Adam Tooze is an acclaimed economic historian and professor at Columbia University. This tome has been labeled the authoritative work on the Great Recession. He refers to it as 'The First Crisis of the Global Age'. It was a global catastrophe, but with significant American causation. The contention of the book is that the responses to the crisis are central to understanding how the liberal democracy consensus has deteriorated. To do that, we must explore the economics of what happened. We will see an interconnectedness that makes the concept of the nation state seem an anachronism, but it was the central bank of one country that literally saved the world from financial collapse. Yet, it was the same central bank's almost zero interest rate after the dot.com bubble and 9/11 that created the vast liquidity that fostered the crisis. In contrast to the successful US response to the Great Recession, the EU totally mismanaged its subsequent debt crisis. The world's problems appeared to be resolved by 2012, but then reemerged as globalization strengthened issues of inequality and opportunity into "a comprehensive political and geopolitical crisis."
Early in the second Bush term, a Brookings Institute colloquium articulated concern about the rising US fiscal deficit being absorbed by foreign investors, particularly, China. It was a particular concern when combined with the trade deficit. However, it would not be this imbalance that led to a global crisis, but an old-fashioned bout of Wall Street excess. The story of the real estate bubble is quite familiar. Expanding home ownership was encouraged and easy credit was available. Loans of limited quality were packaged, securitized, and sold, while everyone's house values went up and up. "The subprime mortgage boom of the 2000s led to a financial crisis because hundreds of billions of private label MBS' were stockpiled on the balance sheets of the mortgage originators and securitizers themselves." By 2007, a handful of private investors and institutions were shorting the real estate boom. As America's financial system fell apart in the fall of 2008, Europeans confidently asserted that it was the failure of the laissez-faire philosophy of regulation and assured themselves that they were immune. They did not realize how much capital the subprime boom had sucked into the US or that although they did not speak English, their investment banks did. London was as complicit as Wall Street and all of the continent's banks were players. Additionally, the EU had a built in problem because of the incomplete nature of the currency union. They had allowed Greece join and, then watched its tax revenue to collapse to the point where it could not service its national debt. The early 2000s saw egregious real estate booms in Europe, especially in Spain and Ireland. Lurking on the periphery were all of the new members of the union. Former satellites of the USSR, as well as former republics, were now part of an expanded Europe. They hadn't participated in any of the aggressive financial activities of the decade. But they were funded by all of the excess liquidity in the system. The crisis may have originated in the Anglo-Saxon economies, but the pain and consequences were spread far and wide.
The liquidity crunch began in 2007 in Europe when banks started failing because they could not roll over their short term fundings. The following year, Bear Stearns was absorbed by JPMorgan when they faced a crunch. Lehman filed for bankruptcy on Sept. 15 when it could not meet creditors' collateral calls. A day after Lehman, AIG was hours away from failing, and the Reserve Fund notified the Fed it was about to 'break the buck'. Every investment bank in the world was on the cusp. It was more than Wall Street and the City that were in pain. The collapse of available credit stalled economies everywhere and shattered the personal fortunes of many around the world. In the US, nine million families lost their homes, over 20 trillion dollars of wealth disappeared and the largest mass migration since the Depression took place. Worldwide job losses have been estimated at 35 million. Ben Bernanke has said that September and October of 2008 were worse than anything in the Great Depression. The world of 1929 had not been as coordinated as it is now. "The speed and force of the avalanche was unprecedented." The decisions that were made that staunched the bleeding were made by the Fed chair, Hank Paulson and Tim Geithner. "Bailout battles were fought in the US, Iceland, Ireland, Britain, France, Germany, the Benelux, and Switzerland." The US solved its problem quickly, but the political cost separated the Republican managerial elite from the party's right wing base. After bailing out FreddieMac and FannieMae over Republican opposition, Paulson and Bernanke were not willing to ask Congress again for a new authorization for Lehman. It was immediately apparent that they underestimated the Lehman failure. The next day, facing what was labeled "an extinction level event", they offered Fed credit to AIG. Realizing that they were still looking at extinction, Paulson and Bernanke asked Congress for a $700 billion Troubled Asset Relief Program. It failed in the House. TARP passed the second time it came before Congress. Paulson and Bernanke insisted the nine largest banks take a capital infusion of $125B. A month later, Citi required another $20B, as did BofA, who was strong-armed into completing its acquisition of Merrill. The incoming Obama team was prepared to be fully supportive of government intervention to solve the problems of the financial markets.
The crisis in Europe reflected the interconnectedness of their markets with the US, but their political system did not grasp this, and was not capable of solving the problem. Both Sarkozy and Merkel repeatedly criticized the Anglo-Saxons and stood in the way of coordinated European action. The US Fed, without consulting Congress, became the lender of last resort in Europe. It worked "hand in glove with the European mega banks to unwind the transatlantic balance sheet." The Fed lent dollars to the ECB, the Bank of England, the National Bank of Switzerland and the Scandinavian national banks, who in turn funneled it to their banks. Additionally, the Fed lent to fourteen banks in Eastern Europe, Latin America and Asia. It was also necessary for the IMF to step up in the former Soviet states. Two countries that did not receive help from the Fed were Russia and China. Russia suffered from a collapse in oil prices and the ubiquitous liquidity challenge. The state intervened, but Putin exacted a price from the oligarchs. He demanded they contribute and clawed back some of their excesses for the state. China had not participated in any of the financial hi jinks but suffered significant consequences as the largest holder of US debt and the US' largest trading partner. The state responded with a spending program that was the largest stimulus package in world history. Indeed the Russian, Chinese and emerging market actions made the derisory actions in Europe look laughable, as the only western stimulus that was worth the name was in the US. The Obama stimulus and the Fed's initiation of Qualitative Easing were, on top of the TARP, all that the American political system could tolerate. Unfortunately for the future, there was no program or solution for the millions with underwater mortgages. The Obama administration turned to the banks and successfully put "the American banking system on a forced road to recovery." After years of crisis, the American banks, with aggressive government support, were alive, well and sufficiently capitalized. That was not true of Europe.
After the largess of 2008, stepping back to prudent fiscal and monetary policies became the theme on both sides of the Atlantic. But in Europe, Ireland had guaranteed its banks' liabilities, and in Greece, the decline in tourism meant that the national debt could not be serviced. A return to normalcy was not in the cards. French and German banks were the largest holders of EU sovereign debt and each country's leaders had diametrically opposed philosophies about how to handle a debt crisis. The Germans wanted haircuts on the debt of troubled nations. The French wanted to refinance them. The US weighed in, and the outcome was an EU/IMF/ECB (the troika) program labelled here as 'extend and pretend'. But it failed to satisfy the markets and by May 2010 the world appeared ready to spin out of control again. Greece was being analogized to Lehman. The troika came back with more money and stabilized the markets, but at the price of more Greek austerity. Fear of debt contagion spread strict budgeting around the world. The entire G-20 committed to halving their respective budget deficits in three years. When Ireland teetered, they too slashed expenditures further. By 2011, it was evident that the extend and pretend of the previous year had failed. The US insisted on more refinancing and the troika accommodated. Europe argued, modified, made deals, ousted irresponsible leaders and still it was necessary, in early 2012, to go to the G-20 and ask for $300-400B of IMF funding. The US, China and Brazil refused. Europe had still not addressed the instabilities in their sovereign bond markets or their banks' need to recapitalize. That spring, Greece's debt was reduced by a fifth and the debt that remained was now held by the European Financial Stability Fund, the ECB and the IMF. In May, voters fed up with austerity turned out the governments in Greece, Spain and France and pushed hard to the left even in Germany. However, the crisis in Europe ended when Mario Draghi, ECB president assured the world that the ECB "was ready to do whatever it takes to preserve the euro." Markets calmed and yields dropped. The eurozone collapsing was no longer on everyone's lips. "The eurozone was saved by its belated Americanization." Obama's reelection and Bernanke's QE3 on top of Draghi's speech righted the world. All appeared resolved.
The year 2013 saw income inequality come to the fore as an issue in America. Over the previous forty years, productivity increased bu 80% but wages by about half as much. The wealth created was flowing to those at the top, and that was even more true during the very slow recovery since 2008. It was not just globalization and technological change that led to inequality. To some extent, the deck was stacked; the government worked for the elite. This concept had been accelerated in America's consciousness by the fallout from 2008, and would become the issue of the next presidential election cycle. The Tea Party and its Congressional hard-liners opposed anything the government, and in particular Obama, tried to accomplish on this or any front. Meanwhile in Europe, Russia appeared to be in a death spiral after its 2014 invasion of the Crimea led to severe sanctions and the price of oil collapsed, only to be saved the following year by a helping hand from China. In Greece, the economy deteriorated further when 400,000 of its best educated and most capable emigrated because of round after round of German imposed austerity. A leftist government was prepared to leave the EU if more austerity was all it could offer. The IMF acknowledged publicly that extend and pretend was hopeless. Yet, again, the 2015 Greek compromise was more of the same. The next crisis for Europe would not be financial, but political. Right wing governments were elected in the UK and Poland, right wing extremist politicians were gaining strength.
"Nationalism and xenophobia were the common denominators from the challengers from the Right." In June 2016, the UK narrowly voted for Brexit. In the US, the Republican candidate "promised to fight for the neglected, ignored and abandoned..the forgotten man and woman.. Americanism not globalism will be our credo." When elected, he announced he was withdrawing from NAFTA, and denounced the EU and NATO.
Since 2007, the scale of the financial crisis has placed democratic politics and capitalist governance under a great strain. Party alliances around the world are being reconfigured. In some countries, the moderates have been eliminated. Brexit has hamstrung the Tories. The GOP can win elections but "is incapable of legislating or cooperating effectively in government." The author closes with a comparison between 2008 and 1914. "How does a great moderation end? How do huge risks build up that are little understood and barely controllable? How do the tectonic shifts in the global order unload in sudden earthquakes? Who is to blame for the ensuing human induced man made disaster? Is the uneven and combined development of global capitalism the driver of all instability? How do the passions of popular politics shape elite decision making? Can we achieve perpetual stability and peace? These are the questions we have asked about 1914 for the last hundred years. It is not by accident that their analogues are also the questions we ask about 2008 and its aftermath. They are the questions that haunt the great crisis of modernity."
I submit my observations here quite humbly. There is a great deal about the dismal science I do not comprehend. There were entire chapters in this book where I did not make a single note. It wasn't just the trilateral repos or the single tranche open market operations that befuddled, but the big picture as well. I remain unclear about Greece. Why they were allowed in the EU and why they were allowed to stay? Apparently the political imperative of continental unification is the reason. But, how and why the leaders of Europe would spend so much time, money and political capital to extend and pretend is beyond me. Angela Merkel comes off as a real heavy in this book and the austerity imposed on the Greeks by the Germans is hard to fathom.
Nonetheless Tooze is probably the best expositor of economic history I've ever come across. He brilliantly ties the overlapping issues around the world together and I for one feel much better informed about what transpired. I remember thinking in 2008 that this was a 10-20 year problem and I believe we are still in the middle of the problems created by the Great Recession. I don't disagree with the author's contention that the response on the right is correlated to all of the problems created by the cross-Atlantic elites, but I do not think he connects the dots well enough in the last fifth of the book. I believe he drifts from superb economic history into somewhat banal assessments of the political results. That said - this is a must read!
Early in the second Bush term, a Brookings Institute colloquium articulated concern about the rising US fiscal deficit being absorbed by foreign investors, particularly, China. It was a particular concern when combined with the trade deficit. However, it would not be this imbalance that led to a global crisis, but an old-fashioned bout of Wall Street excess. The story of the real estate bubble is quite familiar. Expanding home ownership was encouraged and easy credit was available. Loans of limited quality were packaged, securitized, and sold, while everyone's house values went up and up. "The subprime mortgage boom of the 2000s led to a financial crisis because hundreds of billions of private label MBS' were stockpiled on the balance sheets of the mortgage originators and securitizers themselves." By 2007, a handful of private investors and institutions were shorting the real estate boom. As America's financial system fell apart in the fall of 2008, Europeans confidently asserted that it was the failure of the laissez-faire philosophy of regulation and assured themselves that they were immune. They did not realize how much capital the subprime boom had sucked into the US or that although they did not speak English, their investment banks did. London was as complicit as Wall Street and all of the continent's banks were players. Additionally, the EU had a built in problem because of the incomplete nature of the currency union. They had allowed Greece join and, then watched its tax revenue to collapse to the point where it could not service its national debt. The early 2000s saw egregious real estate booms in Europe, especially in Spain and Ireland. Lurking on the periphery were all of the new members of the union. Former satellites of the USSR, as well as former republics, were now part of an expanded Europe. They hadn't participated in any of the aggressive financial activities of the decade. But they were funded by all of the excess liquidity in the system. The crisis may have originated in the Anglo-Saxon economies, but the pain and consequences were spread far and wide.
The liquidity crunch began in 2007 in Europe when banks started failing because they could not roll over their short term fundings. The following year, Bear Stearns was absorbed by JPMorgan when they faced a crunch. Lehman filed for bankruptcy on Sept. 15 when it could not meet creditors' collateral calls. A day after Lehman, AIG was hours away from failing, and the Reserve Fund notified the Fed it was about to 'break the buck'. Every investment bank in the world was on the cusp. It was more than Wall Street and the City that were in pain. The collapse of available credit stalled economies everywhere and shattered the personal fortunes of many around the world. In the US, nine million families lost their homes, over 20 trillion dollars of wealth disappeared and the largest mass migration since the Depression took place. Worldwide job losses have been estimated at 35 million. Ben Bernanke has said that September and October of 2008 were worse than anything in the Great Depression. The world of 1929 had not been as coordinated as it is now. "The speed and force of the avalanche was unprecedented." The decisions that were made that staunched the bleeding were made by the Fed chair, Hank Paulson and Tim Geithner. "Bailout battles were fought in the US, Iceland, Ireland, Britain, France, Germany, the Benelux, and Switzerland." The US solved its problem quickly, but the political cost separated the Republican managerial elite from the party's right wing base. After bailing out FreddieMac and FannieMae over Republican opposition, Paulson and Bernanke were not willing to ask Congress again for a new authorization for Lehman. It was immediately apparent that they underestimated the Lehman failure. The next day, facing what was labeled "an extinction level event", they offered Fed credit to AIG. Realizing that they were still looking at extinction, Paulson and Bernanke asked Congress for a $700 billion Troubled Asset Relief Program. It failed in the House. TARP passed the second time it came before Congress. Paulson and Bernanke insisted the nine largest banks take a capital infusion of $125B. A month later, Citi required another $20B, as did BofA, who was strong-armed into completing its acquisition of Merrill. The incoming Obama team was prepared to be fully supportive of government intervention to solve the problems of the financial markets.
The crisis in Europe reflected the interconnectedness of their markets with the US, but their political system did not grasp this, and was not capable of solving the problem. Both Sarkozy and Merkel repeatedly criticized the Anglo-Saxons and stood in the way of coordinated European action. The US Fed, without consulting Congress, became the lender of last resort in Europe. It worked "hand in glove with the European mega banks to unwind the transatlantic balance sheet." The Fed lent dollars to the ECB, the Bank of England, the National Bank of Switzerland and the Scandinavian national banks, who in turn funneled it to their banks. Additionally, the Fed lent to fourteen banks in Eastern Europe, Latin America and Asia. It was also necessary for the IMF to step up in the former Soviet states. Two countries that did not receive help from the Fed were Russia and China. Russia suffered from a collapse in oil prices and the ubiquitous liquidity challenge. The state intervened, but Putin exacted a price from the oligarchs. He demanded they contribute and clawed back some of their excesses for the state. China had not participated in any of the financial hi jinks but suffered significant consequences as the largest holder of US debt and the US' largest trading partner. The state responded with a spending program that was the largest stimulus package in world history. Indeed the Russian, Chinese and emerging market actions made the derisory actions in Europe look laughable, as the only western stimulus that was worth the name was in the US. The Obama stimulus and the Fed's initiation of Qualitative Easing were, on top of the TARP, all that the American political system could tolerate. Unfortunately for the future, there was no program or solution for the millions with underwater mortgages. The Obama administration turned to the banks and successfully put "the American banking system on a forced road to recovery." After years of crisis, the American banks, with aggressive government support, were alive, well and sufficiently capitalized. That was not true of Europe.
After the largess of 2008, stepping back to prudent fiscal and monetary policies became the theme on both sides of the Atlantic. But in Europe, Ireland had guaranteed its banks' liabilities, and in Greece, the decline in tourism meant that the national debt could not be serviced. A return to normalcy was not in the cards. French and German banks were the largest holders of EU sovereign debt and each country's leaders had diametrically opposed philosophies about how to handle a debt crisis. The Germans wanted haircuts on the debt of troubled nations. The French wanted to refinance them. The US weighed in, and the outcome was an EU/IMF/ECB (the troika) program labelled here as 'extend and pretend'. But it failed to satisfy the markets and by May 2010 the world appeared ready to spin out of control again. Greece was being analogized to Lehman. The troika came back with more money and stabilized the markets, but at the price of more Greek austerity. Fear of debt contagion spread strict budgeting around the world. The entire G-20 committed to halving their respective budget deficits in three years. When Ireland teetered, they too slashed expenditures further. By 2011, it was evident that the extend and pretend of the previous year had failed. The US insisted on more refinancing and the troika accommodated. Europe argued, modified, made deals, ousted irresponsible leaders and still it was necessary, in early 2012, to go to the G-20 and ask for $300-400B of IMF funding. The US, China and Brazil refused. Europe had still not addressed the instabilities in their sovereign bond markets or their banks' need to recapitalize. That spring, Greece's debt was reduced by a fifth and the debt that remained was now held by the European Financial Stability Fund, the ECB and the IMF. In May, voters fed up with austerity turned out the governments in Greece, Spain and France and pushed hard to the left even in Germany. However, the crisis in Europe ended when Mario Draghi, ECB president assured the world that the ECB "was ready to do whatever it takes to preserve the euro." Markets calmed and yields dropped. The eurozone collapsing was no longer on everyone's lips. "The eurozone was saved by its belated Americanization." Obama's reelection and Bernanke's QE3 on top of Draghi's speech righted the world. All appeared resolved.
The year 2013 saw income inequality come to the fore as an issue in America. Over the previous forty years, productivity increased bu 80% but wages by about half as much. The wealth created was flowing to those at the top, and that was even more true during the very slow recovery since 2008. It was not just globalization and technological change that led to inequality. To some extent, the deck was stacked; the government worked for the elite. This concept had been accelerated in America's consciousness by the fallout from 2008, and would become the issue of the next presidential election cycle. The Tea Party and its Congressional hard-liners opposed anything the government, and in particular Obama, tried to accomplish on this or any front. Meanwhile in Europe, Russia appeared to be in a death spiral after its 2014 invasion of the Crimea led to severe sanctions and the price of oil collapsed, only to be saved the following year by a helping hand from China. In Greece, the economy deteriorated further when 400,000 of its best educated and most capable emigrated because of round after round of German imposed austerity. A leftist government was prepared to leave the EU if more austerity was all it could offer. The IMF acknowledged publicly that extend and pretend was hopeless. Yet, again, the 2015 Greek compromise was more of the same. The next crisis for Europe would not be financial, but political. Right wing governments were elected in the UK and Poland, right wing extremist politicians were gaining strength.
"Nationalism and xenophobia were the common denominators from the challengers from the Right." In June 2016, the UK narrowly voted for Brexit. In the US, the Republican candidate "promised to fight for the neglected, ignored and abandoned..the forgotten man and woman.. Americanism not globalism will be our credo." When elected, he announced he was withdrawing from NAFTA, and denounced the EU and NATO.
Since 2007, the scale of the financial crisis has placed democratic politics and capitalist governance under a great strain. Party alliances around the world are being reconfigured. In some countries, the moderates have been eliminated. Brexit has hamstrung the Tories. The GOP can win elections but "is incapable of legislating or cooperating effectively in government." The author closes with a comparison between 2008 and 1914. "How does a great moderation end? How do huge risks build up that are little understood and barely controllable? How do the tectonic shifts in the global order unload in sudden earthquakes? Who is to blame for the ensuing human induced man made disaster? Is the uneven and combined development of global capitalism the driver of all instability? How do the passions of popular politics shape elite decision making? Can we achieve perpetual stability and peace? These are the questions we have asked about 1914 for the last hundred years. It is not by accident that their analogues are also the questions we ask about 2008 and its aftermath. They are the questions that haunt the great crisis of modernity."
I submit my observations here quite humbly. There is a great deal about the dismal science I do not comprehend. There were entire chapters in this book where I did not make a single note. It wasn't just the trilateral repos or the single tranche open market operations that befuddled, but the big picture as well. I remain unclear about Greece. Why they were allowed in the EU and why they were allowed to stay? Apparently the political imperative of continental unification is the reason. But, how and why the leaders of Europe would spend so much time, money and political capital to extend and pretend is beyond me. Angela Merkel comes off as a real heavy in this book and the austerity imposed on the Greeks by the Germans is hard to fathom.
Nonetheless Tooze is probably the best expositor of economic history I've ever come across. He brilliantly ties the overlapping issues around the world together and I for one feel much better informed about what transpired. I remember thinking in 2008 that this was a 10-20 year problem and I believe we are still in the middle of the problems created by the Great Recession. I don't disagree with the author's contention that the response on the right is correlated to all of the problems created by the cross-Atlantic elites, but I do not think he connects the dots well enough in the last fifth of the book. I believe he drifts from superb economic history into somewhat banal assessments of the political results. That said - this is a must read!
