the outrage this shambles should inspire, we are apt to forget another of its long-term consequences. The botched management of the eurozone crisis coming on the heels of the transatlantic financial crisis of 2008–2009 was damaging not only for millions of Europe’s citizens. It had dramatic consequences for European business too, on whom willy-nilly those same people rely for jobs and wages.

  Far from being beneficiaries of EU crisis management, business was one of its casualties, and the European banks above all. Since 2008, it is not just the rise of Asia that is shifting the global corporate hierarchy. It is the decline of Europe.40 This might ring oddly to Europeans used to hearing boasts of Germany’s trade surplus. But as Germany’s own most perceptive economists point out, those surpluses are as much the result of repressed imports as of roaring export success.41 The inexorable slide of corporate Europe down the global rankings is clear for all to see. 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. In that battlefield of corporate competition, the crises of 2008–2013 brought European capital a historic defeat. No doubt there are many factors contributing to this, but a crucial one is the condition of Europe’s own economy. Exports matter, but, as both China and the United States demonstrate, there is no substitute for a profitable home market. If we take the cynical view that the basic mission of the eurozone was not to serve its citizens but to provide European capital with a field for profitable domestic accumulation, then the conclusion is inescapable: Between 2010 and 2013 it failed spectacularly. And not first and foremost as a result of missing eurozone institutions, but as a result of choices made by business leaders, dogmatic central bankers and conservatively minded politicians.

  Of course, we may not welcome a world organized this way. Europeans may warm to the spectacle of the European Commission as a consum
er champion taking on global monopolists like Google and challenging Apple’s tax evasion.42 But the fines levied on Silicon Valley are a tiny portion of those firms’ cash hoards. A rather different vision of the balance of power is suggested by those moments in 2016 when the financial world waited with bated breath to learn the size of the settlement that the US Department of Justice was going to impose on Deutsche Bank for mortgage fraud. Deutsche’s financial condition was understood to be so fragile that the US authorities held its fate in their hands.43 A bank that for more than a century had been a powerhouse of Germany Inc. was at the mercy of the United States. In the wake of the crisis it was the last European investment bank with any global standing.

  Europeans may wish to opt out of the global battle for corporate domination. They may even hope that they may thus achieve a greater degree of freedom for democratic politics. But the risk is that their growing reliance on other people’s technology, the relative stagnation of the eurozone and the consequent dependence of Europe’s growth model on exports to other people’s markets will render those pretensions to autonomy quite empty. Rather than an autonomous actor, Europe risks becoming the object of other people’s capitalist corporatism. Indeed, as far as international finance is concerned, the die has already been cast. In the wake of the double crisis, Europe is out of the race. The future will be decided between the survivors of the crisis in the United States and the newcomers of Asia.44 They may choose to locate in the City of London, but after Brexit even that cannot be taken for granted. Wall Street, Hong Kong and Shanghai may simply bypass Europe.

  If this were simply a drama of Europe’s self-inflicted wounds, it would be bad enough. But to write the history of the eurozone crisis as simply European would be barely less misleading than writing the history of 2008 as all-American. In fact, the eurozone crisis spilled over, repeatedly. At least three times—in the spring of 2010, in the fall of 2011 and then again in the summer of 2012—the eurozone was on the brink of a disorderly breakup with the distinct possibility of the sovereign debt crisis sucking in trillions of dollars of public debt. The idea that Germany or any other country would have been immune was fatuous. The resulting inversion of the fronts was spectacular. In 2008 it had been the worldly Europeans calling on the out-of-touch Bush administration to recognize the reality of globalism. Eighteen months later it was the centrist liberals of the Obama administration pleading for the eurozone to stabilize its financial system in the face of dogged and unheeding resistance from conservatives in Berlin and Frankfurt. Already in April 2010, in the judgment of the rest of the G20 and far beyond, the eurozone crisis was too dangerous and the Europeans too incompetent for them to be left to sort out their own affairs. To prevent Greece from becoming “another Lehman,” the Americans mobilized the IMF, that quintessential creation of mid-twentieth-century globalism, to rescue twenty-first-century Europe. That rescue in May 2010 stopped a further escalation, but it locked Europe, the IMF and the United States as an accessory into a nightmarish entanglement from which they still had not extricated themselves seven years later. Nor did it staunch the panic in bond markets. As late as the summer of 2012 the prospect of a major European sovereign debt crisis threatened the United States and the rest of the world economy. It was not until July 2012, with insistent urging from Washington and the rest of G20, that Europe stabilized, and it did so by means of what was generally taken to be the belated “Americanization” of the ECB.45

  III

  If one stopped the clock in the fall of 2012, the difference to the scene four years earlier in New York would have been remarkable. Despite the unpromising start, it would have been churlish to deny that American corporate liberalism, as embodied by the Obama administration, had prevailed once again. Indeed, even today, our sense that the financial crisis had an ending, that at some point in the not too distant past something like normality was restored, depends on looking back to the fall of 2012. At that point the acute threat of a comprehensive crisis was ended. And a sign of that restored normality was the fact that America had not been dethroned. Obama’s reelection in November 2012 clinched it. The Palin tendency had been stopped in its tracks. Internationally, the emerging markets were booming, helped along by the Fed’s generous supply of dollars. The EU was playing catch-up. Whereas in 2008 Obama had put distance between himself and the Bush-Cheney years by adopting a tone of modesty and caution, in 2012 he resumed a classic exceptionalist narrative. America was “indispensable.” The phrase coined in the Clinton era had a new lease on life.46 There was a revival in big-picture foreign policy thinking. The new frontier was the “trade” treaties of TTIP and TPP, in reality gigantic projects of commercial, financial, technical and legal integration with geopolitical intent. Insofar as the first Obama term had been disappointing, this could be laid at the door of conservative opposition. That was depressing but predictable. Modernity and the global capitalism that gave it so much of its dynamic are demanding pacesetters; foot-dragging from conservatives is only to be expected. But in the end history moves on. Even in Europe, pragmatic managerialism in the end prevailed over conservative dogma.

  If we are to understand the last ten years historically, we have to take this moment of renewed complacency seriously. Given subsequent events, our retrospective view is easily clouded by a combination of rage, indignation and fear. But at the time the sense of self-confidence restored was real enough and it left an intellectual legacy. It was the moment when the first surveys of the crisis began to be written. The most optimistic insisted that The System Worked.47 Another declared that 2008 had turned out to be The Status Quo Crisis.48 The more pessimistic version argued that we lived in a Hall of Mirrors.49 Precisely because the crisis had been contained so early and effectively, it had produced a false sense of stability. That in turn had sapped the energy necessary for fundamental reform. And this meant that there was an acute risk of repetition. But repetition is not the same as continuation or extension. What all of these narratives took for granted—both the more and the less pessimistic versions—was the fact that the 2008–2012 crisis was over. That was also the basis on which this book was begun. It was intended to be an anniversary retrospect on a crisis that had reached closure. The tasks that seemed urgent in 2013 were to explain the interconnected history of Wall Street and the eurozone crisis, to do justice to the transnational quality of the crisis—its effects across Eastern and Western Europe and Asia—to highlight the indispensable role of the United States in anchoring the response to the crisis and the novel tools that the Fed had deployed, to chart the painful and protracted inadequacy of the European response and to cast light on an intense but underappreciated period of transatlantic financial diplomacy. All of that is still worth doing. But it has now taken on a new and more ominous meaning. Because it is only if we get to grips with the inner workings of the dollar-based financial system and its fragility that we can understand the risks that lurk in the situation of 2017. If Trump’s presidency marks the nadir of American political authority, that is all the more troubling given the deep functional dependence on the United States revealed not only by 2008 but by the eurozone crisis as well.

  What we have to reckon with now is that, contrary to the basic assumption of 2012–2013, the crisis was not in fact over. What we face is not repetition but mutation and metastasis. As Part IV of this book will chart, the financial and economic crisis of 2007–2012 morphed between 2013 and 2017 into a comprehensive political and geopolitical crisis of the post–cold war order. And the obvious political implication should not be dodged. Conservatism might have been disastrous as a crisis-fighting doctrine, but events since 2012 suggest that the triumph of centrist liberalism was false too.50 As the remarkable escalation of the debate about inequality in the United States has starkly exposed, centrist liberals struggle to give convincing answers for the long-term problems of modern capitalist democracy. The crisis added to those preexisting tensions of increasing inequality and disenfranchisement, and the dramatic cr
isis-fighting measures adopted since 2008, for all their short-term effectiveness, have their own, negative side effects. On that score the conservatives were right. Meanwhile, the geopolitical challenges thrown up, not by the violent turmoil of the Middle East or “Slavic” backwardness but by the successful advance of globalization, have not gone away. They have intensified. And though the “Western alliance” is still in being, it is increasingly uncoordinated. In 2014 Japan lurched toward confrontation with China. And the EU—the colossus that “does not do geopolitics”—“sleepwalked” into conflict with Russia over Ukraine. Meanwhile, in the wake of the botched handling of the eurozone crisis, Europe witnessed a dramatic mobilization on both Left and Right. But rather than being taken as an expression of the vitality of European democracy in the face of deplorable governmental failure, however disagreeable that expression may in some cases be, the new politics of the postcrisis period were demonized as “populism,” tarred with the brush of the 1930s or attributed to the malign influence of Russia. The forces of the status quo gathered in the Eurogroup set out to contain and then to neutralize the left-wing governments elected in Greece and Portugal in 2015. Backed up by the newly enhanced powers of the fully activated ECB, this left no doubt about the robustness of the eurozone. All the more pressing were the questions about the limits of democracy in the EU and its lopsidedness. Against the Left, preying on its reasonableness, the brutal tactics of containment did their job. Against the Right they did not, as Brexit, Poland and Hungary were to prove.