'Failure of the elite'

A decade on from the most terrifying two months in global economic history Adam Tooze, a Brit based in the US, is well placed to explore the transatlantic failure that was the financial crash

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It wasn’t the start of the financial crash and it certainly wasn’t the end but Lehman Brothers’ bankruptcy on 15 September 2008 left the world on the brink of not having an economy. And yet it needn’t have happened, according to Adam Tooze.

Earlier that year US policymakers had bailed out investment bank Bear Stearns as it teetered on the edge of bankruptcy, unable to find the short-term funding it relied on to fund its reckless speculation.

The New York Federal Reserve rescued Bear despite criticism that it allowed the bankers off the hook and opposition from those within the Republican Party who believed free markets should face no interference.

Ben Bernanke, chairman of the Federal Reserve – the US central bank – insisted that without it, bankruptcy would have damaged the wider economy and led to a “chaotic unwinding” of investments across the US markets.

But as Tooze details in his new history of the crash, Bernanke and colleagues took the opposite course of action months later when Lehman Brothers, a bigger bank, found itself in the same position.

Although in the meantime they had also nationalised mortgage providers Fanny Mae and Fanny Mac, Bernanke, treasury secretary Hank Paulson and Tim Geithner, president of the Federal Reserve Bank of New York, let Lehman fail.

It was, says Tooze, a “spectacular error of judgement”. The policymakers had argued that an orderly bankruptcy would calm the markets. But within days Paulson warned his staff of a possible “economic 9/11” and, on 20 September, told Congress they might be facing the collapse of the world economy within 24 hours.

“Those two months of September and October 2008 are undoubtedly the most terrifying in global economic history,” says Tooze, a history professor at Columbia University in the US.

The world did not end. A fragile bipartisan coalition in the US Congress eventually passed a massive economic relief effort that averted Armageddon while then prime minister Gordon Brown led a bailout of British banks, with Royal Bank of Scotland only hours from shutting its cash machines. But they could not prevent a global recession deeper and longer than anything since the Great Depression of the 1930s. In fact, argues Tooze, in the speed with which it spread the 2008 crash was even more terrifying than the Wall Street Crash of 1929.

Listen to the first part of our interview with Adam Tooze here


Investment vanished, demand for goods and services collapsed and an estimated 27-40 million jobs were lost worldwide. In the UK earnings have yet to return to pre-2008 levels and the austerity imposed in 2010, ostensibly in response to the subsequent Eurozone debt crisis, continues to punish the country. But Tooze’s book, Crashed: How A Decade Of Financial Crises Changed The World, is not the story of the effects of the crash. Instead, he says, it’s a study of the way elites could not prevent it.

A recent review of Crashed by Guardian writer Aditya Chakrabortty said that it was brilliant but “ultimately bloodless”. Tooze is unrepentant.

“I thought it was a great review. It was a very telling comment at the end. I’ve been thinking about it quite a lot because it’s such a cutting remark. I would prefer ‘cold-blooded” to ‘bloodless,’” he says, adding: “It’s not bottom up, it’s not an experiential book, it’s not a book filled with the lives of quote unquote ordinary people. It’s not as though that’s absent from the narrative but that isn’t the central purpose of this project. It’s a book about elite political failure.”

Tooze traces the origins of the crash even further back than the US sub-prime mortgage crisis, its immediate cause. In the 1960s he identifies the emergence of trading in the dollar in the City of London as a connection tying together the American and European economies. But the elites missed the significance of these private transatlantic flows, preferring instead to scour traditional macro-economic measures like GDP for signs of weakness.

Markets crash on 15 September 2008

What they missed in the run-up to the crash was that banks from all over the world were trading heavily in US mortgage-backed securities that were dependent on mortgages sold to people who couldn’t afford them. When house prices crashed in the US in 2006, mortgage-holders defaulted, the securities collapsed in value and – worse – no one could work out how many trillions of dollars of bets the banks had made using those securities as collateral. 

It wasn’t a run on the bank in the sense of people queuing outside Northern Rock to withdraw their savings – as they had in 2007, Britain’s first bank run in 150 years. It was worse. But if one of the US elite failures was to let Lehman go to the wall, one of the European elite failures was to view it at first only as a ring-fenced American banking problem. A failure of both was to see the financial crash as separate from the 2010 Eurozone crisis, when in fact, he says, the Eurozone crisis was the “long delayed after-shock of 2008”.

Tooze puts this down to the inter-connectedness of economics and politics – another of the themes of the book. It was US election year and Bush wasn’t guaranteed to lose to Obama. To many Republicans – and indeed to many on the left – bank bailouts looked suspiciously like socialism and to try to get another through Congress would have meant burning scarce political capital.

“Everything suggests beyond reasonable doubt Paulson and Bernanke committed themselves to not putting government money behind the deal. They had found ways to put money behind the Bear Stearns deal and they just simply decided they weren’t going to do it in this case. They will tell you they couldn’t because Lehmans was such a basket case. And that’s where you just go: ‘You are kidding me.’ They were all basket cases, Bear was a basket case.”

He adds: “The evidence is very clear that the politics dictated they not do it, which to me is a key point. This is why I would insist this is a highly critical account of elite decision making – the Republican Party is disintegrating before the eyes of the Bush administration.”

“Why didn’t they go after these bankers and send someone to jail? And the other big question mark is could something more direct have been done for American homeowners?”

Public money continued to flow to the private sector to pull up the US economy from its nosedive, with recipients including industrial giants such as General Motors and Chrysler as well as the banks. But the one sector the Obama administration decided not to directly compensate was the homeowners who had been mis-sold mortgages in the first place.

“There are two big what-ifs for the Obama administration. The simple one is more punishment. Why didn’t they go after these bankers and send someone to jail? I had a chance to talk to John Podesta, Obama’s counselor, and he said flat out: ‘Not enough punishment – should have been more vengeance.’ And the other big question mark is could something more direct have been done for American homeowners?”

Tooze says the Obama administration considered this but rejected it, partly because of the size of the sum needed to make a difference, partly because – see above – they’d have to burn political capital to get it through Congress and partly because, perhaps paradoxically, it would have been unpopular.

“This is what the Tea Party was riding in on. The Tea Party is not an anti-banker mobilisation, it’s an anti-welfare mobilisation. And so it feeds off all the toxic politics of welfare because of course in the minds of your average Tea Party-er the person who borrowed the money is Latino, a single mother, black, feckless white trash. Anti-welfarism in America is really like Britain, 1970s, 1980s style. It’s a really vicious syndrome that had been unleashed.”

Listen to part two


Tooze, who was born in London and grew up between England and Germany, started to write Crashed in 2013, when it seemed the crash had been contained and European Central Bank president Mario Draghi had calmed the initial euro debt crisis with a simple promise to “do whatever it takes” and rescue distressed countries by buying their bonds. But it turned out he was only half way through the decade of his title.

“Obviously in 2012 it’s a mixed blessing, cold comfort, it’s not as though it’s a happy story. But in any case, Obama is re-elected, ‘whatever it takes’ has fixed the Eurozone, it feels like we had closure. So I started writing from the conviction that the story that needed to be told was the story of another successful example of transatlantic financial stabilisation. And if it wasn’t a triumphalist story it was at least to tell the Americans and the Europeans they were still dependent on each other. 

“It was a blow against European complacency and it was a message to the Americans to wake up and smell the coffee – you still have this crucial global role. And then of course everything kept shifting on me. That initial, not complacent or triumphalist but nevertheless confirming, narrative has just been moved again and again and again in the years since, with Ukraine, the umpteenth round of the Greek crisis, of course with Brexit and Trump and with the Chinese near miss crisis of 2015-2016. 

“The parameters have kept shifting on me and I’ve never written a book where I’ve been more clear where my investments have been written into the book and then were shaken by subsequent events.”

One thing that did shift Tooze’s thinking was the emergence of links during the crash between central banks, allowing the Fed to secretly pump billions around the world that could ultimately provide liquidity to banks needing dollars. These so-called swap lines, says Tooze, were seen by many experts as the most decisive intervention of the crisis, but took place away from the public and political eye. They only came to light after freedom of information requests by the financial publisher Bloomberg in 2010 but have now been extended elsewhere.

“Fundamentally a new system is being built to stabilise this deeply networked transatlantic banking system. Which isn’t bailout – it’s very important to be clear about this distinction. It doesn’t involve the American central bank or the Treasury taking a stake in European banks. What it involves is them being the other thing that central banks do – which is the lender of last resort for the entire dollars-based banking system.”

Interview part three


For Tooze, it is in this system where global dangers remain the greatest, even in these new times of Trump’s trade wars. “I absolutely stick to my guns about trade versus finance. Trade wars are a kind of arthritis – a question of the general flexibility of the world economy. Things you can do or not do. Whether the general economy can progress in certain directions, for better or worse. Finance generates heart attack-type symptoms and that is a qualitatively different phenomenon and there aren’t very many of them in global economic history.

“We could be in a climate change model of history, in which there’s nothing quite like the thing we see now and the thing we see next is even worse and even more dramatic and we’re getting there quite quickly. That is a reasonable kind of scenario but that is the way we need to think about this kind of history, not as, oh well, there’s a financial crisis every 10 years and financial crisis and trade wars are all the same thing.”

But if the climate change model is correct, are we heading for another crash soon? “If you looked at the West you’d say no – you’d actually have to have a boom in Europe and where’s that?

Nor, despite intense scrutiny, do economists see the right ingredients in the US, “because you need the bubble to burst, then you need a highly leveraged entity to be invested in it, like a bank, and then you need its short term funding to be unstable. You need all three elements and there’s none of that.

“The place where you do see all those elements is China and so there’s a lot riding on that but then what you need is another place with a similar structure because in the US it burst in 2008 and Europe was the same way.”

Crashed: How a Decade of Financial Crises Changed the World is published by Allen Lane (hardback £30, Kindle £12.99)

Brexit and coming to terms with the past

Born in London, brought up in Germany and now working in the US, Adam Tooze says his identity is “completely tied up with being able to move freely” and admits he finds it hard to write about Brexit “without losing his rag”. The Brexit vote was in part, he says, down to the Britain’s failure to come to terms with its past.

“This was to my mind the issue that the British elite dodged from the 1970s onwards. They didn’t solidly step behind this programme. Britain needed some coming to terms with the past, frankly, about the empire, Ireland, its own screwed-up relationship with Europe, what World War One and World War Two were really about. Instead we got this weird British appropriation of the Holocaust, as though this was integral to us because it was serving the purpose of the human rights agenda. 

“Obviously Holocaust education is a big deal – I wrote books about Nazi Germany for a reason. But why isn’t there a museum about Ireland, why isn’t there a museum about India? Well, there is but it’s the V&A, as if it’s some form of cultural artefact. 

“We’ve got a fantastic museum about the Holocaust, which is the experience of some British people but it’s tiny. There was never a concerted move, as there was say in Germany, to digest the complexities of our 19th and 20th century, which is crucial if you are going to do the European project 60 years later because you really do have to get over some of your crap.

“The French have to do this in 1958 and 1968 because of Algeria. It tore that society apart. None of that happened in Britain over Ireland. Why not?” 

“How is it conceivable we are in government with that party in Ireland?”

This has led to Theresa May relying on the DUP to prop up her government and the danger that the Good Friday Agreement, which brought peace to Northern Ireland, will collapse under a hard Brexit.

“Where do we stand on this? How is it conceivable we are in government with that party in Ireland? This is an illiberal force of the most pernicious kind that once upon a time would have been beyond discussion. The Tory Party knew this at the time because these were the people who were the spoilers, who nearly brought Britain to the brink. 

“So that for me is the deeper question and now we are living with the consequence of it. Because Britain undoubtedly has a far right, nationalist, xenophobic potential like most societies and it’s kind of untouched. It’s native.”

Tooze company: a Q&A

In one way 10 years looks like historical perspective. In another it looks like current affairs. What do you think that perspective allows you to see on the origins of the crash and how it played out?
It’s quite a tricky question obviously because most historians would say you need more time. What is it they expect to see through time, from having more distance, would be my response. What is it they expect to get? And I think what they expect is to get some sort of stability but more often than not it simply means a stable vantage point with a given set of biases.

We now know that witchcraft trials were terrible and there’s really not a whole lot that’s going to shift in the next 100 years that’s going to convince us that witchcraft trials were great. But we do bring the bias that witchcraft trials were terrible and that witches were innocent. And that’s actually quite problematical – not that I have any questions about witches – but it’s a massive bias that comes in, whereas working on something as recent in time as this you can almost track your bias shifting as you go along, so in fact it’s more revelatory in a sense of what you’re biases are.

What I found remarkable about writing it is precisely that experience of seeing my preconceptions and seeing my framing of the question constantly under pressure as I was going along. The effect of that is to make you more, not less conscious of this problem that all history has, namely it’s framed by your preconceptions.

More on his response to Aditya Chakrabortty’s review of Crashed, which called it brilliant but “bloodless”.
It’s a book about how structured inequality and the governance that’s built around that fails. It’s not a book which necessarily discusses the parameters of transformative politics… I am demarcating and describing what I take to have been the range of debate that was central. I do go into at length the Syriza experiment and Varoufakis as finance minister. That strikes me as a very interesting moment and as close as we came to any kind of real radical resistance from within the system.

Portugal strikes me as a very interesting experiment but I kind of feel I’d taxed the reader’s patience with the Eurozone as far as I could go. Portugal in the end has turned out to be a more promising example of what a very intelligent, compromising type of politics can do. And I do think there’s a lot to be learned there about how strategies not of compliance but also not of direct confrontation may offer progressive politics more wriggle room.

This is a theme of the book – that politics is crucial at every stage. Capital markets and business exercise huge asymmetric power. They are vastly more powerful than other actors in the system although their power is not absolute. And at a moment of crisis they are in a position of extreme weakness in fact, and the question is what use you make of that moment of weakness and where you can apply leverage.

The idea for instance that bond vigilantes are a permanent threat that stalk the world and will haunt any democratic progressive politics – that’s nonsense. That’s something that conservative politicians invoke to explain why they have to do conservative things, like Osborne did in 2010 – “We have to do this otherwise we will end up like Greece”. It’s a reality imposed on countries like Greece by conservative governments in the rest of Europe that don’t want to do what’s necessary to stabilise bond markets, which would protect Greece, because they don’t want Greece protected. because it’s a left wing truant government that they want to discipline.

And there’s a certain sort of Marxist, frankly, who has a stake in arguing about certain sorts of determinism and the conflicts those necessarily, inevitably and always impose that make democracy under capitalist conditions impossible. And Greece provides you with all the evidence you need for that kind of argument. As Argentina does at various moments. But in the Eurozone it turns out that even the UK, for crying out loud – if you’ve got an active central bank and a deep bond market for your government debt you can get away with murder and nothing happens. All you need is the confidence that your central bank will act as a buyer of last resort for your government debt and the UK can have the largest increase in public debt since World War Two and all that happens is sterling devalues, which is not bad for exports. That’s the sum total of the crisis. Interest rates go down.

If the bond market was exerting insuperable pressure on all democratic systems in 2008 and after you’d expect interest rates to go up. In Greece they, in Portugal they do and in Ireland and Italy they do. But Germany’s never been able to borrow at cheaper rates, right? People will pay Germany to lend it money. Germany’s democracy is under zero, nada pressure. It could do whatever it liked at this point.

With the Eurozone, since Draghi’s been in the market that’s the great lesson of 2015 – you can take the Eurozone to the edge of losing one of its members and there is not a tremor in the rest of the bond market because the ECB is just hoovering it all up.

It’s all about politics, it’s all about the interactions between state authorities of different types and their position within the global system of power. The eurozone, the Bank of England, the Swiss national bank are easily powerful enough and stable enough within that global system to pursue quite autonomous economic policy if they do it with intelligence and real determination. But if you’ve got a Mervyn King pulling the rug from beneath Gordon Brown you’re in trouble. If the Bank of England is going to say to government, you know what, we need a real fiscal tightening, that is really damaging. That is an explicit conservative elite project against an elected government – you have to be frank about it.

On the other hand, for instance, during the referendum in Italy in 2016 when there was the constitutional crisis and Renzi’s mandate was on the line, Draghi explicitly said: “I will buy bonds, I will buy Italian bonds, whatever the outcome of this referendum.”

That is a model, I think, of what a central bank ought to do. You ought to have a period either side of all elections when the central bank simply says we will stabilise the market and, what’s more, we will punish speculators because they are acting against the interests of democracy. We will hurt them, indifferently to the outcome, conservative or progressive. We will burn anyone who attempts to speculate on this election. So you just assume status quo or else we will go after you.

You know, in the same way as some countries banned opinion polls we should deploy the resources of central banks to stabilise markets around elections.

Would you choose other events then as well then?
Elections seem to be the critical, the neuralgia one but yes, with the swap lines now, with the Brexit referendum, the Bank of England and the Fed turned the swap lines on to stabilise Britain’s bank funding whatever happened in the referendum. That’s the right thing to do in my opinion. I hate the referendum outcome but if you’re going to have a referendum treat it seriously as a democratic exercise.

Central bank resources ought to be deployed to support that. We can’t simply assume that nature will protect democracy. It won’t, because we are in a privately-owned economy that is profit driven so there is an antagonism here, but we do have the resources necessary to minimise that antagonism.

As you ask in the book, was the third Greek bailout suicide or assassination?
Something else – more like some form of slow torture.

Waterboarding?
No, it’s more like footbinding. In the interests of it looking clean and tidy and manicured and conforming to some image we have of what European economic ought to look like we’re going to create this essentially crazy settlement and impose it and maintain and project debt stability conditions for Greece out to 2050. This is obscene. Greece’s debt will come down to the 120-130 per cent of GDP mark in decades out from now. So footbinding is the analogy I would use, in the sense that it’s kind of formal. It’s perverse, it’s torturous, it’s damaging and it’s driven by a kind of formal logic that is very satisfying and very important to the culture that sits around it.

The story that they’ve exited now…
Yes, we’re all good now, right? Investment is 60 per cent down on its pre-crisis level and GDP has tanked as hard as anyone ever tanked in the Great Depression. It’s not recovered. There’s not an inch of headway.

But the thing about Greece is that it’s tiny. The liberal in me says there’s a solution to the Greek problem and it’s what the EU always ought to embrace, which is education and labour mobility. And it does require major shifts in lifestyle.

As a migrant myself I’ve moved continuously between countries and it’s been nothing but good. Obviously I did so from a position of enormous privilege. My personal attitude is that the EU ought to have a massive labour mobility programme. It ought to target investment on training young Greeks to speak other languages and they ought to move to places where there’s higher employment. Because as tragic as the youth unemployment situation in Greece is, in absolute terms it’s tiny. If half a million Greeks move a large part of that epic and ghastly problem disappears. Now that does mean that Greece declines. Many of its talented young people will leave. But that is the logic of this system.

You have to own that if we’re going to make a go of these market economics. All the way back to the 1990s the liberal progressive folks like Robert Reich were saying we’ve got to [do this] and the EU is a framework for this but does a very bad job really of enabling it. The Greek education system fails. It doesn’t train enough of its people to speak foreign languages.

I’m not saying this is the ideal solution. The ideal solution obviously would be some local reflation as well. But within the parameters of the system as given, that would seem to be the only way out. It’s indicative of the broader failure to grasp the nettle of migration policy that they can’t even see this internally as the solution….

If you were serious about this kind of market driven solution that’s where you would go. You would focus all your resources on that and Germany would simply have to say here are the jobs for half a million of your young people. Come. And of course that isn’t good politics in Germany and they don’t accommodate this with public investment.

It is, let’s be clear, a wrenching process of dislocation and Greece of course has been through that once before in the last two generations with the emptying of countryside to Athens and then it would be a question of another move from Athens and Thessaloniki to other parts of Europe.

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