CRASHED: Long version of my Observer review of Adam Tooze’s new book on the Crash of 2008

Every so often humanity manages genuinely to surprise itself. Events to which we had previously assigned zero probability push us into what the ancient Greeks referred to as aporia: a state of intense bafflement urgently demanding a new model of the world we live in. The Crash of 2008 was such a moment. Suddenly, the world ceased to make sense in terms of what, a few weeks before, passed as conventional wisdom – even McDonald’s, for goodness’ sake, could not secure an overdraft from Bank of America!

Moments of aporia produce collective efforts to dissolve the overwhelming puzzlement. In late 18th Century the pains of the industrial revolution begat free-market economics. The crisis of 1848 brought us the Marxist tradition. The Great Depression produced both Keynes’ General Theory and Friedman’s Monetarism. Over the past decade, the Crash of 2008 has given rise to a cottage industry of books, articles, documentaries, even films but not, so far, some overarching theory. Now, a new book has arrived deserving to be at the very top of the reading list of anyone shocked by the events of 2008 and eager to make sense of its aftermath.

Authored by Adam Tooze, an accomplished English economic historian teaching at Columbia University (and, in the interest of full disclosure, a colleague with whom we have been exchanging ideas), Crashed: How a Decade of Financial Crisis Changed the World is a compelling read. Combining excellent explanations of complex financial concepts with a majestic narrative tracing the crisis’ prehistory and destructive path across the planet (including long, apt and erudite chapters on Russia, the former Soviet satellites, China, South East Asia), Crashed also offers original insights into the nature of the wounded beast (financialised capitalism) that a lesser author would fail to combine with a chronicle of such precision and detail. Of the myriad unacknowledged truths that Tooze illuminates some examples follow.

Many economies (e.g. Ireland, South Korea) that were run according to what the global establishment considered ‘best practice’ (i.e. government and trade surpluses, light regulation of banks and employers) crashed the moment ninety percent of global money flows ceased up. Why? Because the establishment’s prescription had skilfully left out the crucial truth that the main threat came from the banking system (not the state) and from private (not public) debt. That there were no runs on banks (perhaps with the exception of Northern Rock) meant little: financiers froze up (once called upon to repay unpayable debts, often in excess of their country’s national income) while operating a system whose survival depended on tsunamis of money rushing hither and thither. Meanwhile, American and European politicians, who had grown used to a cosy relationship with the bankers, began to convert a crisis of (super-rich and super-inane) creditors into a crisis of (poor and middle class) debtors, pushing the losses of the former upon the latter – also known as socialism for bankers and austerity for the many. In particular, the European establishment’s analysis that the crisis was caused by too much spending on welfare, and thus universal belt-tightening was what we needed as the world was falling down about our ears, had “no basis in economics”; which may explain why, in early 2015, I was scalded for presenting… macroeconomic arguments in the Eurogroup[1] (the gathering of the Eurozone’s finance ministers).

Tooze also reminds us that the Eurozone’s austerity, which condemned tens of millions of Europeans to cruel, unnecessary hardship, was originally championed not by conservatives but by Germany’s social democrats; and modelled on the brutality with which Eastern European elites (raised on a diet of authoritarian communism) had imposed austerity on their own people (to preserve their private benefits via continued membership of the international financial elite). The EU may have succeeded in implementing, to this day, what I call fraudulent insolvency concealment (e.g. a decade of loaning more money to the insolvent Greek state and to bankrupt European banks in order to conceal the fact that there is no chance these debts and losses can be repaid) but it paid a gigantic price for this: a “historic defeat for European capitalism”, as Tooze puts it, not to mention its loss of legitimacy in the eyes of a majority of Europeans whose life prospects were either ruined or severely diminished.

On a more positive note, Tooze helps dissolve several stereotypes: Widespread German antipathy to lending to Greek, Italian and, generally, Southern European ‘profligates’ was not underpinned by racist sentiments but was a belated reaction to the West Germans’ fatigue from supporting their Eastern German brethren a decade before. Moreover, along with a majority of Greeks, a majority of Germans also opposed the bailouts of the German and French banks that Chancellor Merkel (along with President Sarkozy, the International Monetary Fund and the European Central Bank) imposed upon successive Greek governments, thus pushing the people of Greece into permanent debt-bondage. Brexit did not reflect some endemic xenophobia of the British but was due to a deadly combination of (i) mismatched monetary policies across the Channel, causing an influx of EU workers into the UK (as the European Central Bank ridiculously reduced the supply of euros while the Bank of England printed pounds energetically, the result being collapsing labour markets on the continent while in the UK many, admittedly low-quality, jobs were being created), and (ii) George Osborne’s penchant for self-defeating austerity, which meant treating a large section of the population as cattle whose market value had tanked.

As for the war of words between Europe and the United States, Tooze reminds us that it was not started by Donald Trump. Funnily enough, it was Wolfgang Schäuble, the then German finance minister, who at a G20 meeting in 2010 opined that the American growth model was “…in deep crisis”, adding that “[t]he Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base” – and, thus, prompting Tim Geithner, the US Treasury Secretary at the time, to retort that the crisis had its roots in global imbalances caused by Germany’s (and China’s) mercantilism.

Informative, and often delightful, insights are to be found on every page. Together, they afford the reader a sense of how the evolution of really-existing capitalism reinforces dominant ideas about capitalism. Though almost entirely misleading, these ideas then feed into the evolution of really-existing capitalism often with the effect of magnifying a crisis which establishment thinking rules out as impossible. Then, in a never-ending cycle of mutual buttressing, the unsustainable system and the offending ideas underpinning it gain additional staying power, to the detriment of a majority of people in a majority of countries. It is in this rich context that Crashed helps the reader frame the events of 2008 within a larger, intelligible picture. Much of it has been drawn by other authors before:

  • Global trade imbalances were growing inexorably, creating a glut of savings in surplus countries that flowed into deficit countries, causing house price, stock exchange and debt bubbles whose bursting would never end well.[2]
  • These imbalances were essential to the preservation of US hegemony after the 1971 collapse of the Bretton Woods system – the global system of fixed exchange rates and heavily regulated banks that pegged all Western money to the dollar and gave us capitalism’s golden age in the 1950s and 1960s. Why were these imbalances essential after 1971? Because, once the US was in deficit to the rest of the world, but nonetheless owned the world’s main currency unit (the dollar), the only alternative to imposing austerity upon itself (and shrinking like… Greece) was to boost its trade deficit (providing in the process China’s, Japan’s and, later, China’s factories with the necessary demand) while making non-American capitalists pay for the US trade deficit voluntarily. How? By enticing their capital to Wall Street through marvellous financial returns. But for that to happen, Wall Street and the City had to be allowed to go berserk.[3]
  • To enable this, co-opted politicians unshackled the financiers from all meaningful regulation, causing Wall Street and the City to erect mountain ranges of private, toxic, combustible quasi-money which changed the nature of capitalism. [4]
  • Meanwhile in Europe, the demise of the Bretton Woods system caused large fluctuations in exchange rates that were pure poison for a European Union forged initially as a cartel of central European oligopolies (cartels need stable prices and supranational cartels need fixed exchange rates). This gave the impetus to the creation of a common currency (the euro) in a manner guaranteeing that it could never absorb the shockwaves of the inevitable global financial crisis, thus poisoning European democracy and destabilising the global economy.[5]

Tooze not only lays bare and pieces together these central aspects of the crisis but, importantly, goes one step further in the direction of providing the reader with an illuminating Archimedean perspective from which the totality of our complex, multifaceted predicament makes a lot more sense.

Back in 1967, John Kenneth Galbraith described how capitalism had shifted from a market society to a hierarchical system owned by a cartel of corporations: the Technostructure, as he called it.[6] Run by a global elite that usurped markets, fixed prices and controlled demand, the Technostructure replaced the New Deal’s full employment objective with that of GDP growth. Though Tooze does not mention Galbraith, he implores us to grasp how Galbraith’s Technostructure extended, post-Bretton Woods, its realm magnificently by adding the black magic of financialisation to its structure (through, for example, turning car companies like General Motors into large speculative financial corporations, that also made some cars!), magnifying by a dizzying factor its power and, ultimately, replacing the aim of GDP growth with that of ‘financial resilience’: enduring paper asset inflation for the few and permanent austerity for the many.

The result was the strengthening of the Technostructure’s dollar-based hegemony in a manner that no macroeconomic approach (limited, by design, to looking at the national accounts of states) can even recognise as, from the 1990s onwards, the “real action” was taking place in the balance sheets of the global financiers.

To give an example of how old-fashioned national accounting fails to explain contemporary economic reality consider the example of Germany’s banks and exporters. National accounts do reveal Germany’s large trade surplus (as President Trump keeps reminding us) with the United States. In August of 2007, German exporters netted a cool $5 billion from selling Mercedes-Benzes and the like to American consumers. However, in the same month, Wall Street was entering its annus horribilis and German bankers became apoplectic when their New York pals began to call in dollar debts that Frankfurt’s bankers had taken out to buy the US paper assets whose value was now dropping like a brick. Could Germany’s bankers not borrow dollars from Germany’s exporters? They could but how would the $5 billion the latter had earned during that August help when the German bankers’ outstanding debt to Wall Street, that the Americans were now calling in, exceeded $1000 billion?

What had happened, globally, is that imbalanced dollar-denominated financial flows, that had initially grown on the back of the US trade deficit, ‘succeeded’ in almost achieving escape velocity and leaving Planet Earth behind (once the bankers invented, created and… kept on their own balance sheets toxic dollar-denominated instruments) – before crashing down violently in 2008.

In the end, two powers saved the financialised Technostructure from itself: The US government, and in particular the trillions of dollars that the Federal Reserve pumped into European private and central banks (through what is known in the trade as ‘swap lines’). And China, whose skilful economic management boosted domestic investment to unheard of levels, kept on its books worthless dollar assets that many others were shedding, and even went so far as to propose the elimination of trade imbalances via the adoption of a multilateral clearing union of the type that John Maynard Keynes had proposed at the Bretton Woods conference in 1944 (only to be denied by the Obama administration, who preferred to keep the dollar’s privilege intact at the expense of a seriously unstable capitalism).

While the financialised Technostructure was saved by two governments (America’s and China’s), the neoliberal populist myth (that wholesale deregulation will make everyone’s dreams come true under the rule of democracy and… Montesquieu) is now dead. Is it any wonder that racism and geopolitical tensions are all the rage? Was it not inevitable, as some of us have been warning since before 2008, that a Nationalist International would soon gain power, on the back of an explicitly xenophobic narrative, in the White House, in Italy, Austria, Poland, Hungary, the Netherlands, shortly in Germany (once Mrs Merkel is shoved aside)?

Tooze worries that, in this putrid political environment, the US and Chinese governments will never again be able to pull off a trick similar to the one that saved the dominant Technostructure between 2008 and 2015. To this I would add the real and present danger caused by the fantasy of apolitical macroeconomic management that the Technostructure promotes energetically. Aimed at shrouding in techno-bubble the undeclared class war with which the establishment has been shifting all the risks and all the losses onto the weak, instructing them to “suffer what they must”, it is pushing whole populations (in the absence of a progressive internationalist alternative) into the arms of a post-modern fascism.

In his concluding remarks, Tooze draws a parallel between our present aporia and 1914, the year when an earlier illusion of some ‘great moderation’ was shattered. On this I beg to differ. From where I stand we are at a 1930 moment: Soon after the Crash and with a fascist moment upon us. If so, the pressing question is: When will we rise up against the Nationalist International bred across the West by the Technostructure’s inane handling of its inevitable crisis?

The above is a longer version of the review published in The Observer (12 August 2018) of Adan Tooze’s Crashed: How a Decade of Financial Crisis Changed the World, London: Allen Lane


[1] While representing Greece as its finance minister. See Adults in the Room: My battle against Europe’s Deep Establishment, London: Bodley Head, 2017.

[2] See Martin Wolf’s The Shifts and the Shocks: What We’ve Learned – and Have Still to Learn – from the Financial Crisis, London: Allen Lane, 2014.

[3] See my The Global Minotaur: Europe, America and the Future of the World Economy, London: Zed Books, 2011-2015.

[4] See John Lanchester’s Whoops! Why everyone owes everyone and no one can pay, London: Penguin, 2010 and Richard Koo’s The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy, Singapore: John Wiley, 2015

[5] See my And the Weak Suffer What They Must? Europe, Austerity, and the Threat to Global Stability, London: Bodley Head, 2016 and Joseph Stiglitz’s Euro: How a Common Currency Threatens the Future of Europe, NY: W.W. Norton, 2016

[6] See The New Industrial State, Princeton, 1967, 2007, and in particular the foreword by James K. Galbraith