So, why did the Crash of 2008 happen? A first glimpse of the Global Minotaur

Regular visitors will know that these days I am deeply immersed in the writing of a book about the Crash of 2008 and its after math. One that will bear the title THE GLOBAL MINOTAUR: America, the True Origins of the Financial Crisis and the Future of the World Economy. Well, I just finished a couple of chapters, which is small beer given than the whole damned thing must be finished by the end of the month… Anyhow, here is an extract from the introductory chapter:

Coming to terms with the Crash of 2008 is like coming face to face with the Parallax Challenge at its most demanding. Who could credibly deny that economists and risk managers miscalculated systemic risk big time? Is there any doubt that Wall Street, and the financial sector at large, did grow fat on insidious voracity, on quasi-criminal practices, and on financial products that a decent society ought to have banned? Were the credit rating agencies not a textbook case of conflict-of-interest in action? Was Greed not hailed as the new Good? Did the regulators not fail spectacularly at resisting the temptation to stay on the bankers’ ‘right’ side? Were Anglo-celtic societies not more prone than others to the cultural trickery of neoliberalism, acting as a beachhead from which to spread the word to the rest of the globe that ‘scruples’ meant nothing and self-interest was the only way, the only motive? Is it not true that the Crash of 2008 affected the developed world more acutely than the so-called emerging economies? Can anyone refute the simple proposition that capitalism, as a system, has an uncanny capacity to trip itself up?

Just like in a simple optical parallax all perspectives are equally plausible depending on one’s standpoint, here too each of the explanations listed above illuminates important aspects of what happened in 2008. And yet, they leave us dissatisfied, with a pernicious feeling that we are missing something important. That, while we have glimpsed at many crucial manifestations of the Crash, its quintessence still escapes us. Why did it happen, really? And how could legions of keenly motivated, technically hyper-skilled market observers miss it? If it was not greed and profligacy, loose morals and even looser regulation that caused the Crash and the ensuing Crisis, what was it? If the Marxists’ expectation that capitalism’s internal contradictions will always strike back is too simple an explanation of the events leading to 2008, what is the missing link there?

My figurative answer is: The Crash of 2008 was what happened when a beast I call the Global Minotaur was wounded critically. While it ruled the planet, its iron fist was pitiless, its reign callous. Nevertheless, as long as it remained in rude health, it kept the global economy in a state of balanced disequilibrium. But when it fell prey to the inevitable, collapsing into a comatose state in 2008, it plunged the world into a simmering crisis. Until we find ways to live without the beast, radical uncertainty, protracted stagnation and a revival of heightened insecurity will be the order of the day.

The collapse of communism in 1991 saw the conclusion of a tragedy with classical overtones, a fatal inversion (a peripeteia, as Aristotle would have called it) which began when the noble intentions of revolutionary socialists first turned into their opposites, before giving way to an unsustainable industrial feudalism bearing only victims and villains. In contrast, the Crash of 2008 exuded the air of a pre-classical, more mythological, sequence of events. It is for this reason that this book adopts a title alluding to a period before tragedy had been invented.

Indeed, I could have entitled this book The Global Vacuum Cleaner, a term that captures quite well the main feature of the second post-war phase that began in 1971 with an audacious strategic decision by US authorities: Instead of reducing the twin deficits that was building up in the late 1960s (the budget deficit of the US government and the trade deficit of the US economy), they decided to increase both aspects of it liberally and intentionally. And who would pay for the red ink? Simple: The rest of the world, by means of a permanent tsunami of capital that rushed ceaselessly across the two great oceans to finance America’s twin deficits.

The twin deficits of the US economy, thus, operated for decades like a giant vacuum cleaner, absorbing other people’s surplus goods and capital. While that ‘arrangement’ was the embodiment of the grossest imbalance imaginable at a planetary scale, and required what Paul Volcker described vividly as the “controlled disintegration of the world economy”, nonetheless, it did give rise to something resembling global balance; an international system of rapidly accelerating asymmetrical financial and trade flows capable of putting on a semblance of stability and steady growth.

Powered by America’s twin deficits, the world’s leading surplus economies (e.g. Germany, Japan and, later, China) kept churning out goods that Americans gobbled up and then sent almost 70% of the profits, in the form of capital flows, to Wall Street which, at the speed of light, turned them into cheap loans, investments and, of course, a nice ‘little’ earner for the bankers themselves. Through this prism, everything seems to make more sense: the rise of financialisation, the triumph of greed, the retreat of regulators, the domination of the anglo-celtic growth model; all these phenomena that typified the era suddenly appear as mere by-products of the massive capital flows necessary to feed the twin deficits of the United States.

I already suggested this most peculiar phase of world capitalism could reasonably be labelled the Global Vacuum Cleaner. Alas, it would be a title whose origins in the humble world of domestic appliances might pass over the dramatic, almost mythological, aspects of the international design under which we all laboured prior to the ill-fated 2008. A design too unstable to survive in perpetuity but, at the same time, a design that helped maintain global tranquillity for decades upon a constant flow of tributes from the periphery to the imperial centre; tributes sustaining the mutual reinforcement between (a) the US twin deficits and (b) aggregate demand for the surplus nations’ goods and services. These features of the ‘beast that roared’ from the 1970s until so very recently lend themselves, I believe, more readily to the Minotaur metaphor than to one involving domestic chores.

The Cretan Minotaur

The Minotaur is a tragic mythological figure, the result of greed, divine retribution, revenge and the progenitor of much suffering. He is also a symbol of a particular form of political and economic equilibrium spanning the world’s continents. According to the myth’s main variant, King Minos of Crete, the most powerful ruler of the era, asked Poseidon for a fine bull as a sign of godly approval, pledging to sacrifice it in the god’s honour. Recklessly, after Poseidon obliged him, Minos decided to spare the animal, taken by its beauty and poise. The gods, never letting a good excuse for horrid retribution go to waste, chose an interesting punishment for Minos: Using Aphrodite’s special skills, they had Minos’ wife, Queen Pasiphaë, fall in lust with the bull. Using various props constructed by Daedalus, the infamous engineer, she managed to impregnate herself, the result of that brief encounter being the Minotaur: a creature half human half bull (Minos’ Bull, from the Greek taurus meaning bull).

Once the Minotaur grew larger and increasingly unruly, King Minos instructed Daedalus to build the Labyrinth, an immense maze where the Minotaur was kept. Unable to nourish itself with either maize or human food, the beast had to feast on human flesh. It proved an excellent excuse for Minos to seek his revenge on the Athenians, whose King Aegeus, a lousy loser, had had Minos’ son killed after the young man had won all races and contests in the Pan Athenian Games. After a brief war with Athens, Aegeus was forced to send seven teenage boys and seven teenage girls to be devoured by the Minotaur every year (or every nine years, depending on the myth’s version). Thus, the myth has it, regular tributes that kept the Minotaur well nourished established a Pax Cretana.

Beyond myth, historians suggest that, at the time, Crete was the economic and political hegemon of the Aegean region. Weaker city-states, like Athens, had to pay tribute to Crete regularly as a sign of subjugation. This may well have included the shipment of teenagers to be sacrificed by priests wearing bull masks. Returning to the realm of myth, the eventual slaughter of the Minotaur by Theseus, son of King Aegeus of Athens, marked the emancipation of Athens from Cretan hegemony and the beginning of a new era. Alas, on his return voyage to Athens, Theseus forgot to replace the original black sails on his vessel with fresh, white, ones, as previously agreed in order to signal to his waiting father that the mission was successful and that Theseus was returning from Crete alive and well. Upon spotting the black sails from afar, and thinking that his son had died in the clutches of the Minotaur, Aegeus plunged to his death into the sea below, thus giving his name to the Aegean Sea.

A quick perusal of the ancient myth (see above) confirms its suitability as a tale of unbalanced might stabilised and sustained by one-sided tributes; of an hegemonic power projecting its authority across the seas, and acting as custodian of far reaching peace and international trade in return for regular tributes that keep nourishing the beast within.

In our modern world, the role of the beast was played by the US twin deficits and the tributes took the form of incoming goods and capital. In the misty world of Cretan myth, the beast was a sad, unloved, vicious creature and the tributes were young people whose sacrifice preserved a hard won peace. Turning to the tale’s ending, it took a brave prince, Theseus, to perform the ugly deed, to slay the Minotaur and usher in a new post-Cretan era. In our more complicated world, that of the Global Minotaur, it took the spontaneous collapse of the banking system. But while this ‘death’ certainly ended the second post-war phase, the new era is stubbornly refusing to show its face. Until it does, we shall all remain in the state of aporia brought on by 2008