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.
Michael Roberts Blog 
Thanks Michael, clear and concise as ever. I find your blog very useful in understanding how things are and where they might go in the future – assuming no significant challenge to neoliberal capitalism.
Do you write anywhere about what a socialist economy might look like and how a transition to such an economy might happen – and here I’m talking about the ‘economics’ rather than the politics of change?
In a world where everyone had agreed that need rather than profit should govern production, and given a political mandate to achieve that, what would you aim for and how would you engineer the change?
Richard – apologies for not responding. Your questions are pertinent but very difficult to answer in a short space. Marx offered some guidelines in his Critique of the Gotha Programme. Many Marxists have considered the issue more precisely. And there are many lessons to be drawn from the experience of the success and failure of governments that replaced the capitalist mode of production at least domestically and for a while. The basic principle with a world government and a planned economy (ie without capitalists) would be to raise the productivity of labour to reduce hours of work and increase the amount of goods and services free at the point of use. That’s all I can say in this space
Thanks for replying Michael, no worries about the delay – it’s not exactly a time critical question 🙂 and thanks for the Marx reference. I wasn’t expecting a treatise in the comments section but wondered if you have published on the topic elsewhere or within the blogs archive? Failing that is there any text / commentator – beyond the Marx one you just cited, that you’d recommend on the topic(s)? Best wishes, Richard
The problem with Economics History is that, in an attempt to respect the boundaries between them and the economists proper, they kind of resort to the historicist methodology (trying to describe day by day, word by word, as if History was the union of atomized infinitesimal events). In this, they often fall in many traps of this method, the main one being anachronism: to treat the fact that is object of the research as a fait accompli, as already written in the stars. So, I’m not surprised mr. Tooze came out bland with the conclusion.
That’s why I only use these kind of historians as a source of primary sources: since most historicists are anti-Marxist, they usually have access to bourgeois sources (and vast material resources and institutional cooperation) that a Marxist could not even dream of getting close.
Is Corbyn a genuine leftist? What about his inability or unwillingness to deal with anti-semitism in the UK LP? This suggests an opportunistic effort from the “left” to siphon off some of the reactionary working class anger with finance from the far right as a road to political victory. Very dangerous
Really, Mr. Diamond, don’t you think what’s “dangerous” is for well meaning “leftists” like yourself to clumsily conflate criticism of a state with hatred of a racially fictionalized people?
”Is Corbyn a genuine leftist?” No!
” What about his inability or unwillingness to deal with anti-semitism in the UK LP? ” The danger in the UK LP is not anti-semitism but pro Zionism. The Zionist Herrenvolk continue to expand their Lebensraum at the expense of the Palestinian Untermenshen. What is the Final Solution? On this the the anti-corbynites in the L.P. are silent.
I note the Israeli Minister of “Defence” was in the Ukraine peddling the Neo-Nazis there weapons. Hitler must be chortling!
Exactly. Both the Nazis and the Zionists institutionally legitimize traditional antisemitism’s fiction of a jewish “race” with certain universal characteristic–the Nazis negatively, the Zionists positively. Therefore, criticism of “the Jewish State” resonates as being “antisemitic” among traditional antisemites, just as it does among liberal humanitarian imperialists pretending to be “leftists”.
Why bother taking Diamond’s bait and answering that Corbyn isn’t a “genuine leftist”? The term is meaningless. Is Corbyn a communist? probably not.
How did we get into this thread. Corbyn and MacDonald are tripped up by two fundamental contradictions which have always bedevilled the Labour Party. Firstly, that it is a broad church where the preservation of its unity is the most important imperative. So to keep Zionist MPs and councillors from running out of the tent he has to conciliate. Secondly, the programme of the party must always be affordable, fully costed therefore conditional. Hence in the end they end up behaving like accountants rather than politicians. That aside, the main reason why Corbyn should have stood firm against the Zionists is to protect the Jewish community in Britain. When anti-Semitism is weaponised, therefore misused, it backfires hurting those it claims to be protecting, the Jewish community itself. Islamophobia is currently putting the lid on anti-Semitism, but beneath it studies show about 30% of the population harbour prejudices against Jews. This just adds fuel to these prejudices. How long before they start whispering, look the Jews are running the Labour Party or the Jewish Bankers don’t want the LP to be elected because their policies will reign in the banks and so on and so forth. Of course in the end the Zionists don’t care because if anti-Semitism erupts in Britain because of their actions that is more Jews fleeing to Israel. That said, the attempt to silence criticism of Israel is not a sign of strength but of weakness, even desperation, as support for Israel ebbs around the world including in the USA.
No more comments on the anti-semitism thing will be allowed on this blog which is aimed at political economy not political arguments as such.
Michael, Isn’t the point of Tooze’s book that the credit crisis opened the door to populism of the very sort now emerging on the right and left of UK politics? Nonetheless, it’s your blog so I respect your request.
That’s fine as long we dont get into a debate about whether Labour is anti-semitic or not. There are plenty of places to debate that.
Which is interesting in itself, Michael, as if Marx’s work doesn’t show that the two are inseparable and that “political economy” is of necessity, abolished by proletarian revolution. But hey, it’s your blog, you make the rules
yep
It is too simplistic to dismiss the Brexit vote as “rightist”. There were clear elements of xenophobia and anti-migrant racism in the vote but if you spoke to working class Brexit voters, there was also anger with austerity and the elite telling them in the middle of the long depression that EU membership had brought them properity. Depressed former industrial regions which had voted for Brexit also tended vote for Corbyn’s Labour Party in the general election that followed the EU referendum. That election also led to Theresa May’s government losing its majority in Parliament and the collapse of the right-wing populist UKIP party, at least some of whose vote went to Labour. Anger with austerity can go both ways at the same time as we are seeing with rise of the far right in Britain.
Yes, Tony, but the origin, the “reason” for the referendum had nothing to do with working class struggle against austerity; and the campaign around the referendum had nothing to do with working class struggle. Would that it had, but it didn’t. Ask those voting for Brexit if they support the withdrawal of the UK from NATO, from the IMF, etc.
MR:”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.”
Except of course there was a recovery in profitability after the 2001 recession, based pretty much based on draconian controls on capital spending and driving wages off their 2000 highs. The rate of profit turns down in the US when capital spending resumes in 2005-2006.
The securitization of mortgages had more to do with the decline in capital spending as banks, investment and commercial, had to shift away from the declining commercial loans and into consumer-based vehicles. I think the shift in banking assets went from 50-50 to 70 consumer, 30 commercial during the 2001-2008 period– that’s from memory, no sure thing these days.
«ensured that the stronger and luckier big banks gained at the expense of the weaker and smaller»
Interesting point that I read on another blog: when USA law effectively prevented big “money centre” banks from branching outside their home states, there was a big lobby of state chartered small and midsize banks that actively fought them; when Glass-Steagall was neutered the “money centre” banks bought out the state chartered bank and their countervailing lobby was neutered, meaning that USA politicans had to seek sponsorship only from the big ones.
«he credit boom was just as strong in Europe.»
This graph by prof. S Keen is especially telling:
«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.»
That is “nokeynesian Economists”; keynesian political economists have always know, like JM Keynes, that the financial system is unstable (largely because money and liquidity are not the same thing), and the keynesian political economist H Minsky exposed well that line of understanding.
«Wolf’s explanation is equally inadequate: what was the cause of this global savings glut and ‘imbalances’ that arose in the 2000s?»
C Crouch has argued this is the result of a switch to “privatised keynesianism”, that is boosting demand through private lending, pushing up asset prices and generating a “wealth effect”, beloved of every neoliberal:
http://www.theguardian.com/commentisfree/2013/mar/25/george-osborne-britons-economic-cannon-fodder
«Actually, the savings glut was in reality an investment dearth … was a product of falling profitability»
That “Actually” seems quite optimistic to me given of the immense sums invested in the past decades in real estate in the “first-world” and in productive capacity (and real estate) in China. In prof. Keen’s amazing graph mentioned above most of the increase in UK private debt was due to real estate investment, a colossal amount.
The “falling profitability” explanation seems to be really weird too, given the enormous real estate profits made in the “first world” (often 50-70% compound annual return on cash invested, for decades), and the gigantic profits from moving production to China and India that have create a large number of very rich people in those countries.
The sources of the so-called “savings glut” were mostly three countries: Germany, China, Japan, and transparently that was because they adopted mercantilistic policies to export capital in order to export goods, a form of macroeconomic “vendor financing”.