Crashed

by Adam Tooze

  Back to the 1500s and the conjoined birth of capitalism and the modern state system, such moments of decision, contingency, choice and attendant drama have been constitutive of our sense of modern history. Though that sense of history might temporarily have been in abeyance after 1989, it has returned with a bang. Such moments are the coordinates of memory and commemoration. They motivate action: After September 15, 2008, avoiding another Lehman became an idée fixe of crisis managers around the world. They make up the timeline of narration and history. They define anniversaries, triggering debate and reexamination. Given the turmoil of the early twentieth century, the early twenty-first century is crowded with centennials. In 2014 came the biggest of them all: the centennial of 1914. Commemoration and discussion of the outbreak of World War I was attended with profound interest around the world. Historians recalled the Urtrauma of the twentieth century.23 And they did so against the backdrop of conflict in Ukraine and East Asia that made the lessons of 1914 seem particularly pertinent. In a less literal way, 1914 may also be a good way for thinking about the kind of historical problem that the financial crisis of 2008 represents.

  There is a striking similarity between the questions we ask about 1914 and 2008.24 How does a great moderation end? How do huge risks build up that are little understood and barely controllable? How do great tectonic shifts in the global order unload in sudden earthquakes? How do the “railway timetables” of giant technical systems combine to create disaster? How do anachronistic and out-of-date frames of reference make it impossible for us to understand what is happening around us? Did we sleepwalk into crisis, or were there dark forces pushing? Who is to blame for the ensuing human-induced, man-made disaster? Is the uneven and combined development of global capitalism the driver of all instability? How do the passions of popular politics shape elite decision making? How do politicians exploit those passions? 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?

  These are the questions that we have asked about 1914 for the last one hundred years. It is not by accident that their analogues are also the questions we ask about 2008 and its aftermath. They are the questions that haunt the great crises of modernity.

  NOTES

  INTRODUCTION: THE FIRST CRISIS OF A GLOBAL AGE

  1. http://www.un.org/en/ga/63/generaldebate/brazil.shtml.

  2. http://www.un.org/en/ga/63/generaldebate/pdf/usa_en.pdf.

  3. http://www.un.org/en/ga/63/generaldebate/pdf/philippines_en.pdf.

  4. http://www.un.org/en/ga/63/generaldebate/argentina.shtml.

  5. http://www.un.org/press/en/2008/080923_Sarkozy.doc.htm.

  6. http://www.un.org/en/ga/63/generaldebate/pdf/uk_en.pdf.

  7. P. H. Gordon and J. Shapiro, Allies at War: America, Europe, and the Crisis over Iraq (New York: McGraw-Hill, 2004).

  8. J. Habermas and J. Derrida, “February 15, or What Binds Europe Together: Plea for a Common Foreign Policy, Beginning in Core Europe,” Frankfurter Allgemeine Zeitung, May 31, 2003, in Old Europe, New Europe, Core Europe, ed. D. Levy, M. Pensky, and J. Torpey (London: Verso, 2005).

  9. T. Purdum, “It Came from Wasilla,” Vanity Fair 39 (2009).

  10. G. Jarvie, D. Hwang and M. Brennan, Sport, Revolution, and the Beijing Olympics, (Oxford: Bloomsbury Academic, 2008); and M. E. Price and D. Dayan, Owning the Olympics: Narratives of the New China (Ann Arbor: University of Michigan Press, 2011).

  11. G. Toal, Near Abroad: Putin, the West and the Contest over Ukraine and the Caucasus (New York: Oxford University Press, 2017).

  12. D. Trump, “Remarks of President Donald J. Trump—As Prepared for Delivery, Inaugural Address” (speech, Washington, DC, January 20, 2017), https://www.whitehouse.gov/inaugural-address; and for video, http://www.cnn.com/videos/politics/2017/01/20/trump-speech-america-first-sot.cnn.

  13. For an excellent sociopyschological approach to the consequences of the crisis in the United States and Britain, see T. Clark, Hard Times: Inequality, Recession, Aftermath (New Haven, CT: Yale University Press, 2014).

  14. A. S. Blinder, After the Music Stopped (New York: Penguin, 2014), is simultaneously the best economist’s account of the crisis and exclusively American. And G. Packer, The Unwinding: An Inner History of the New America (New York: Farrar, Straus and Giroux, 2013).

  15. In deep agreement with L. Panitchin and S. Gindin, The Making of Global Capitalism: The Political Economy of American Empire (London: Verso, 2012); E. S. Prasad, The Dollar Trap: How the US Dollar Tightened Its Grip on Global Finance (Princeton, NJ: Princeton University Press, 2014); H. M. Schwartz, Subprime Nation: American Power, Global Capital, and the Housing Bubble (Ithaca, NY: Cornell University Press, 2009); and P. Gowan, “Crisis in the Heartland,” New Left Review 55 (2009), 5–29.

  16. I. Bremmer, “The Return of State Capitalism,” Survival 50 (2008) 55–64; and J. Gyriel, “The Return of Europe’s Nation-States: The Upside of the EU’s Crisis,” Foreign Affairs 95 (2016), 94.

  17. Attributed to Douglas Adams of Hitchhiker’s Guide to the Galaxy fame, the notion of a “sudden stop” was introduced into international economics by way of G. A. Calvo, “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops,” Journal of Applied Economics 1 (November 1998), 35–54.

  18. A. Tooze, Statistics and the German State: The Making of Modern Economic Knowledge (Cambridge: Cambridge University Press, 2001); and T. Mitchell, Rule of Experts (Berkeley: University of California Press, 2001).

  19. R. Skidelsky, Keynes: The Return of the Master (New York: PublicAffairs, 2010).

  20. Paul Krugman has vigorously and convincingly defended the 1930s-era IS-LM as essential to understanding the mechanics of the recession and the sluggish recovery; see P. Krugman, “IS-LMentary” (Conscience of a Liberal Blog), New York Times, October 9, 2011, and “Economics in the Crisis” (Conscience of a Liberal Blog), New York Times, March 5, 2012.

  21. R. Baldwin, “Global Supply Chains: Why They Emerged, Why They Matter, and Where They Are Going,” in Global Value Chains in a Changing World, ed. D. K. Elms and P. Low (Geneva: WTO, 2013), 13–60.

  22. H. S. Shin, “Globalisation: Real and Financial,” BIS 87th Annual General Meeting, https://www.bis.org/speeches/sp170625b_slides.pdf.

  23. M. Obstfeld and A. M. Taylor, “International Monetary Relations: Taking Finance Seriously” (CEPR Discussion Paper No. DP12079, June 2017), https://ssrn.com/abstract=2980858.

  24. Some of the key texts are T. Adrian and H. S. Shin, “Liquidity and Leverage,” Journal of Financial Intermediation 19 (July 2010), 418–437; C. Borio and P. Disyatat, “Global Imbalances and the Financial Crisis: Link or No Link?” (BIS Working Paper 346, 2011); and S. Avdjiev, R. N. McCauly and H. S. Shin, “Breaking Free of the Triple Coincidence in International Finance,” Economic Policy 31 (2016), 409–451.

  25. Paradigmatically, D. Yergin and J. Stanislaw, The Commanding Heights: The Battle for the World Economy (New York: Simon & Schuster, 2002).

  26. B. Bernanke, “The Great Moderation,” Eastern Economic Association, Washington, DC, February 20, 2004.

  27. In place of many, D. Harvey, A Brief History of Neoliberalism (New York: Oxford University Press, 2007).

  28. Summarizing a complex multistranded literature, G. Ingham, The Nature of Money (Cambridge: Polity, 2004).

  29. In place of many, A. Roberts, The Logic of Discipline: Global Capitalism and the Architecture of Government (New York: Oxford University Press, 2011).

  30. “Re-Thinking the Lender of Last Resort” (BIS Working Paper 79, September 2014), available at SSRN: https://ssrn.com/abstract=2504682.

  31. Whereas the swap lines involving trillions of dollars receive no more than a series of passing mentions, an entire chapter is devoted to AIG in B. Bernanke, Courage to Act (New York: W. W.
Norton, 2015), 270–291.

  32. D. Coyle, GDP: A Brief but Affectionate History (Princeton, NJ: Princeton University Press, 2015); P. Lepenies, The Power of a Single Number: A Political History of GDP (New York: Columbia University Press, 2016); and T. E. Shenk, “Inventing the American Economy,” Columbia University Academic Commons (PhD, 2016), https://doi.org/10.7916/D8NZ87N1.

  33. From the French side, this is noted by M. Roche, Histoire secrète d’un krach qui dure (Paris: Albin-Michel, 2016). For the German repression of the crisis, see L. Müller, Bank-Räuber: Wie kriminelle Manager und unfähige Politiker uns in den Ruin treiben (Berlin: Econ, 2010).

  34. See Marco Buti at the European Institute, Columbia, April 2016, see https://www.youtube.com/watch?v=7aGtNbmvmTs.

  35. In refusing to accept that either theories of optimum currency or divergent growth regimes doom the euro and in focusing on finance, the interpretation offered here agrees with M. Sandbu, Europe’s Orphan: The Future of the Euro and the Politics of Debt (Princeton, NJ: Princeton University Press, 2015); E. Jones, “The Forgotten Financial Union: How You Can Have a Euro Crisis Without a Euro,” in The Future of the Euro, ed. M. Matthijs and M. Blyth (New York: Oxford University Press, 2015); E. Jones, “Getting the Story Right: How You Should Choose Between Different Interpretations of the European Crisis (and Why You Should Care),” Journal of European Integration 37.7 (2015), 817–832; and W. Schelkle, The Political Economy of Monetary Solidarity: Understanding the Euro Experiment (Oxford: Oxford University Press, 2017).

  36. T. Wieser quoted in C. Gammelin and R. Löw, Europas Strippenzieher: Wer in Brüssel Wirklich Regiert (Berlin: Econ, 2014), 65.

  37. M. Blyth, Austerity: The History of a Dangerous Idea (Oxford: Oxford University Press, 2013), 73.

  38. As acknowledged with admirable frankness in T. F. Geithner, Stress Test: Reflections on Financial Crises (New York: Crown, 2015).

  39. For the essential importance of the idea of a “muddle” for Keynesian liberalism, see G. Mann, In the Long Run We Are All Dead: Keynesianism, Political Economy, and Revolution (London: Verso, 2017).

  40. “From Clout to Rout: Why European Companies Have Become a Fading Force in Global Business,” Economist, June 30, 2016.

  41. M. Fratzscher, Die Deutschland-Illusion: Warum wir unsere Wirtschaft überschätzen und Europa brauchen (München: Carl Hanser, 2014); J. Bibow, “The Euro Debt Crisis and Germany’s Euro Trilemma,” Levy Economics Institute (Working Paper 721, May 2012); and S. Dullien, “A German Model for Europe?,” European Council on Foreign Relations, July 2013.

  42. “CSU für Apple, Linke gegen Steuerdeals,” Neues Deutschland, September 1, 2016.

  43. J. B. Stewart, “Deutsche Bank as Next Lehman Brothers: Far-Fetched but Not Unthinkable,” New York Times, October 6, 2016.

  44. C. Goodhart and D. Schoenmaker, “The United States Dominates Global Investment Banking: Does It Matter for Europe?,” Bruegel Policy Contribution (2016).

  45. “Special Report: How Mario Draghi Is Reshaping Europe’s Central Bank,” Reuters, January 9, 2013; and L. Elliott, “Take a Bow Mario Draghi—Has the ECB Chief Saved the Eurozone?,” Guardian, June 8, 2017.

  46. Z. Micah, “The Myth of the Indispensable Nation,” Foreign Policy, November 6, 2014.

  47. D. W. Drexner, The System Worked: How the World Stopped Another Great Depression (Oxford: Oxford University Press, 2014).

  48. E. Helleiner, The Status Quo Crisis: Global Financial Governance After the 2008 Meltdown (Oxford: Oxford University Press, 2014).

  49. B. Eichengreen, Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and Misuses of History (Oxford: Oxford University Press, 2015).

  50. T. Frank, Listen, Liberal: Or, Whatever Happened to the Party of the People? (New York: Macmillan, 2016).

  51. Among many, two particularly thoughtful pieces are W. Davies, “The Age of Post-Truth Politics,” New York Times, August 24, 2016; and A. M. Rondón, “Donald Trump’s Fictional America,” Politico, April 2, 2017, https://www.politico.com/magazine/story/2017/04/donald-trumps-fictional-america-post-fact-venezuela-214973.

  52. C. Forelle, “Luxembourg Lies on Secret Meeting,” Wall Street Journal, May 9, 2011.

  CHAPTER 1: THE “WRONG CRISIS”

  1. Conference moderated by P. Orszag, “Restoring America’s Promise of Opportunity, Prosperity and Growth,” Brookings Institution, Washington, DC, 2006, http://www.hamiltonproject.org/assets/legacy/files/downloads_and_links/Restoring_Americas_Promise_of_Opportunity_Prosperity_and_Growth_Transcript.pdf.

  2. R. Rubin, In an Uncertain World: Tough Choices from Wall Street to Washington (New York: Random House, 2003); and N. Prins, All the Presidents’ Bankers: The Hidden Alliances That Drive American Power (New York: Nation Books, 2014).

  3. R. Altman, P. Orszag, J. Bordoff and R. Rubin, “An Economic Strategy to Advance Opportunity, Prosperity, and Growth,” The Hamilton Project, April 2006, http://www.hamiltonproject.org/assets/legacy/files/downloads_and_links/An_Economic_Strategy_to_Advance_Opportunity_Prosperity_and_Growth.pdf.

  4. For a dissection of video footage of Obama’s performance, see https://www.nakedcapitalism.com/2013/04/obama-at-the-hamilton-project-2006-this-is-not-a-bloodless-process.html.

  5. Orszag, “Restoring America’s Promise.”

  6. Joint Committee on Taxation Estimated Budget Effects of the Conference Agreement for H.R. 1836, May 26, 2001, JCX-51-01.

  7. P. Blustein, “Reagan’s Record,” Wall Street Journal, October 21, 1985.

  8. S. M. Kosiak, Cost of the Wars in Iraq and Afghanistan, and Other Military Operations Through 2008 and Beyond, CSBA, December 15, 2008; and J. Stiglitz and L. Bilmes, The Three Trillion Dollar War (New York: W. W. Norton, 2008).

  9. T. Oatley, A Political Economy of American Hegemony: Buildups, Booms, and Busts (New York: CUP, 2015).

  10. Data from https://www.cbo.gov/about/products/budget-economic-data#2.

  11. A. Sinai, P. Orszag and R. Rubin, “Sustained Budget Deficits: Longer-Run US Economic Performance and the Risk of Financial and Fiscal Disarray,” Brookings Institution, January 5, 2004.

  12. See the highly influential account by B. Woodward, The Agenda: Inside the Clinton White House (New York: Simon & Schuster, 1994).

  13. D. Wessel and T. T. Vogel Jr., “Arcane World of Bonds Is Guide and Beacon to a Populist President,” Wall Street Journal, February 25, 1993, A1.

  14. “The Long-Term Budget Outlook,” CBO, Washington, DC, 2005, 26. For a Republican view see L. Ball and N. G. Mankiw, “What Do Budget Deficits Do?,” NBER Working Paper 5263, September 1995.

  15. An essential claim common to P. Anderson, American Foreign Policy and Its Thinkers (London: Verso, 2015); and A. Negri and M. Hardt, Empire (Cambridge, MA: Harvard University Press, 2000).

  16. The phrase is Robert Zoellick’s, then deputy secretary of state, as found in R. Zoellick, “Whither China? From Membership to Responsibility,” New York, September 21, 2005 (New York: NCUSCR, 2005), https://2001-2009.state.gov/s/d/former/zoellick/rem/53682.htm.

  17. M. J. Dunne, American Wheels, Chinese Roads: The Story of General Motors in China (Singapore: Wiley, 2011).

  18. Z. Wang, Never Forget National Humiliation: Historical Memory in Chinese Politics and Foreign Relations (New York: Columbia University Press, 2012).

  19. M. Mandelbaum, Mission Failure: America and the World in the Post–Cold War Era (Oxford: Oxford University Press, 2016).

  20. Linking his distinctive approach to the hierarchical nature of money, shadow banking and the “money view” see the presentation by Perry Mehrling, “Shadow Banking, Central Banking, and the Future of Global Finance,” City University London, February 2, 2013, https://www.city.ac.uk/__data/assets/pdf_file/0018/163440/Mehrling_Future-Global-Finance-126sn0t.pdf.

  21. E. Ilzetkzi, C. M. Reinhart and K. S. Rogoff, “Exchange Arrangements Entering the 21st C
entury: Which Anchor Will Hold?,” (NBER Working Paper 23134, 2017).

  22. M. Pettis, The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (New York: Oxford University Press, 2001).

  23. Time (cover), February 1999; and Rubin and Weisberg, In an Uncertain World.

  24. G. A. Calvo, “Sudden Stop, Financial Factors and Economic Collapse in Latin America” (NBER Working Paper 11153, 2005).

  25. “The Argentine Crisis, 2001–2002,” Rabobank, August 23, 2013, https://economics.rabobank.com/publications/2013/august/the-argentine-crisis-20012002-/.

  26. M. Wolf, Fixing Global Finance (Baltimore: Johns Hopkins University Press, 2008).

  27. M. P. Dooley, D. Folkerts Landau and P. Garber, “The Revived Bretton Woods System,” International Journal of Finance & Economics 9 (2004), 307–313.

  28. D. A. Steinberg, “Why Has China Accumulated Such Large Foreign Reserves?,” in The Great Wall of Money: Power and Politics in China’s International Monetary Relations, ed. E. Helleiner and J. Kirshner (Ithaca, NY: Cornell University Press, 2014), 71.

  29. E. M. Truman, “Sovereign Wealth Funds: The Need for Greater Transparency and Accountability,” Peterson Institute for International Economics, August 2007, https://piie.com/publications/pb/pb07-6.pdf.

  30. P. G. Peterson, “Riding for a Fall,” Foreign Affairs (September/October 2004), https://www.foreignaffairs.com/articles/united-states/2004-09-01/riding-fall.

  31. N. Roubini, “The US as a Net Debtor: The Sustainability of the US External Imbalances,” November 2004, http://people.stern.nyu.edu/nroubini/papers/Roubini-Setser-US-External-Imbalances.pdf.

  32. S. Edwards, “Is the US Current Account Deficit Sustainable? And If Not, How Costly Is Adjustment Likely to Be?” (NBER Working Paper 11541, August 2005).

  33. N. Ferguson and M. Schularick, “‘Chimerica’ and the Global Asset Market Boom,” International Finance 10 (2007), 215–239, http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2362.2007.00210.x/abstract.