Most retellings of the 2008 financial crisis, which began in the US and swiftly spread across the world, hinge on the understanding that the crisis came to an end—and that, in the US, it ended quite quickly.
Crashed: How a Decade of Financial Crises Changed the World (Penguin Random House, Aug. 7, 2018), the latest book by British historian and Columbia University professor Adam Tooze, says this isn’t so. Though Tooze is a historian, it would be misleading to call this a history book. Ten years later, the the crisis still essentially determines how the financial system works, thanks to the political decisions and interventions by central banks in response to it. There has been no “return” to normal.
Tooze, whose previous subjects include the Nazi economy and American global power during the interwar period of the 20th century, offers a compelling account of what he argues was a North Atlantic crisis created by a global “interlocking matrix” of corporate balance. While tackling the political nature of both the crisis and the responses to it, he also unpacks the technicalities of financial underpinnings of the crisis, highlighting the importance of the the global banking system’s dependence on the US dollar.
Crashed tears apart the notion that the 2008 crisis was American, and then, separately, a few years later, there was a European sovereign debt crisis. These crises, Tooze writes, were intrinsically linked in part because European banks had heavily involved themselves in America’s financial system. And this also meant Europe was deep into the US subprime-mortgage market—nearly a third of high-risk mortgage-backed securities that weren’t backed by Fannie Mae or Freddie Mac were held by European investors. One of the surest signs of the deepening of the crisis was the desperate attempts of banks, particularly European institutions, to access dollars. Interbank lending rates sky rocketed and worsened the crisis.
With the wisdom of hindsight, Tooze believes the critical intervention that mitigated the crisis was not the bank bailouts or central bank asset-buying programs but rather “unprecedented transnational action by the American state” to pump dollars into banks all over the world.
Tooze certainly isn’t celebrating these measures but acknowledges that they worked in the short term. He has unflinching scorn for the collective European response to the 2012 crisis, writing that “millions have suffered for no good reason.” While millions suffered in the US as well, Tooze argues that at least in the US, a political decision was made: save Wall Street first and worry about Main Street later. In Europe, there were too many opposing ideas and leadership couldn’t decide how to act. The lack of coordinated response was a disaster. Ask any Greek or Italian today if the crisis is over, and they’d likely share Tooze’s opinion.
Reinserting the role of the dollar in this piece of financial history is not just a matter of setting the record straight, writes Tooze, but also essential if we want to adequately prepare for the consequences of Donald Trump’s “declaration of independence from an interconnected and multipolar world.” The dollar locks the global financial system together, and it took the Fed plus a shaky US political coalition—that understood the importance of the US dollar to foreign banks—to take the actions necessary in the aftermath of the crisis to alleviate it. If something were to happen again, Trump’s “America First” policy outlook doesn’t indicate a desire to take actions explicitly designed to help other countries.
The supply of US dollars funneled into the global finance system in response to the crisis partly ended up in emerging markets. In recent years, many developing countries used the low rates that followed the crisis to gorge on dollar-denominated debt. The impact of that can be seen today as the US dollar rises and investors wonder if these countries will be able to repay all the debt they’ve accrued. It’s bringing down currencies as far flung from each other as Turkey and Indonesia.
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What we have to reckon with now is that, contrary to the basic assumption of 2012-2013, the crisis was not in fact over. What we face is not repetition but mutation and metastasis. The financial and economic crisis of 2007-2012 morphed between 2013 and 2017 into a comprehensive political and geopolitical crisis of the post-cold war order. And the obvious political implication should not be dodged. Conservatism might have been disastrous as a crisis-fighting doctrine, but events since 2012 suggest that the triumph of centrist liberalism was false too. As the remarkable escalation of the debate about inequality in the United States has starkly exposed, centrist liberals struggle to give convincing answers for the long-term problems of modern capitalist democracy. The crisis added to those preexisting tensions of increasing inequality and disenfranchisement, and the dramatic crisis-fighting measures adopted since 2008, for all their short-term effectiveness, have their own, negative side effects.
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The US Federal Reserve’s liquidity operations feature heavily in Tooze’s narrative of the mitigation of the crisis. Ten years ago, as interbank and wholesale markets closed, there was severe pressure on dollar-funding markets. This is when the Fed made itself the lender of last resort for the world. “It was historically unprecedented, spectacular in scale, and almost entirely unheralded,” Tooze writes.
Trillions of dollars were provided through various money-market transactions. One key operation was currency swap lines, where the Fed loans dollars out to other countries’ central banks in exchange for those banks’ currency to be repaid later with interest. They were developed in the 1960s but went out of use after about a decade (though they returned briefly after the Sept. 11 terrorist attacks in 2001). Currency swap lines were revived in 2007 between the Fed and global central banks to give loans of dollars to foreign banks. These loans, though by now repaid in full, show how much extra funding was desperately needed by Europe at the time. By September 2010, total lending and repayment on the swap facilities came to $10 trillion.