Ten Years After Lehman’s Collapse: What caused the Crash of 2008 is now shaping our post-modern 1930s – der Freitag


In the autumn of 2008 events unfolded in Wall Street that the crushing majority of people around the world had been led to believe could never occur. It was the financial equivalent of watching the sun spinning out of control soon after it rose above the horizon. Humanity watched on in collective disbelief. The ancient Greeks had a term for moments like that one: 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.

Before long, the repercussions were felt everywhere. The certainties created by decades of of establishment thinking were gone, along with around $40 trillion of equity globally, $14 trillion of household wealth in the US alone, 700,000 US jobs every month, countless repossessed homes everywhere; the list is as long as the numbers it includes are unfathomable. Even McDonald’s, for goodness’ sake, could not secure an overdraft from Bank of America!

The collective aporia intensified by the response of governments that had hitherto clinged tenaciously onto fiscal conservatism, as perhaps the 20th century’s last surviving ideology: the pouring of trillions of dollars, euros, yen etc. into a financial system which had been, until a few months before, on a huge roll, accumulating fabulous profits and provocatively professing to have found the pot of gold at the end of some globalised rainbow. And when that response proved too feeble, our Presidents and Prime Ministers, men and women with impeccable anti-statist neoliberal credentials, embarked upon a spree of nationalising banks, insurance companies and automakers that put even Lenin’s 1917 exploits to shame.

Ten years on, the crisis unleashed in Wall Street in 2008 is still with us. It takes different forms in different countries (i.e. a Great Depression in places like Greece, a scourge of middle class savers in countries like Germany, history’s greatest sponsor of brutal inequality in the United States, a permanent cause of geopolitical and trade tensions in Asia, Eastern Europe etc.). It migrates from continent to continent, from country to country. It morphs from an unemployment-generator to a deflation-machine, to another banking crisis, to a maximiser of trade and capital global imbalances.

Forcing Europe’s ruling elites into a series of laughable errors, it has succeeded in destroying the moral and political foundation of the European Union while, on the other side of the Atlantic, it has resulted in Donald Trump’s Presidency. The more our rulers proclaim the crisis’ taming the deeper the crisis is becoming. Indeed, the only beneficiaries from the crisis’ incessant mutations are the top 0.1% of earners, primarily the financiers, and what I once called the Nationalist International that is creating a new fascist, putridly xenophobic moment in Europe, America and beyond.

So, what happened in 2008?

To answer the question, we need to begin at the beginning – in 1944. As the war was drawing to a close, the New Dealers’ administration in Washington understood that the only way of avoiding the Great Depression’s return, once the guns had been silenced, was to recycle America’s surpluses to Europe and to Japan, and thus generate abroad the demand that would keep their own factories producing all the gleaming new products (washing machines, cars, television sets, passenger jets) that American industry would switch to.

The result was the project of dollarising Europe, of founding the European Union as a cartel of heavy industry, and of building up Japan – all within the context of a global currency union known as the Bretton Woods system: a fixed exchange rates regime anchored on the US dollar, featuring almost constant interest rates, boring banks (operating under severe capital controls) and American management of aggregate demand for global capitalism’s goods and services.

This dazzling design brought us a Golden Age of low unemployment, low inflation, high growth and massively diminished inequality. Alas, by the late 1960s Bretton Woods was dead in the water. Why? Because America lost its surpluses, slipped into a burgeoning twin deficit (trade and government budget) and could, therefore, no longer stabilise the global system by recycling surpluses it no longer had. Never too slow to accept reality, Washington killed off its finest creation: On August 15th, 1971 President Nixon announced the ejection of Europe and Japan from the dollar zone.

Nixon’s decision was founded on the Americans’ refreshing lack of deficit-phobia. Unwilling to rein in the deficits by imposing austerity (that would shrink the United States’ capacity to project hegemonic power around the world), Washington stepped on the accelerator boosting its deficits. Thus American markets worked like a giant vacuum cleaner absorbing massive net exports from Germany, Japan and, later China – ushering in the second phase of post-war growth (1980-2008). And how were the expanding American deficits paid? By a tsunami of other people’s money (around 70% of the profits of European, Japanese and Chinese net exporters) enthusiastically rushing into Wall seeking refuge and higher returns.

In effect, the 1970s inaugurated a remarkable Global Surplus Recycling Mechanism (which I have likened to a Global Minotaur elsewhere): the United States were absorbing a large portion of the Rest of the World’s surplus industrial products while Wall Street would administer the foreign capital flooding into the US in three ways. First, it provided credit to American consumers (whose wages stagnated as part of the same process that boosted the US profit rate and made Wall Street a destination for foreign capital more lucrative that Europe or Japan). Secondly, it channelled direct investment into US corporations and, of course, thirdly, it financed the purchase of US Treasury Bills (i.e. funded the American government deficits).

But for Wall Street to act as this ‘magnet’ of other people’s capital, and perform the role of recycling other people’s surpluses so as to pay for America’s deficits, it had to be unshackled from the New Deal and Bretton Woods era stringent regulations. Institutionalised greed, wholesale de-regulation, the infamous ‘revolving doors’, the exotic derivatives etc. were mere symptoms of this brave new global recycling mechanism. Financialisation was upon us, Europe’s financial centres joined in enthusiastically and, after 1991, an additional two billion workers (from the former Soviet Union, China and India) entered the global proletariat producing new output that boosted imbalanced trade flows – Globalisation had begun!

In Globalisation’s wake, the EU created its common currency. The reason the EU needed a common currency was that, as all cartels, it had to keep the prices of its main oligopolistic industries stable across Europe’s single market. To do this, it was necessary to fix exchange rates within its jurisdiction, as they had been fixed during the Bretton Woods era. However, from 1972 to the early 1990s each EU attempt to fix European exchange rates had failed spectacularly. Eventually, the EU decided to go the whole hog: to establish a single currency. This it did within the supportive environment of (grossly imbalanced yet temporarily impressive) global stability that the US-anchored Global Surplus Recycling Mechanism maintained. Alas, in its infinite inanity, the EU created the euro on the basis of a delicious paradox: A Central Bank (the European Central Bank) without a government to have its back, and nineteen governments without a central bank to have their back. Effectively, the ECB would be supplying a single currency to the banks of nineteen countries, whose governments would have to salvage these banks, at a time of crisis, without a central bank that could support them!

Meanwhile, Wall Street, the City and the French and German banks were taking advantage of their central position in the US-anchored global recycling system to build colossal pyramids of private money on the back of the net profits flowing into the United States from the Rest of the World. This added much energy to the recycling scheme, as it fuelled an ever-accelerating level of demand within the United States, in Europe and Asia. It also brought about the de-coupling of financial capital flows from the underlying trade flows.

When, in 2008, Wall Street’s pyramids of private money auto-combusted, and turned into ashes, Wall Street’s capacity to continue ‘closing’ the global recycling loop vanished. America’s banks could no longer harness the United States’ twin deficits for the purposes of financing enough demand within America to keep the net exports of the Rest of the World going. To boot, Europe’s common currency came unstuck following shockwaves it did not possess the shock absorbers to withstand.

From that dark moment onwards, the world economy, especially Europe’s, would find it impossible to regain its poise.

Taking stock: Socialism for bankers, austerity for the many, and the inexorable rise of the Nationalist International

Most of my German friends tell me that, to this day, they don’t get it: How is it that Deutsche Bank, and the rest of the German banks, went, effectively, bust in 2008? How can any economic sector go, within 24 hours, from making zillions to insolvency, demanding massive taxpayer bailouts. The answer is as simple as it is devastating.

Consider Germany’s banks and exporters back in the summer of 2007. Germany’s national accounts confirm Germany’s large trade surplus with the United States. In the month of August of 2007, to be precise, German net export income from selling Mercedes-Benzes and the like to American consumers was a cool $5 billion. What Germany’s national accounts do not, however, show was the real behind-the-scenes drama, the real action.

From the early 1990s and until 2007, Wall Street bankers manufactured quasi-money toxic derivatives and succeeded in ensuring that their market price was rising fast. Frankfurt’s bankers were dying to buy these lucrative derivatives and did so with dollars that they were borrowing from… Wall Street. In August 2007, Wall Street entered its annus horribilis (which culminated in September 2008 with Lehman’s collapse) when, as it was inevitable, the price of these derivatives began to fall. German bankers became apoplectic when their panicking New York pals began to call in their dollar debts. They needed dollars in a hurry but no one would buy the mountain of US toxic derivatives they had purchased. This is how, from one moment to the next, German banks swimming in oceans of paper profit found themselves in desperate need of dollars they did not have. Could Germany’s bankers not borrow dollars from Germany’s exporters to meet their dollar obligations? 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?

In summary, what had happened, globally, was that imbalanced dollar-denominated financial flows, which had initially grown on the back of the US trade deficit, ‘succeeded’ in de-coupling themselves from the underlying economic values and trade volumes. It would not be far-fetched to say that they almost achieved escape velocity and nearly left 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.

From that moment onwards, politicians went into overdrive to shift the losses from those who created them (the bankers) onto the shoulders of the innocent (middle class debtors, waged labourers, the unemployed, those on disability payments and the taxpayers who could not afford to set up off-shore accounting units). In Europe, in particular, one proud nation was turned against another by political elites determined to disguise: (A) a crisis caused by an alliance of Northern and Southern bankers and other rent-seeking oligarchs, into (B) a clash caused by the profligate Southerners and ant-like Northerners or as as crisis of over-generous German, Greek, Italian etc. social welfare systems.

It takes no genius to put all this together and to grasp why, in the absence of a serious, effective, articulate Left, nationalism, racism and generalised misanthropy is now triumphing in the United States and, especially, in Europe.

Where are we now?

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. 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.

From the late 1970s onwards, that Technostructure extended its realm 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.

In the end, this financialised Technostucture was brought to its knees by the weight of its hubris. That’s what the Crash of 2008 was all about. Two powers proceeded to save 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 Technostructure was saved by two governments (America’s and China’s), those in authority blamed government debt, the cost of welfare, high wages, inflexible labour markets (i.e. the survival of some trades unions struggling to prevent the uberisation of waged workers) – and embarked on a massive, self-defeating austerity drive causing avoidable, industrial-scale suffering. Based on the toxic fantasy of apolitical macroeconomic management, the Technostructure is, to this day, 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”, delivering whole populations (in the absence of a progressive internationalist alternative) into the arms of a post-modern fascism.

Ten years on, the Technostructure is still hanging on to the levers of power. But, nevertheless, the neoliberal populist myth (i.e. the myth that wholesale deregulation will make everyone’s dreams come true under the rule of democracy and… Montesquieu), on which it used to rely for manufacturing consent, 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)?

And so, here we are: At our generation’s 1930 moment. Soon after the Crash and with a fascist moment upon us. The pressing question facing this generation is a harsh one that, while no young person deserves to face, none of us have the right to evade: When and how will we rise up against the Nationalist International bred across the West by the Technostructure’s inane handling of its inevitable crisis?



John Kenneth Galbraith, The New Industrial State, Princeton, 1967, 2007, with a foreword by James K. Galbraith

Adam Tooze, Crashed: How a decade of financial crises changed the world, London: Allen Lane, 2018

Yanis Varoufakis, The Global Minotaur: America, Europe and the Future of the World Economy, London: Zed Books, 2011,2013,2015

Yanis Varoufakis, And the Weak Suffer What They Must? Austerity, Europe and the Threat to Global Stability, London: Bodley Head, 2016