Crashed: more the how, than the why

by Michael Roberts

Adam Tooze was in London this week to present his new book, Crashed, How a decade of financial crises changed the world. Tooze is the author of The Deluge and The Wages of Destruction. The Wages of Destruction won the Wolfson Prize for History and the Longman-History Today Book of the Year Prize. He has taught at Cambridge and Yale and is now Kathryn and Shelby Cullom Davis Professor of History at Columbia University. In my view, he is our leading radical economic historian.

Tooze’s new book makes a massive contribution to the economic history of the global financial crash of 2008-9.  Tooze shows what happened and how it came about that the great credit boom of the early 2000s eventually led to the biggest financial disaster in modern economies and the ensuing deepest slump in capitalist production since the 1930s.  And he concludes that the way this was dealt with by ‘the powers that be’, namely through bailouts of the banks and the general saving of the wealth of the rich at the expense of the rest of us, has provoked the emergence of a ‘populist’ reaction against ‘capitalism’, whether leftist as in Greece or Spain, or rightist as with Trump, Brexit and the Liga in Italy.  So the legacy of the first ten years of 21st century capitalism is still with us in the second decade.  And worse, the underlying problem of rising debt and an uncontrolled financial sector has not been resolved.  The financial crisis of 2008-9 could well return.

There have been other intriguing analyses of the great financial crash before Tooze’s.  The most popular was The Big Short by Michael Lewis (which was made into a movie).  Lewis tells the story of the investment banks who sold ‘toxic’ mortgage backed bonds to their clients (mainly other investment banks and rich individuals, often from Europe), knowing full well that they were rotten.  As the property bubble started to burst, these banks then secretly went ‘short’ (betting on a collapse).   As Lewis puts in his book, “Goldman Sachs did not leave the house before it began to burn; it was merely the first to dash through the exit – and then it closed the door behind it.” 

In my own book on this period, The Great Recession, which is a chronological account, month by month, of the crisis from 2005 to 2010, I describe how the big banks in particular completely escaped the consequences of this scam, thanks to the US government.  Indeed, the whole ugly story of the activities of Goldman Sachs and other investment banks before, during and after the credit crunch and the Great Recession beggars belief.

But Tooze’s long book covers the significant financial crises of the previous ten years in much more detail than Lewis or me – and is global in scope.  Its length does not mean it is boring at all, as he presents us with vignettes of the major players and their decisions.  He shows how they ensured that the stronger and luckier big banks gained at the expense of the weaker and smaller; and how government intervention provided funding for the culprits of the financial disaster at the expense of the victims, working people, tax payers and small businesses.  It was ‘socialism for the rich and capitalism for the poor’: such is the stuff of the capitalist order.

Tooze particularly emphasises that the crash was not so much a story of the US spreading its financial contagion to Europe. The credit boom was just as strong in Europe. And as Tooze notes, “The flow of funds around Europe, as around the global economy, was driven not by trade flows but by the business logic of bankers, who compared the cost of funding and the expected return.” Indeed, the credit crunch started with BNP in France and was soon followed by the run on Northern Rock in Britain.

What is no surprise to readers like me who have studied the failures of mainstream economics and the official authorities prior to the crash is that Tooze shows that the competent powers that be were not competent at all.  They failed to see the crisis coming, denied it was happening and could not explain afterwards why it happened.  I won’t cite all the idiocies of the great and good in their complacency before the crisis and stunned surprise during the crash.  Tooze does it all.  But there are two examples worth restating.

In January 2007, just six months before the beginning of the global credit crunch and the collapse of the British money lender Northern Rock, Gordon Brown, the finance minister (Chancellor) in the UK spoke to a dinner of bankers in the City of London, just before he became Prime Minister.  He said: “Over the ten years that I have had the privilege of addressing you as Chancellor, I have been able, year by year, to record how the City of London has risen by your efforts, ingenuity and creativity to become a world leader.. an era that history will record as the beginning of a new golden age for the City…Britain needs more of the vigour, ingenuity and aspiration that you already demonstrate is the hallmark of your success.”

After the financial meltdown and in the depth of ensuing Great Recession, the great helmsman and ‘guru’ of the preceding credit boom and supporter of ‘financial engineering’ and derivatives, Alan Greenspan, the former chairman of the Federal Reserve, was asked in the US Congress investigating the disaster, why it happened.  He responded: “I am in a state of shocked disbelief.” He was questioned further: “In other words, you found that your view of the world, your ideology was not right, it was not working”(House Oversight Committee Chair, Henry Waxman). “Absolutely, precisely, you know that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well”.

When you read that, it is a little surprising that Tooze seems to find the role of Alan Greenspan, Larry Summers (former Treasury secretary) or Hank Paulson (the head of Goldman Sachs who became Treasury secretary in the crash) and other players in the crash as people who did the best they could, rather than as arrogant supporters of the ‘financial engineering’ that led to the crash.  These players get off lightly compared to Tooze’s correct criticism of Keynesian economists like Paul Krugman, who also reckoned that the financial sector was stable and would not be the catalyst for a crisis.  Of course, after the slump, Krugman attacked mainstream economics for its failure to see it coming.

Crashed provides us with the most granular and fascinating account of the crash and its aftermath.  It powerfully shows what happened and how, but in my view does not adequately show why it happened.  But maybe that is not the job of economic history, but that of political economy.  For Tooze, the cause seems to be deregulation of the banking system, financial greed and incompetent authorities.  For me, these are symptoms or immediate catalysts of the underlying causes in the capitalist economy.

As Martin Wolf said in his review of Crashed, “Even a story this complete has omissions. Tooze focuses on the idea that the growth of the financial sector’s balance sheets was ultimately the cause of the crisis. He does not pay enough attention to why policymakers needed this to happen.”  Wolf presents his causal explanation in Keynesian terms. “The explanation, as I have argued in my own book, The Shifts and the Shocks, was the global savings glut and associated global macroeconomic imbalances. Huge external surpluses in some countries necessitated huge deficits in others. Central banks needed the credit growth if they were to hit the macroeoconomic targets.”

Wolf’s explanation is equally inadequate: what was the cause of this global savings glut and ‘imbalances’ that arose in the 2000s?  Actually, the savings glut was in reality an investment dearth.  And slowing global investment, particularly in the advanced capitalist economies, was a product of falling profitability, from the late 1990s onwards – something that I and others have documented.

In Tooze’s view, “These crises are hard to predict or define in advance,” and, short of more regulation, there is nothing we can do. In a way, as long as capitalism continues as the dominant mode of production globally, that is pretty much right.  That reminds me of what Greenspan said in his final summation of the crisis: “I doubt that stability is achievable in capitalist economies, given the always turbulent competitive markets continuously being drawn toward but never quite achieving equilibrium”. He went on, “unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging the aftermath is all we can hope for.”

Tooze is pessimistic about the future.  Economically, he sees a future crash, probably coming from a meltdown in debt-ridden China.  In my view, it is more likely in the heart of Capital: the corporate sector of the US and Europe.

Politically, he warns that the 2008 crash and the response of the ruling orders has created the conditions for “illiberal democracy.” The success of the Tea Party and the American far-right, he argues, has grown directly from it.  And now we have Donald Trump, Putin, Brexit, Erdogan and the rise of the far right in Europe.

But ‘populism’ as it is called by the mainstream, has also taken a left turn with Syriza (until the crunch came); leftist groups in Spain and other parts of Europe, as well as Corbyn in the UK. 

Opposition to the main capitalist solutions to the crash (bailouts, austerity and free markets (‘business as usual’) has not come purely from the reactionary nationalist right.