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After the Financial Crisis, A Decade of Damage

Adam Tooze’s new book traces today’s political breakdowns to the 2008 crash.


We already know much of the story that Adam Tooze tells in Crashed: How a Decade of Financial Crises Changed the World, his ambitious study of the causes and effects of the financial meltdown that caused the Great Recession. The opening pages of his book recount the events of September 16, 2008, “the day after Lehman.” In a matter of hours, the Dow Jones plummets “778 points, wiping $1.2 trillion off the value of American businesses.” The entire financial system begins to unravel and it becomes clear that the mortgage-based CDOs and credit default swaps that underpinned world banking are nearly worthless. Mutual funds pull back from investing and banks face an immediate shortage of funding. World lending begins to freeze altogether. European countries face capital shortages. The entire world economic system is on the edge of collapse.

Viking, 720 pp., $35.00

But Tooze is not simply telling a story of the financial crisis. Crashed is also the tale of the political intricacies of the crash, the ensuing bailout, and of the great political unraveling that has followed. He documents the descent into recession in 2008 as housing values plummeted and the average net worth of the middle class American household halved from $107,000 to $57,800 in a year. American car sales came to a near halt, sending a reaction through the global manufacturing chain. Chrysler and General Motors teetered on bankruptcy; Mexico, a major center in North American car manufacturing, reeled as its non-petroleum exports dropped by 28 percent and its GDP contracted 7 percent over the year. By 2009, the crisis had spread worldwide, with Germany’s exports falling 34 percent. GDP dropped around the world and a credit crunch caused poorer, over-indebted European nations like Portugal and Greece into virtual bankruptcy.

Although the bailout of American investment banks prevented total world economic meltdown, it did not instill the public with trust in the government or institutions. Their failure to prevent massive declines in the standard of living would discredit establishment politicians on both the center left and right. Whereas average citizens lost huge chunks of their wealth and buying power, the banks got a bailout and the people responsible for the crisis walked away, not only without jail time but, in many cases, with handsome golden parachutes, funded by taxpayer money.

What looked like an American mortgage debacle ended up as a world financial crisis that has shaken the foundations of liberal democracy from Washington and Rome to Istanbul. Tooze shows the global nature of financial and political breakdowns, which have otherwise been linked to local factors. Although it is a stretch to compare Turkey and former eastern bloc countries to the UK, the US and Italy—where liberal democracy is under attack, but has not yet ceased to function—what this book makes clear is that one more crash could very well be the tipping point for Western democracy.

A scholar of early twentieth century European economic history, Tooze has chosen here to write a history of the recent past on a global scale. To regular readers of the Financial Times, or of IMF, OECD, World Bank, and European Commission reports, most of the details in this book will be familiar. But it is the configuration of Tooze’s analysis that is novel—he darts from the crisis in Washington to monetary politics in Europe, and on to Chinese fiscal policy to explain how interconnected each of these countries’ economies are. This sends a clear message to those who believe in nationalist economic policies: We are all in this together, to a greater extent than financial institutions and governments have made clear. 

Many see the origins of 2008 in America’s deregulated and undercapitalized banks. There is no question that they created a mortgage crisis that morphed into a financial crisis as toxic subprime CDOs—a financial product of mortgage, mortgage insurance, and bonds pooled together as collateral for the product itself—became worthless. American banks were overleveraged at 20:1 in subprime assets, which means that for every 20 dollars of risk investment, they held, by US law, only one dollar of actual capital guarantee. But, Tooze seeks to demonstrate, the crash was not solely about the United States; it was an international phenomenon. 

The American financial playing field, he shows, was designed in great part by Europeans in the 1980s. When German, Swiss, French and Dutch banks began to buy into the city of London as a “springboard” to US markets, they also developed and spread the dangerous CDO products. And, as the economists Anat Admati and Martin Hellwig have long shown, European banks were even more undercapitalized than the Americans with Deustchebank, UBS and Barclays averaging 40:1 risk exposure. Tooze makes a convincing case that the crash came from a failure of international regulation and the lack of political will to limit a dangerous system of financial risk.

Tooze is careful to show that the crash was not simply the fault of banks and regulators. National governments also flouted financial responsibility at every level. Starting in 1995, many European countries began an unsustainable borrowing spree that began in 1995 and continues to this day in the US, Europe and beyond. As Tooze shows, debt-to-GDP ratios have skyrocketed in Europe. In Spain, Portugal and Greece debt went from the EU stipulated maximum of 60 percent of GDP to well over 100 percent. The same was happening in Italy and France, and indeed, the US and Japan. This meant that even major countries could not, and still cannot, realistically pay off their debt.  

What Tooze does not say is that most countries are much poorer than they think they are. They face the daunting challenge of somehow convincing their publics to cut spending and raise taxes or face downgrades, defaults and more financial crises. The likelihood of future crashes may be even greater than he suggests.

Tooze’s most insistent point is that the 2008 crash created the conditions for “illiberal democracy.” The success of the Tea Party and the American far-right, he argues, grew directly from it: Once George W. Bush, Treasury Secretary Hank Paulson, and Federal Reserve Chairman Ben Bernanke realized that they needed to spend $700 billion to nationalize the American financial system, their own party revolted against them. Most Republicans flatly rejected the bailout and refused to vote for it. Of the 205 votes in favor of the Troubled Asset Relief Program, “140 came from the Democrats and only 65 from the Republicans. Of those opposed, 133 were Republicans and 95 Democrats.” These facts are worth revisiting, because, as Tooze tells it, those who refused to vote for TARP would pave the way for the reactionary House Freedom Caucus that has steadfastly stood by Donald Trump.

The links between the financial crisis and the rise of neo-fascism in Hungary and Poland are similarly clear. Both countries had entered European capital markets not with the euro but with their old currencies, the forint and the zloty. Vulnerable and small, Hungary had taken much of its national and household debt in Swiss francs. As the forint collapsed and the franc grew in the wake of the crisis, Hungary and its companies and homeowners found themselves nearly ruined by far-away forces that made their debts untenable. Hungary was “humiliated” by favorable but intrusive IMF and EU loan assistance, which many in Hungary thought made Hungary a colony of the EU and interests of international capital. 

To nationalists and those who lost their savings and houses, it was reminiscent of the Trianon Treaty of 1920, which saw the big powers of Europe amputate 70 percent of Hungary’s landmass and 75 percent of its population. The far-right Fidesz party, led by Victor Orbán, used anti-Semitic specters of foreign bankers and Jewish conspiracies bringing down Hungary, and set up a home base for what is politely known today as the alt-right. Poland followed suit, though later, with its own shift to Catholic, authoritarian nationalist government.

Of course this does not explain why hard-hit countries such as Spain, Italy, Portugal and Greece did not turn to extreme reactionary governments. Italy re-elected Silvio Berlusconi in 2008, and in 2011 elected a series of moderate center and center-left governments, only voting in a nationalist, xenophobic, pro-Russian government this year, after a long simmering migration crisis. Meanwhile, Spain and Portugal have opted for traditional, moderate parties, and Greece chose the democratic socialism of Syriza. Tooze leaves unanswered the question of why the crash pushed some countries to a threshold of intolerance and authoritarianism while others have so-far resisted. Nor does he explore the possibility that the crash only exacerbated existing tendencies, rather than wholly reshaping the politics of the countries hit hardest.

Tooze is a master of the modern financial report and his book is built on a dizzying array of expert reports, studies and Financial Times and Economist articles. He is the financial reader’s reader. But this poses some issues: He often enthusiastically follows the official accounts of the most famous leaders, press releases and reports from the OECD, the IMF, the World Bank and the credit ratings agencies. By sticking to the official lines and citing usually the most glamorous figures, he can overlook the fine grain of what actually happened.

Take for example his reading of former Greek finance minister Yanis Varoufakis’s telling of the Greek debt crisis. Varoufakis claimed that the Germans had offered Greece unsustainable debt and publicly humiliated and crushed the country.  Few can argue with that. But Tooze never mentions Varoufakis’s disastrously undiplomatic insistence on calling creditors immoral during negotiations (Greece too had its share of blame in the crisis), revealing the closed discussions, violating rebate agreements, and attacking creditors, while threatening to pull out of the monetary union. It served instead to spook creditors and the markets, and to cause a bank run, capital controls, and the loss of tens of billions of euros from the already bankrupt Greece. By treating sources like Varoufakis uncritically, Tooze simply misses the real story.

Tooze’s account of German economic policy is also relatively superficial, relying on sources such as “the official chronicle of the German finance ministry” and a small sample of news articles. He does not compare various arguments or versions of what happened. This means that rather than critical analysis, we get instead an anodyne summary. Tooze rightly recognizes that Germany’s loans to Greece, Italy, Portugal and Spain helped stabilize German export markets. What he does not say is that while claiming to be a victim of Greece’s profligacy, Germany benefitted from the Greek and southern European debt crisis to an extent that some might find morally dubious.   

By causing chaos and uncertainty in the Eurozone, the Greek crisis lowered the value of the euro, and ostensibly allowed over-indebted southern European countries to borrow more at lower cost so they could afford to buy more German goods, which propped up German industry. All the while, this drove down Germany’s own interest rates in relation to other countries, allowing them to undercut Italian and French firms, while, at the same time, snapping up Greek assets for next to nothing, and profiting from Greek interest payments to help their own struggling banks. This is the kind of information one can dig out of a critical analysis of the sources, but it requires a willingness to question many of the Olympian authorities on which Tooze relies. That willingness is essential in the difficult historical process of assessing testimony.

In the end, Tooze does not give a clear sense of exactly who caused the crisis. Even Alan Greenspan, Larry Summers, Hank Paulson and George W. Bush—who gutted the SEC and made it even harder to see and manage potential fraud and crisis—are portrayed as cool and potentially heroic decision-makers in the face of crisis. Avoiding any specific criticism, Tooze, for the most part, constructs a play-by-play narrative. The same is true when he looks to the future: He rightly warns that national hubris in China could be the source of the next crisis, but has little more to say about who might contribute to this or how. 

By his account, we are powerless to control the invisible hand of the global financial system that will bring us another crisis, and we can only react, as Paulson did. “These crises are hard to predict or define in advance,” Tooze writes, 

They are not anticipated and often deeply complex … And they demand action.  It is this juxtaposition that frames the narrative of this book: large organizations, structures and processes on the one hand; decision, debate, argument and action on the other.

There is truth in his depiction of the unwieldy behemoth of global finance. And yet, we know the culprits in this story: investment banks, those who are supposed to regulate them, and the states that take unmanageable debt. We also know that good, unbiased financial auditing is an old and effective tool for measuring risk, debt and capitalization, as are good public financial management and well-designed financial regulations, which were peeled away from the 1990s onwards. As powerless as one might feel, jail time for bankers guilty of misconduct is a deterrent that has not yet been tested. It might just work. 

Indeed, Tooze’s book makes it clearer than ever that effective regulation is needed. In this light, the recent bi-partisan repeal of the Dodd-Frank Act, created to reign in many of the excesses that caused the crash, looks all the more ominous. And while China risks an unforeseen crisis, Tooze suggests that stable and well-capitalized banks would be more able to weather another crash. Our future is not completely decided by an irrational market. Yet a public that no longer believes in the law’s capacity to protect it from the market will turn to terror, autocracy and technocracy over democracy. That is a chilling and convincing conclusion.