Reviewing Adam Tooze's Crashed: How a Decade of Financial Crises Changed the World (August 2023)

Published in 2018, Tooze's 700-page exposition of the first crisis of global capitalism in the 21st century promotes the idea that while the 2008 global financial crisis revealed the shortcomings of laissez-faire capitalism, it also demonstrated that state intervention saved the world from a 2nd Great Depression. Both are striking conclusions. Yet the neoliberal ideology that self-regulating markets govern better lives on. And millions suffered home foreclosures, unemployment, and poverty even as the banks were bailed out and the 'money men' grew ever wealthier. This, despite it being their recklessness and greed that precipitated the crisis in the first place. Sophisticated financial engineering by means of endless rounds of securitization—essentially creating money out of thin air—this was the 21st century's alchemy of magical wealth.

In the chapter entitled 'Bailouts,' Tooze writes that the neoliberal mantra of laissez-faire was out and state capitalism was in. He quotes Martin Wolf, the well-respected economics commentator of the Financial Times as asserting that March 14, 2008 was “the day the dream of global free-market capitalism died.” That was beginning—the day the US Government facilitated J.P. Morgan's rescue acquisition of the investment bank Bear Stearns.

The ferocity of the financial crisis in 2008 was met with a mobilization of state action without precedent in the history of capitalism. Never before outside wartime had states intervened on such a scale and with such speed. It was a devastating blow to the complacent belief in the great moderation, a shocking overturning of prevailing laissez-faire ideology. To mobilize trillions of dollars on the credit of the taxpayer to save banks from the consequences of their own folly and greed violated maxims of fairness and good government. But given the risk of contagion, how could states not act? Having done so, however, how could they ever go back to the idea that markets were efficient, self-regulating and best left to their own devices?

The crucial intervention by government in response to the 2008 crisis thoroughly contradicted the neoliberal fiction of fully-automated rule-based economic stabilization policy for which Milton Friedman, North America's premier monetarist economist, deserves considerable credit for popularizing. (For a humorous account of the discretionary/rules-based monetary policy approaches, see 'Milt, Mo and the Money Machine' in my Flash! Fiction 3.)

The events of 2008 massively confirmed the suspicion raised by America’s selective interventions in the emerging market crises of the 1990s and following the dot-com crisis of the early 2000s.... The foundations of the modern monetary system are irreducibly political.

For Friedman, this previous point would have provided the basis for his assertion that real world markets don't operate optimally because political interference disturbs the economy's natural tendency to reach equilibrium. For neoliberals, it is a curious thing that sometimes state aid is socially acceptable and sometimes not. If it targets the poorer classes, it's often written off as public waste and evidence of personal failure, and if it benefits foreign firms it's mercantilism and considered patently 'unfair.' However, if a domestic corporation, its executives and shareholders are the beneficiaries, then it's perfectly rational and in tune with the way the world should work. Tax incentives to lure businesses to move; court decisions to allow anticompetitive mergers and permit monopolistic market behaviour; offshore tax havens to avoid income taxes;' bailouts to rescue feckless and rapacious corporations; 'forever patents' intended to ensure long-term monopoly rents from innovations; revolving government contracts for dependent corporations and industries—all are part of a system intended to bypass competition in favour of asymmetrical wealth accumulation. In the words of Peter Thiel, billionaire venture capitalist, "Competition is for losers."

The severity of the economic collapse of 2008 was remarkable in its scope and its "extraordinary global synchronization." It may have been made in America, but it rapidly spread across the globe like no other.

Of the 104 countries for which the World Trade Organization collects data, every single one experienced a fall in both imports and exports between the second half of 2008 and the first half of 2009. Every country and every type of traded goods, without exception, experienced a decline....

[O]f the sixty countries that supply the IMF with quarterly GDP statistics, fifty-two registered a contraction in the second quarter of 2009. Not since records began had there been such a massive synchronized recession. Tens of millions of people were thrown into unemployment.

Precisely how many people lost their jobs across the global economy depends on our guess as to joblessness among China’s giant migrant workforce. But reasonable estimates range between 27 million and something closer to 40 million unemployed worldwide.

However, according to Tooze, it could have been worse had the US Treasury and the Fed not stepped up to prevent the global financial crisis from developing into a full-scale global depression—something the 1930s Fed had failed to do with the result that the Great Depression lasted from the 1929 stock market crash until the massive government spending of World War II.

In its own terms, as a capitalist stabilization effort, the response patched together by the US Treasury and the Fed was remarkably successful. Its aim was to restore the viability of the banks. It not only did that but also provided massive liquidity and monetary stimulus to the entire dollar-based financial system, to Europe and the emerging markets beyond.

[A]cting in the enlightened self-interest of the US financial system ... the Fed, without public consultation of any kind, made itself into a lender of last resort for the world. When the music in the private money markets stopped, the Fed took up the tune, providing a stopgap of liquidity that, all told, ran into trillions of dollars and was tailored to the needs of banks in the United States, Europe and Asia. It was historically unprecedented, spectacular in scale and almost entirely unheralded.

But the Treasury and the Fed didn't save the world alone.

In 2009, for the first time in the modern era, it was the movement of the Chinese economy that carried the entire world economy. Together with the huge liquidity stimulus delivered by the US Federal Reserve, China’s combined fiscal and financial stimulus was the main force counteracting the global crisis. Though they were not coordinated policies, they made real the vision of a G2: China and America leading the world.

But the recovery was far from even ... either within countries or across international boundaries. In the midst of the crisis, while those at the bottom were feeling the effects immediately, those arguably most responsible for the crisis were—in the cruelest of ironies—reaping the benefits of the rescue.

In Britain ... RBS [Royal Bank of Scotland], a now majority state-owned bank ... announced in February 2009 that it intended to honor £1 billion in bonus contracts. In the United States the figures were far larger. In the 2008 bonus season, after suffering tens of billions in losses, Wall Street paid out $18.4 billion to its top staff.... [T]he investment banks weren’t conventional public companies. They were partnerships run primarily for the benefit of their managerial elite and they expected to be paid, whatever happened. In the 2008 bonus season Merrill Lynch alone was responsible for $4–5 billion in payments.... [AIG] closed its fourth quarter of 2008 with a loss of $61.7 billion, the largest in US corporate history. Nevertheless, on March 16, 2009, the company announced that its Financial Products division, which had been at the heart of the toxic spill, would be awarding $165 million in bonuses, a figure that might rise to as much as $450 million.

Concomitantly, income and wealth inequality in the US was on the rise. In 2013, Emmanuel Saez and Thomas Piketty calculated "that of the growth generated by the economic recovery since 2009, 95 percent had been monopolized by the top 1 percent." And then, among those regarded as saviours,

After the events of 2008–2009 and the spectacularly lopsided bailouts, could anyone seriously doubt whom government was for? At the level of personnel, the revolving door that connected the Treasury, the Fed and the top banks continued to spin at a steady pace. By 2014 both Bernanke [Fed Chairman, 2006-2014] and Geithner [President, NY Fed, 2003-2009 and Treasury Secretary, 2009-2013] were on their way from public service to well-upholstered positions in finance. Geithner went to the well-connected investment bank Warburg Pincus. Bernanke advises the Citadel hedge fund and chaired an advisory board for the giant PIMCO bond fund, owned by Allianz of Germany, which also included as its members Jean-Claude Trichet [President, European Central Bank, 2003-2011) and Gordon Brown [Chancellor of the Exchequer, 1997-2007, and British Prime Minister, 2007-2010] as well as Anne-Marie Slaughter [State Department, 2009-2011] of the Obama foreign policy team.

Tooze draws three significant (and contested) conclusions from his research:

• First, markets are inherently unstable, which is not just a Keynesian notion but has long figured prominently in the 20th century literature of business cycle fluctuations and forms the basis for the research program at the well-known National Bureau of Economic Research (NBER), the official recession-dating body in the US.
• Second, the state is necessary to provide market regulation and to manage economic stabilization through the crests and troughs of economic activity.
• Third, within the nexus between the public and private sectors, there are power brokers and experts whose enlightened self-interest is capable of bringing about collaboration during a crisis. Earlier in the book though, Tooze points to the failure of enlightened self-interest in the case of the 2003 Iraq War, and this weakens the evidence that such instances of "feral financial capitalism" that led to the 2008 crisis can be safely left in the hands of those in power.

With respect to governance in the third conclusion, Tooze reflects on the host of obstacles that emerge to frustrate crisis resolution. Referring to the US crisis (originating from the toxic asset heap of high-risk mortgage-backed securities) and the subsequent European crisis, Tooze writes

Whereas the US crisis involved overextended banks and mortgage borrowers impelled by greed and financial excess, the eurozone crisis would revolve around quintessentially European themes of public finance and national sovereignty. It would pit Greeks against Germans and reawaken memories of World War II. Both crisis narratives play to type: mercenary Americans, squabbling European nationalisms.

Can good governance always be counted on to come to the rescue given the ubiquitous nature of greed in human affairs and the observed regularity of boom-and-bust economic cycles? And what are the limits of the 'greater good' in international political economy given the incorrigibility of nationalism, particularly in the case of Germany whose economy is the elephant in the EU as Tooze goes to some length to demonstrate with his history of the eurozone crisis. And how do crisis interventions that perpetuate economic inequality within countries, e.g., the US, and among countries, e.g., the Global North and the Global South or in Europe, between the northern European countries, led by Germany, and the PIIGS (the high-unemployment eurozone members Portugal, Italy, Ireland, Greece and Spain for whom the watchword was 'austerity' not 'stimulus.')?

And what if good governance gives way to illiberal leaders like Trump who have great appeal during economic hard times? Post-2008 it was obvious that the bailouts were for the 'too big [i.e., important] to fail' while austerity was the program for the rest—the age-old dogma that wealth must trickle down from the top if there is to be prosperity below. In a predictable twist, Trump tapped into the vast resentment against the privileged class of government and business insiders, and then once in power repeated the same self-serving script. And what confidence can we have that the big picture thinking of government and corporate leaders and their experts and apologists, even in so-called democracies—in between elections—won't 'rationally' sacrifice ordinary citizens like pawns in various gambits? Tooze repeatedly argues that mass mortgage foreclosures, high and protracted unemployment, poverty and war come back to political economy not the 'scientific' discipline of economics.

In other words, 'who gets what' is a political question not a technical question as Tooze quotes from a New York Times opinion piece penned by the Nobel laureate economist Paul Krugman after the 2012 presidential election:

What do the pre- and postcrisis consensuses have in common? ... Both were economically destructive: Deregulation helped make the crisis possible, and the premature turn to fiscal austerity has done more than anything else to hobble recovery. Both consensuses, however, corresponded to the interests and prejudices of an economic elite whose political influence had surged along with its wealth …. Some pundits [might wish to] depoliticize our economic discourse, to make it technocratic and nonpartisan. But that’s a pipe dream. Even on what may look like purely technocratic issues, class and inequality end up shaping—and distorting—the debate.”

Finally, with respect to economics and war, Tooze devotes an entire chapter—'"F*** the EU: The Ukraine Crisis'—to develop the argument that the EU (and the US) 'sleepwalked' into the 2014 Ukrainian Crisis—the Russian annexation of Crimea. And it is this notion of 'sleepwalking' into a crisis that provides the segue to a comparison between 1914 and 2008 with which the book ends. Hardly a sanguine assessment of our near future from 2018.