Crashed: How a Decade of Financial Crises Changed the World

by: Adam Tooze (0)


"An intelligent explanation of the mechanisms that produced the crisis and the response to it...One of the great strengths of Tooze's book is to demonstrate the deeply intertwined nature of the European and American financial systems."--The New York Times Book Review

From the prizewinning economic historian and author of Shutdown and The Deluge, an eye-opening reinterpretation of the 2008 economic crisis (and its ten-year aftermath) as a global event that directly led to the shockwaves being felt around the world today.

We live in a world where dramatic shifts in the domestic and global economy command the headlines, from rollbacks in US banking regulations to tariffs that may ignite international trade wars. But current events have deep roots, and the key to navigating today’s roiling policies lies in the events that started it all—the 2008 economic crisis and its aftermath. Despite initial attempts to downplay the crisis as a local incident, what happened on Wall Street beginning in 2008 was, in fact, a dramatic caesura of global significance that spiraled around the world, from the financial markets of the UK and Europe to the factories and dockyards of Asia, the Middle East, and Latin America, forcing a rearrangement of global governance. With a historian’s eye for detail, connection, and consequence, Adam Tooze brings the story right up to today’s negotiations, actions, and threats—a much-needed perspective on a global catastrophe and its long-term consequences.

The Reviews

Columbia history professor Adam Tooze, an authority on the inter-war years, has offered up an authoritative history of the financial crises and their aftermath that have beset the world since 2008. He integrates economics, the plumbing of the interbank financial system and the politics of the major players in how and why the financial crisis of 2008 developed and the course of the very uneven recovery that followed. I must note that Tooze has some very clear biases in that he views the history through a social democratic prism and is very critical of the congressional Republican caucus and the go slow policies of the European Central Bank under Trichet. To him the banks got bailed out while millions of people suffered as collateral damage from a crisis that was largely made by the financial system. His view may very well be correct, but many readers might differ. Simply put, to save the economy policy makers had to stop the bleeding.He starts off with the hot topic of 2005; the need for fiscal consolidation in the United States. Aside from a few dissidents, most economists saw the need for the U.S. to close its fiscal deficit and did not see the structural crisis that was developing underneath them. Although he does mention Hyman Minsky a few times in the book, he leaves out Minsky’s most important insight that “stability leads to instability” as market participants are lulled into a false sense of security. It therefore was against the backdrop of the “great moderation” that the crisis began. And it was the seemingly calm environment that lulled all too many regulators to sleep.The underbelly of the financial system was and still is in many respects is the wholesale funding system where too many banks are largely funded in repo and commercial paper markets. This mismatch was exacerbated by the use of asset-backed commercial paper to fund long term mortgage securities. It was problems in that market that triggered the crisis in August 2007.The crisis explodes when Lehman Brothers files for bankruptcy in September 2008. In Tooze’s view the decision to let Lehman fail was political, not economic. After that the gates of hell are opened causing the Bush Administration and the Federal Reserve to ask for $750 billion dollar TARP bailout of the major banks. It was in the Congressional fight over this appropriation where Tooze believes the split in the Republican Party between the business conservative and social populist wing hardens. We are living with that through this day. The TARP program passes with Democratic votes. Tooze also notes that there was great continuity between the Bush and early Obama policies with respect to the banks and auto bailout. Recall that in late 2008 and early 2009 nationalization of the banks was on the table. Tooze also correctly notes that the major beneficiary of the TARP program was Citicorp, the most exposed U.S. bank to the wholesale funding system.Concurrent with TARP the Bernanke Fed embarks on its first quantitative easing program where it buys up not only treasuries, but mortgage backed securities as well. It was with the latter Europe’s banks were bailed out. Half of the first QE went to bail out Europe’s troubled banks. When combined the dollar swap lines with QE, Europe’s central banks essentially became branches of the Fed. Now here is a problem. Where in the Federal Reserve Act does it say that the Fed is the central bank to the world? To some it maybe a stretch.Tooze applauds Obama’s stimulus policy but rightly says it was too small. There should have been more infrastructure in it. To my view there could have been more infrastructure if only Obama was willing to deal with the Republicans by offering to waive environmental reviews and prevailing wage rules. He never tried for fear of offending his labor and environmental constituencies. Tooze also gives great credit to China with it all out monetary and fiscal policies. That triggered a revival in the energy and natural resource economies of Australia and Brazil thereby helping global recovery.He then turns to the slow responses in Europe and the political wrangling over the tragedy that was to befall Greece. It came down to the power of Angela Merkel and her unwillingness to have the frugal German taxpayer subsidize the profligate Greeks. As they say “all politics is local”. The logjam in Europe doesn’t really break until Mario Draghi makes an off-the-cuff remark at a London speech in July 2012 by saying the ECB will do “whatever it takes” to engender European recovery.As a byproduct of bailing out the banks and failing to directly help the average citizen a rash of populism, mostly of the rightwing variety, breaks out all over leading to Brexit, Orban in Hungary, a stronger rightwing in Germany and, of course, Donald Trump. But to me it wasn’t only banking policy that created this. The huge surge in immigration into Europe has a lot more to do with it. Tooze under-rates this factor. He also under-rates the risk of having a monetary policy that is too easy and too long. The same type of Minsky risk discussed earlier is now present in the global economy: witness Turkey, for example. Thus it is too early to tell whether or not the all-out monetary policy of the past decade will be judged a success from the vantage point of 2030.Adam Tooze has written an important book and I view it as must read for a serious lay reader to get a better understanding of the economic and political policies of the past decade.

This is not a terrible book. The chronology is good as is the analysis of international relations and international organizations. The author is especially good at the interlinking of great power relations and the financial crisis. He also has the best single account I have seen of how Russia became estranged from Europe and the US. He is actually capable of seeing the world from Moscow's POV instead of repeating sterile 1980's tropes substituting Putin for the old SU. However, he is hopeless on domestic politics. I could say especially US but that is only because the US and the dollar have such an outsized place in early 21st century finance. His POV is an ACELA corridor mandarin whining about the unwashed rubes in Flyover Country. He had the same blinders in his prior book on the post-WW1 period. Representative democracy requires the technocratic elites to actually explain and sell their policies. A key example is his blaming the incoming Trump administration for dumping the Trans-Pacific Partnership. This ignores two years of campaigning where first Bernie, then Donald and finally Hillary all repudiated the Treaty. To have either of the two possible presidents sign it anyway would have been yet another elite technocratic betrayal of the actual voters. The author seems capable of seeing this democracy deficit, of parliaments essentially told to shut up and bark like trained seals, as regards the EU's treatment of the Club Med countries. Yet when it comes to the US, UK, Germany etc. the voters are to be ignored because there are technocratic reasons why there is no other choice. To advocate that passes from history to political advocacy. It also should be stated up front and discussed instead of dismissed with snide comments about people not fit to govern.

David Schulman's and WSMRER's reviews are excellent and hit the required nails on their heads. Two additional comments: First, Tooze is an excellent writer, and parts of the book move along at a Jack Reacher pace. Second, the decisions by the Fed here or other central banks, mainly in Europe, were (and are) not clinical, econometric modeled policy decisions; they were highly responsive to the political climate in various countries, and that climate was shaped by popular perceptions of what was a foot, unfortunately mass opinions based on in grained, uninformed prejudices of various varieties. One example was when Lehman disintegrated in September 2008. Geithner went to D.C. in an attempt to sell the urgent requirement for government and/or Fed intervention, only to be lectured by bloviating politicians about the evils of socialism etc. etc. Despite the pushback from the conservatives, with approval from Bush TARP did get enacted. However, the public's reaction to this program was negative, a big "giveaway" by the taxpayers. Now forgotten, TARP turned a profit of $15 billion, money turned over to the Treasury. Geithner, Bernanke et al found Washington so toxic they initiated new liquidity enhancing programs by stealth, arguably saving the U.S. economy from further deterioration. A good chunk of the book covers the 2010-2012 European battle between the thrifty German's focus on fiscal rectitude vs other nations pushing for stimulus measures to achieve economic growth to help nations like Greece, Spain, Portugal, and Ireland out of their huge economic hole - quire a contest of wills that Tooze covers very well. Which brings us to today. As a nation under Trump that is obsessed with the worship of its own ignorance, what viable policy options will be open if things hit the fan again? The book's final chapter asks some significant (if depressing) questions.

Crashed: How a Decade of Financial Crises Changed the World
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