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Financial crisis headline montage, October 12, 2008. Photo credit: / Flickr (CC BY-SA 2.0)

The 2008 Crash Was Not a Singular Event

How a Decade of Financial Crisis Changed the World


On the tenth anniversary of the 2008 financial crisis, a reinterpretation of what happened — and a warning of the dangers that might lie just ahead.

The holy grail of physics is a unified field theory that somehow explains both the micro and macro aspects of how the world works. The same holds true for what Thomas Carlyle called the “dismal science” of economics, as we seek to understand the causes and consequences of the 2008 financial meltdown.

In this week’s WhoWhatWhy podcast, Jeff Schechtman talks with economic historian Adam Tooze, professor of history at Columbia University and award-winning author, about a reinterpretation of the 2008 financial crisis through the lens of what came before and what followed in its wake.

On this tenth anniversary of the collapse of Lehman Brothers, Tooze explains how, contrary to popular mythology, this was not just a problem that started in the US and rippled outward, but a global problem: the first real crisis of the global age.

He explains how decades of not fully understanding financial entanglement helped set in motion the shock waves that were felt around the world and that are still reverberating today in the economics of Europe and the developing world and in politics in the US.  

In his conversation with Schechtman, Tooze shows how financial globalization engaged the entire world, how China ended up owning America’s public debt, and how Europe’s megabanks helped funnel trillions of dollars into the riskiest American mortgages.

Tooze points out that the threat of financial instability in European and American banking is still with us, although invisible. And how the 2008 crisis not only changed the financial landscape, but gave rise to a new regime of global governance in response. He reminds us that China is, without question, the most important factor in the world economy: 30 percent of all global economic growth now comes from China. That’s more than the US and Europe combined. GM today sells more cars in China than in the US.  

While we may not have realized it, at the height of crisis the Federal Reserve stuffed Europe’s banks with trillions of dollars of liquidity and outsourced $4.5 trillion in credit to European and Asian central banks.

Tooze also talks about the near-miss economic crisis in China in 2015-2016, and why this is a harbinger of just how dangerous things might become in the near future.

Adam Tooze is the author of Crashed: How a Decade of Financial Crises Changed the World (Viking, August 7, 2018).

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Jeff Schechtman Welcome to Radio WhoWhatWhy. I’m Jeff Schechtman.
In physics, the holy grail has always been to seek a unified field theory that somehow explains both the micro and macro aspects of the science of how the world works. The same often holds true for what Carlyle called the dismal science of economics. This is worth thinking about as we mark this tenth anniversary of the collapse of Lehman Brothers and the onset of the 2008 financial meltdown.
Can we tie all of the many causes of the crash together, learn something from it, and is there a singular thread that runs through from the crash to our politics and economics today? Perhaps we don’t have to go as far as Zhou Enlai did when he answered Nixon’s question about the impact of the French Revolution, when he said that even after 200 years, it’s too soon to know. Certainly after ten years, we know more than we did, and perhaps it’s time to ask some real questions to try and put this all in some kind of perspective.
I am joined by Adam Tooze. Adam is a professor of history at Columbia University, an internationally renowned scholar, and an award-winning author, and his newest book is Crashed: How a Decade of Financial Crisis Changed the World.
Adam Tooze, thanks so much for joining us here on Radio WhoWhatWhy.
Adam Tooze Thank you for having me on the show.
Jeff Schechtman One of the things about the crisis, we tend to think of it in very domestic terms. We think of it in terms of the state of the economy at the time, the housing bubble, the debt levels that existed at the time, but one of the points you make is that we need to be looking at this really as the first crisis of the global age.
Adam Tooze Yeah, and that’s really one of my missions in this book is to show readers based on both sides of the Atlantic and beyond how interconnected this crisis was. I mean, the biggest, the most dangerous banks in the world were not American in 2007/8; they were European. Probably RBS, the British bank, was the largest and most dangerous. They all had to be nationalized. It had a balance sheet about three times the size of Lehman.
The interconnections ran deep on both sides. About a third of the most toxic subprime securities in the final stages of the crisis ended up on European balance sheets. American money market mutual funds, the favored savings vehicle for better-off Americans, were deep up to their necks in European bank debt, because it offered slightly better yields than American equivalents. This was a story that really crossed the Atlantic and rippled out from there to South Korea, to Russia, and then by way of trade to China, Japan. It’s a truly comprehensive crisis of the financial system globally.
Jeff Schechtman Why was that aspect of it so underreported at the time, and how crucial is this fact to what really needed to be done to address the crisis at the time?
Adam Tooze Well, I think in fairness to reporting at the time, you couldn’t read The New York Times or The Wall Street Journal in that period and not be aware of the fact that the European banks were in crisis. I think it’s kind of like the short-term memory is where the work was done of largely burying this. I think there is then, on top of that, natural tendency to produce simpler stories that speak to national crises, and as the pain of the crisis hit, each society had to come to terms with it in its own way, and it produces a national story to do that.
Beyond that kind of process, there’s also a politics here, because if bailing out your banks is bad enough, the thought that you might be providing assistance, in whatever form, to foreign banks is almost unspeakable in political terms. Yet it’s true that the Federal Reserve of the United States did not bail out European banks, but it had to provide them with liquidity, which is swapping illiquid long-term assets for short-term cash, on an absolutely epic scale.
It didn’t do that after some sort of misplaced belief in its own superhuman powers and some desire to be a global hegemony for its own sake. It was doing it because it felt that unless it supported the European banks, they would engage in a huge sale of American assets and destabilize the American economy. That degree of interdependence is really difficult for people to digest. It’s easier to think of this as an American problem, with American origins, with American solutions.
Jeff Schechtman If, in fact, there had been an acknowledgement of the scope of the crisis at the time, might the solutions and might the policies that were put in place been any different, and might that have been helpful?
Adam Tooze Well, I think you have to give the Americans credit. They did a global fix without really publicly announcing or trumpeting it. I think where your question really has real force is in Europe, where there was a kind of vigorous pushback by national governments from a very early stage against the entire idea of a joined collective response.
The purpose in revealing this side of the story for me is, on the one hand, in fact, as it were, to make America aware of its continued centrality to global financial stability. The world may find it a little hard to live with the Americans at times, but we can’t really live without them. On the European side, the book is really trying to show how deep the dependence of European finance on America was.
Jeff Schechtman One of the other aspects of this that grows out of looking at this on such a global scale is the degree to which (a) that we’re still feeling the ripple effects of it, and that the consequences of it are a lot deeper and more pervasive than we had any idea of.
Adam Tooze Yeah. I mean, if you talked to Europeans in the hardest-hit countries, they’re not out of the crisis yet. Youth unemployment in countries like Spain and Italy are still appallingly high. There’s been virtually no growth in Italy since 2008. They’re not out the other side.
Beyond that, I think the really crucial thing to understand is that the countermeasures taken to stop the crisis in its tracks were themselves transformative. Above all, what the Fed does is to just pump extraordinary quantities of cheap dollars into the global economy, and business people around the world, in emerging markets, in particular, with really rapid growth where credit is scarce and more expensive than it is in the United States, borrowed those dollars and put them into business ventures around the emerging market, so called. That creates an interdependence that we still really haven’t fathomed.
We’re seeing it, the live test, the live experiment right now, how this interconnected global economy, which now is heavily more dependent than ever, really, on the dollar as its standard medium, how it responds to somebody yanking the chain, how it responds when the Fed raises interest rates.
Jeff Schechtman Does that put us at greater risk or less risk now by spreading that risk around?
Adam Tooze To be honest, we don’t know. I mean, we have estimates. We think that the European-American axis has been de-risked to a certain extent. This is part on the business decisions of European banks, but it’s also concerted effort behind the scenes by American regulators, who just told European banks if they wanted to run big banking businesses in America, they would have to subject themselves to the same rules as American banks and have some capital in the US. Faced with that apparently reasonable proposition, many European banks decided to actually pull out of their American businesses.
Those kinds of angles have been de-risked. I think what we don’t know about really is what new types of risk might have been created by the interdependence between the United States and the emerging market economies.
Jeff Schechtman How does China fit into that equation?
Adam Tooze It’s the big question mark over the entire world economy right now. Once upon a time, China was an emerging market. Once upon a time, it was a small, dramatic, and exciting bit of the world economy. Right now, it’s by far and away the most important factor in the world economy, full stop. Not the same size as America, but far bigger in terms of driving global growth. 30% of all growth in the global economy comes from China. That’s the same as the United States and Europe put together.
We are already beyond the tipping point. We’re in a world now in which Chinese economic growth is the big story, and whether or not Beijing, whether or not the national authorities in China can manage that. It’s a rampaging growth story driven by credit. If they can organize a soft landing, we have one world. If we hit a hard landing, hit the buffers hard in China, we’re in a different reality.
The question of course is, who is entangled with that? GM right now sells more cars in China than it does in the United States. Apple’s entire manufacturing operation for iPhones runs out of China. In terms of finances, the British banks, which are most deeply entangled with the Chinese. We’re in a new constellation, and the old models of cooperation that were so familiar from the transatlantic world, those old models of interconnectedness and interdependence, none of those necessarily extend in the Chinese scenario.
Jeff Schechtman Do they extend into that scenario with respect to financial institutions? Is there another layer of interdependence that exists within the financial world as opposed to the political and governmental world?
Adam Tooze Great question. I mean, at the level of banks, the bank which is most interdependent is HSBC, which straddles Hong Kong and the United Kingdom, and has ever since the heyday of empire. It’s one of the most systemically important and also dangerous banks in the world system. That’s not because it’s a badly run bank. It’s because, on the contrary, it’s a great, well-run bank, but it has this business model that puts it in harm’s way, if you like.
With regard to the IMF, the IMF, you might think of as an organization with that kind of capacity. The IMF has senior staff with Chinese backgrounds. As it does, it recruits from all over the world. The IMF is not large enough to handle this kind of crisis, and the prospect of China having to have recourse to the IMF in political terms is just simply unthinkable. The G20 provides the kind of forum where this sort of thing can go on.
Then there’s a thing called the Basel Committee, which is the agency which regulates global banks. It keeps a list of the top 30 most systemically interconnected and dangerous banks, and there’s a whole bunch of Chinese banks on that list, as there must be, because they are now amongst the biggest in the world. The crucial thing about those Chinese banks is that many of them are effectively policy banks. They’re state owned or state controlled, or effectively state controlled banks with Communist Party representatives in their management or on those boards.
There are all of these levels of interconnection, but we have no idea how that would look if it was really put to the test in a crisis scenario.
Jeff Schechtman The question that I’m sure our listeners are also wondering about is the way in which tinkering with trade right now impacts this broader economic interdependence.
Adam Tooze Yeah, trade, it’s the front-cover issue. It’s the headline issue. Donald Trump has made it into this gigantic political issue. Of course, it does affect people, some parts of the American economy, through trade and through competition. But if you look at the number of Americans that actually work in export-orientated industries, it’s less than 5% of the American workforce. It’s not the dominating issue that finance is, because finance is like the circulatory system, the cardiovascular system of the economy. If it fails, everything fails. Trade affects limited, partial, part bits of the economy which are or are not exposed to international trade.
To my mind, the real issue here is the politics that accompanies the trade war. If you’re locked in the kind of confrontation that Trump seems to be steering towards with China, this does not put you in a position to engage in the kind of delicate maneuvering that we saw between the United States and China in 2015/2016, which for me is really the telltale, the hallmark of the future.
In 2015/2016 we saw the Chinese economy skidding, the Shanghai stock market was down, the yuan, the Chinese currency, was depreciating, all the opposite of what we’d seen the years before that. That sent shock waves through the global economy because the Chinese economy looked like it was going into reverse. The Chinese did a lot to stabilize that situation. They held their nerve. They ran their reserves down.
Crucially, what Janet Yellen’s Fed did was to cushion China’s problems by very cooperative policies from the American side. It put off raising American interest rates so as to ensure that there wasn’t additional pressure on the fragile Chinese economy. Of course, the question going forward is whether an administration like Trump’s, where the president will happily tweet out that the fall in the Chinese stock exchange is evidence that he’s winning in the trade war, whether an administration with that kind of politics would really provide the frame for the kind of cooperative interaction at the level of financial regulation and monetary policy that we need.
Jeff Schechtman Given the degree of regulation we have now and the regulation that we’ve put in place since the crash, is that a help or a hindrance to the stability of the system today?
Adam Tooze I mean, regulation is the entire game, because we didn’t in 2008/9 fundamentally change the system. Both in Europe and the United States, the decision was taken that it was too risky, too difficult, not even desirable, that basically the way to do this was to take the same old high-speed, rickety, souped-up hot rod of a financial system that we have and, rather than turning it into a more sensible vehicle, basically just improve the brakes, clean the windshield so we can see a little bit more clearly ahead, fix the wipers, and then make sure the headlights are going and then keep on trucking. That is the route that we’ve gone down.
The entire game in terms of future financial stability is regulation, and the regulations that matter most, probably, are the ones at the global level, where 30 banks were identified as systemically important financial institutions. They are subject to a level of regulation that banks have not been subject to before. Now, that can be gamed absolutely every level. The entire, if you like, question of financial stability depends on how that game is played.
It ought, in my view anyway, to be a highly political business because this is where society of politics decides what kind of risk that we want our financial system to subject us to, because we know that when those institutions fail, most likely whatever preparations we put in place, we’re going to have to backstop them. They are doing this, of course. They are doing this with profit in mind. There are fundamentally certain trade-offs that have to be made, both at the national and the global level, that center on the kind of regulations that we put in place. It’s technical stuff, but it’s really decisive for the future of economic and, indeed, social policy going forward.
Jeff Schechtman When we look at those banks, in many ways it seems that they’re better capitalized on the one hand, but they’re also a heck of a lot bigger on the other.
Adam Tooze Yeah. It depends which ones you look at. Some are bigger. Some are smaller. The Wells Fargos, the JPMorgans of this world have done very well out of it. If you take all of the banks as a whole, they aren’t great winners in the United States’ case, even less so in Europe, but, yes, they are more recapitalized.
I think the real issue is, where are the new risks? We have devised a basic set of regulations which are more demanding than they were before the crisis on two fronts. Capital is one, and liquidity is the other, because liquidity is really what you need to take care of the risk in a bank run. In both of those respects, I think we can say that the banks are a bit safer.
The question really is, are there other new risks in the banks that we don’t know about? I think, broadly speaking, we’re confident that there isn’t a huge pile of bad news there, but I think a really important set of questions is, if the banks have pushed this risk out of their system, if there is a single, if you like, lump of risk in the economy, where has that risk ended up? Is it now on the books, say, of asset managers of different types? Has it somehow been put into vehicles like index funds, which appear to be safe mechanisms for people as private investors, but may, in fact, contain very serious risk?
Jeff Schechtman One of the things you talk about in Crashed is where Russia sits in all of this.
Adam Tooze Yes. I mean, Russia is the geopolitical antagonist that barked. I mean, before the crisis, the United States policymaking community was already deeply concerned about China and the huge volume of debt that America was building up owned by the Chinese. They weren’t thinking much about Russia, but Russia is, in fact, the antagonist that has emerged. President Putin announced this publicly at the Munich Security Conference big gathering in early 2007. He said “There’s a red line, and you should not cross this.”
One of the anniversaries that has been sort of overlooked in all the to-do about Lehman is that this is also the anniversary of the war in Georgia, in which the Western proxy, which Georgia, a small country in the Caucasus that was applying for NATO membership, was dealt a very stern lesson by Russia. This was clearly a harbinger of what was to happen in Ukraine in 2013/2014. Both Ukraine and Georgia find themselves not just in geopolitical but in financial difficulties.
I think when you put Russia back into the picture, you understand the way in which the financial crisis is not mutual with regard to geopolitics, but really reshuffled the pack also with regard to hard power, if you like. Not just money and politics, but really the tougher side of global politics was reorientated, reshuffled by the financial crisis.
Jeff Schechtman You make the case that even domestic politics here and politics in the UK have all been reshuffled as a result of the financial crisis.
Adam Tooze Absolutely. I mean, it’s a complex story in each case. I’m not the sort of person who argues that economics determines everything in some straightforward or simple way. The way in which this reaction has rippled across Europe and the United States is very, very much by domestic political culture.
If you take the United States, on the one hand you have the emergence of the Tea Party, which is a sort of radicalized, souped-up anti-welfare movement, because, remember, what they’re protesting against is not the bailouts of banks; they’re protesting against the prospect that ordinary taxpayers might be expected to contribute support to their neighbors who’ve taken out too-large mortgages. This is a citizen-on-citizen kind of protest rather than a protest against the banks. That’s on the right-hand side of the American political spectrum, the Tea Party. On the left wing, of course, the Occupy movement, which opens the door in the Democratic Party to the candidacy of Bernie Sanders in 2015/2016. Real polarization or radicalization of American politics which can be traced directly back to 2008.
If you look inside inside the GOP, if you look inside the Republican Party, I mean, there’s very telling divisions that open up in the crisis summer of 2008 when the Congressional Republicans refused to give their support to the crisis-fighting efforts of the Bush administration, refusing to give votes for the bailout of Fannie Mae and Freddie Mac, and for the first round of TARP, the vehicle which is used to recapitalize the bank.
Jeff Schechtman When we look toward China, what does a hard landing look like? What are the potential consequences of that?
Adam Tooze Oh, a Chinese hard landing is a very grim scenario indeed. You would see the defaults on a very large scale by overborrowed corporate borrowers. It would probably run through the real estate sector. That would then ripple into the investment goods industries, things like cement, steel. This is still a heavy industrial economy where the linkages between the construction sector and the industrial sector are still massive and very pronounced.
We would see the prospect of rising unemployment. Beijing is profoundly concerned with political sensitivity. The prospect of mass unemployment would send shock waves in political terms through China. It’s a pretty grim scenario.
The question is how that would then affect Western lenders with the British banks in the city of London, and HSBC probably being the linkages through which this would spread to the West. Then you would have the further depreciation of the yuan, the falling of the Chinese currency, the exchange rate. That would put pressure on emerging market currencies across the world. As their exchange rates fell, the domestic value of the debts which they’ve contracted in United States dollars would rise equivalently, so you would see the wave of bankruptcy and financial distress spreading across the emerging market.
Jeff Schechtman Given where we are now then, what would be the most stabilizing event in terms of helping to secure all of these global markets?
Adam Tooze I mean, this is wishful thinking at this point, but what you’re really looking for is some kind of strategic dialogue between China and the United States about the management of these interconnections. You’d want it to include the Europeans and the ECB, as well, and you’d want this to be conducted in a relatively transparent forum so that we understood as citizens what it is that our policymakers were really engaged in. That’s super wishful thinking, but that’s really what it takes to put this on a solid foundation.
It requires technical cooperation, it requires geopolitical agreement, and it requires political legitimacy. You need all three of those things. Without that, basically we are running a dangerous machine with inadequate safety provisions and with fierce arguments going on inside the car as we head towards the car wreck. You need those three things, technical competence, geopolitical agreement, and political legitimacy, for the whole deal.
Jeff Schechtman Adam Tooze, his latest book is Crashed: How a Decade of Financial Crisis Changed the World. Adam, I thank you so much for spending time with us here on Radio WhoWhatWhy.
Adam Tooze Thank you for having me on.
Jeff Schechtman Thank you.
Thank you for listening and for joining us here on Radio WhoWhatWhy. I hope you join us next week for another Radio WhoWhatWhy podcast. I’m Jeff Schechtman.
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