Adam Tooze’s book, Crashed: How a Decade of Financial Crisis Changed the World (New York: Viking, 2018) has been one of the most-admired books on economics in recent years. Pavlos Roufos caught up with the author recently in Berlin.
Pavlos Roufos (Rail): The magnitude and global outreach of the financial crisis of 2007-2008 seems often overlooked or downplayed. But you make it a crucial part of your book to explain precisely the extent of the impact. Could you summarize the argument here?
Adam Tooze: Part of the problem in visualizing the scale of the shock in 2008 is that it is counterfactual, a kind of virtual experience. In September 2008 it seemed that the financial economy all over the world was about to implode. Cross-border global capital flows collapsed by something like 95%. That was not a continuous thing, it was not a slope, it was a cut. You go from being a viable entity to being a non-viable entity in an incredibly short space of time.
On the American side, it was not just Lehman Brothers. Merrill Lynch was rescued by Bank of America. Goldman Sachs and Morgan Stanley were in deep trouble. Citigroup, everyone knows, was basically dead and should have dismantled--and the list goes on. The really astonishing thing is that this is true around the North Atlantic financial system. Take the German banking system. If you look at the accounts of the Fed it is pretty clear that all of the major German banks, including Deutsche Bank, were under massive liquidity pressure. They were basically facing the modern equivalent of a bank run. Add Commerzbank, Dresdner Bank, the Landesbank… An entire system was under overwhelming pressure. And that fed quickly into the real economy. Over the winter of 2008-9 we saw an extraordinary simultaneous collapse of trade around the world.
But then the ultimate catastrophe was staved off. Though the risk of total collapse was far greater than in 1929, a second Great Depression in the North Atlantic economy was warded off. To that extent one might draw an analogy to the Cuban missile crisis of 1962. We saw the end of the world and pulled back. The history of this kind of event is puzzling. The danger of absolute disaster is real. They are terrifying and shake the existing structure of power and confidence. But then the disaster is avoided and complacency and the old order quickly returns.
Rail: Another important part of your expose is to dispel the myth that this was an American crisis. There is no doubt that its origin lay in the US subprime market but calling 2007-2008 an American crisis is clearly misleading, is it not?
Tooze: Yes. It is entirely self-serving on the part of the Europeans. First of all, the European banks played a major role in the final and most dangerous stage of subprime securitization. The European banks did this, ironically, in part with American money. So they were basically acting as American banks: borrowing in America to lend in America. Globalization has actually happened. Private corporations were acting across borders, without regard for borders. But there is a huge political imperative to re-impose a national script. Especially if you feel you can unload the responsibility rather than face the actual consequences of the globalized system, which all the mainstream parties of the western world helped to construct from the 1970s onwards.
And then of course there is what was happening in Europe at the same time. We insist on thinking of this as an American crisis, even though the Spanish and Irish real estate bubbles were twice as big in proportional terms as the American bubble. And they both broke in 2007-2008. Spain was going to have a crippling recession with very high unemployment after 2008 whatever happened in the rest of the Eurozone. In 2008 Madrid managed initially to contain the crisis; the really dangerous bank failures in Spain came in 2012. By comparison, Ireland’s efforts to contain the crisis in 2008 pushed the state towards bankruptcy. Likewise in Britain. With or without Lehman, two of the largest British banks, RBS and HBOS, were completely broken.
So, on the one hand, the Americans think the crisis is their own because they think very parochially, and the Fed doesn’t want to explain to the American population what it did for global banks, while the Europeans like to offload this onto the Americans. Everyone has decided to think of the Eurozone crisis as a problem that is sui generis — classic European political economy, bad democracy, public choice, and all that, which clearly have nothing to do with 2008.
Rail: This brings us to the next question, about Europe’s “blindness.” You already mentioned the public/private debt configuration. Let’s turn to Germany. How do you see Germany’s role in the crisis? What was the shift that took places in between 2008 and the outbreak of the so-called “sovereign debt crisis” of 2010? For while Germany proceeded with a stimulus and protection of a selective part of its industry, from 2010 onwards there was a shift, and the discourse is about sovereign debt, austerity, and fiscal discipline.
Tooze: The German banking system, which is a very diverse system, was deeply involved at every level, which makes it quite striking that German politicians have been so eager to describe the crisis as an American crisis. This is in part simple self-interest. They don't want the hot potato. But there is a history here of fraught transatlantic relations that goes back at least to the Iraq war, if not earlier. From 2002 – 2003, the Red-Green government positioned themselves as a counterpoint to Bush-Blair. [Jürgen]Habermas and Derrida put out their manifesto in 2003 in which they postulated an entire metaphysics of a “divided West.” This denied the reality of economic and financial entanglement.
Even while the German government was organizing a bailout for the IKB [German Industrial Bank] in the autumn of 2007, they were determined not to recognize the crisis as a European problem. Deutsche Bank did a very good job at handling its problems in Wall Street, to avoid the embarrassment of dealing with Steinbrück [Peer Steinbrück: Finance Minister of Germany 2005-2009] and Merkel at home.
When the crisis hit Europe hard in September 2008, the Germans were notable for failing to cooperate even at the level of basic communication with the other governments handling the crisis. It got so bad that the British government actually phones the British embassy in Berlin to ask them to knock on the door of the German Finance Ministry to see whether anyone was at home. They wouldn’t answer their phone! When was the last time that an act of financial coordination was conducted by an ambassador?
And then there is this extraordinary sequence of events over the Franco-Dutch proposal for joint European action. The Benelux countries and France have deep cross border financial connections. It is obvious that Ireland is struggling to cope with its “too big to fail” banks. And the French are saying, “Why don’t you fall forward and try to come up with the European solution for this?” They float the embryonic idea of a joint approach to guarantees and recapitalization. But the Germans just shoot it down. It’s dead in the water.
Then when Berlin itself begins to worry about a bank run, Steinbrück and Merkel unilaterally declare a comprehensive guarantee for German deposits. Entirely without consultation.
So at the height of the crisis, there is terrifying period when the Germans are uncooperative, uncommunicative, and acting unilaterally. And they are just too big to be allowed to do those three things.
It was the same with fiscal policy. During the G20 meeting in London in the spring of 2009, the British and the Americans were keen to do a big stimulus, but the Germans just killed the idea. There wasn’t going to be a commonly announced fiscal stimulus. They could barely agree within the GroKo [Große Koalition: Grand Coalition government between CDU-SPD] to do a stimulus in Germany. And they were certainly not going to sign up with the Brits and Americans. What Berlin started instead was a conversation about derivatives, hedge funds, tax havens. All of these should clearly be regulated, but they were irrelevant to the short-term crisis. The British and Americans were far more clearly focused on bank recapitalization and liquidity. Berlin interpreted this impulse to put out the immediate fire moralistically, saying, “You (Britain and America) want to cover up the fact that you didn’t do your homework, to cover up how broken your financial system is.” But, first of all, Germany’s own financial system was broken. And secondly, medium-term and long-term reforms do not help with an immediate crisis. They may even increase the pressure at a time when you cannot bear it.
The story reached its conclusion in 2009 with the Schuldenbremse [literally: “debt brake,” meaning a balanced budget amendment, introduced in the German constitution in 2009, forbidding the government from running a structural deficit of more than 0.35% of GDP until 2020, after which no structural deficit would be allowed at all]. When the GroKo did finally agree on a fiscal stimulus in Germany it was offset by the pact to avoid taking up new debts in the future. With the Schuldenbremse Germany put in place a key element of the austerity push of 2010.
Germany was, in short, for its own complex political reasons, uncooperative, unilateral, and critical of a lot of people’s crisis fighting efforts, while downplaying the degree to which its own financial institutions were entangled in the crisis. And if you talk to people like Tim Geithner they will tell you that this was no surprise. This is exactly what the Clinton administration experienced in 1995 over the Mexico crisis. The Germans were deeply uncooperative, protesting on the IMF board about the mobilization of resources to contain a crisis in which America’s banks were deeply involved. For Geithner and Larry Summers it was a formative experience.
Rail: Would you agree that the discussion on the debt brake (Schuldenbremse) presented itself as an opportunity to use the crisis as a vehicle to implement the basic coordinates of what the European elites always saw as the key goals of the Eurozone project?
Tooze: Yes. For [German Finance Minister] Schäuble, it was both a tactic and a strategy. His preference was for deeper Eurozone integration and cooperation. But he knew that the only conceivable way that he could make the argument on the European question to his skeptical constituents in Germany was to say, “Yes, we are asking you to give up more sovereignty, but in exchange for this the other people are going to play by the same rules.” He knew that this was a political sine qua non. If the German electorate was not convinced that everyone will be disciplined, in the same way that North Rhine-Westphalia is disciplined by the debt brake, there would be no deal. Why should different rules apply to Greece than to North Rhine-Westphalia? There were struggling post-industrial German towns under huge financial pressure. NRW was struggling to meet the Schuldenbremse. Why should Greece be on a shorter leash?
So, for Schäuble, discipline is a precondition to deeper integration. At the same time, it is a project of discipline driven by some vision of globalization in which “too much” welfare and “excessive” taxes are bad for competitiveness. Merkel really likes to quote this trio of numbers: 7-25-50—where Europe is 7% of world’s population, has 25% of global GDP, and does 50% of global social spending. That, she insists, is not sustainable. So there is definitely a retrenchment of the welfare state, there are people in the GroKo and the German Finance Ministry whose vision of a good government is a much smaller state.
But I would add another thing, which is quite important to do justice to German policy during the crisis: compared to France, both the German government and the opposition after 2009 were far more open to the idea of burning the creditors. Again and again it was the Germans who insisted that a PSI [Private Sector Involvement, creditors accepting a debt restructuring on their loans] had to be on the table, and if it was not the government, it was the SPD [the Social Democratic Party] who were saying this. To that extent, Germany’s vision of discipline was more even-handed than that of the ECB [European Central Bank]. At least in principle it applied to both creditors and debtors.
Rail: You explain in detail how unprecedented the policy responses were, especially on behalf of the US. So, one question is: how much of that would you say was a trial-and-error project, and how much could be seen as a conscious design? One can say that those responsible for the crisis management were not fully aware of what the results of their policies would be, as nothing like that had been tried before, but at the same time, as we said, Eurozone crisis management was utilized as a vehicle to impose something that had already been decided, i.e. the coordinates of fiscal discipline targets.
Tooze: As a preparatory statement, I would say that everyone in the world does some variant of the policies adopted in 2008. It is not rocket science. If you look, with a reasonable level of information, at the problems you will arrive at these kind of policies: liquidity injections, recapitalization, guarantees. But as a matter of historical fact, it is true that ideas do play a very central role in shaping policy. For the elite groups in the US, the defining experience around which the role of the US government is defined in positive terms is the New Deal, war-time, Marshall Plan era. There wasn’t much of a federal government before that. The New Deal built American big government in its current form, with a central bank focused on preventing deflation. As 1929 – 1933 taught, really bad deflations happen when you have bank failures.
Germany of course has its own historical legacies. And it suffered catastrophic deflation in the early 1930s and it was that which put paid to the Weimar Republic and opened the door to Hitler. But the historic lesson driven home by the Bundesbank is not that it is vital to prevent deflation but that inflation-fighting should have absolute priority.
In 2008-9, in the US, the situation was seen as directly analogous to the moment of FDR’s election. Obama’s benchmark was FDR’s first one hundred days. This is the myth of American democratic politics: the West Wing as the stage for heroic executive action. The Obama team stages the passage of the stimulus bill as emergency legislation. They force Congress to meet during weekends to vote it through. Christina Romer, Chair of the Council of Economic Advisers for Obama, is an economic historian. She makes the case explicitly: we have to outdo the New Deal with our fiscal stimulus.
For obvious reasons, perhaps, the fiscal stimulus launched by Hitler in Germany in 1933 is not an example anyone wants to draw on.
Rail: You write about a transformation from a macroeconomic perspective (focusing on GDP, unemployment etc.) towards macro-finance. The book shows that the crisis exposed that shift. I would want to link this approach to the book’s claim that the idea that a better crisis management, or a better solution, would entail a return to the nation - state does not add up.
Tooze: What gives the 2008 crisis its violence and scale and speed is that it is a private-sector balance sheet implosion, it is a modern bank run. And the logic of a bank run is not driven by macroeconomic forces but by a loss of confidence in markets that operate transnationally between private actors. So the lesson that the crisis regulators, politicians, and managers learn is that those balance sheets, those banks, need themselves to be managed directly. In this sense, as any Marxist critique would predict, reality forces even dogmatic bourgeois ideology to come to terms with the reality of the dominance of the global economy by massive transnational corporations. 2008 reveals how it is literally impossible to understand what is happening unless you look inside the bastions of the financial system. If the internet shut down globally, we would not spend a lot of time looking at America’s trade balance. You would want to know what happened inside whichever platform capitalist had suffered a system failure. And that’s essentially what happened to the financial system. The consequences of this shift from the national economy to a focus on the corporation is, potentially, radical. Because it strips away the euphemisms of the Keynesian paradigm. If the world is dominated by corporations of this scale, and that is in fact an irreversible shift, then to continue to cling to national categories is just to succumb to a kind of delusional structure. That’s the lesson of the crisis at this moment. A “return to the nation state” is illusory unless accompanied by truly radical rewiring of how the global economy actually operates.
Rail: You acknowledge that even though the crisis management was in many ways successful in averting a complete catastrophe, its human and social cost was totally devastating. But if your argument is that “had these policies not been put in place, the situation would have been worse,” doesn't that imply that there was no alternative?
Tooze: Obviously we could sit here and dream of a world in which you have a properly democratic and legitimate sovereign, who responds with assertiveness and energy and intelligence. Image a government like Putin’s regime that is not afraid to bash a few oligarchs’ heads together, sends some of them to jail to satisfy the desire for punishment, but also does a big stimulus, orders the central bank to prevent that from causing a bond market panic, allows the currency to devalue to gain a little bit of competitive edge on China, and rounds all of this off with a push for the mobilization of grassroots democratic, cultural, and social organizations sponsored by central government, enabling a permanent progressive shift in the balance of politics. That would be the New Deal on steroids. All the way down to the stimulus of a collective organization of painters and artists and writers, saying, “They are unemployed too, they need jobs, they can do art, let’s pay for that.” And in so doing the New Deal created one of the great cultural legacies of twentieth century America. I am sure that is what the optimistic politicians of Syriza imagined that their government might be. It is what any democratic politics should aspire to be.
But let’s just assume that this is not realistic for many different reasons. We are then in a world of second or third best. Viewed against that sober backdrop, what the history of the crisis illustrates is the difference between being governed by a bunch of reasonably well-organized self-interested capitalists and their helps or being run by a system in which business interests are no doubt predominant but articulated with each other and with the broader political system in profoundly dysfunctional ways. Neither of these scenarios is going to be pretty, from the point of view of the ideal standard; in both cases terrible things are going to be done. But in the first case, they will realize the basic Fordist idea that the workers you employ have to buy your products, so it would be better if they were employed. Higher wages can’t hurt. The Fed has a full-employment policy. Bernanke is not, at this point, being paid by a bond fund. He is a conservative with a social conscience who came from very modest circumstances. He takes himself on tours of the most blighted bits of America and dedicates the Fed to researching regional inequality. There is something akin to a social policy agenda in the Fed. With QE2 [the second round of Quantitative Easing, government bond buying] in 2012, he commits himself: “interest rates will not move off zero until unemployment is down to 6%.” The Fed has a price stability mandate too. But no one outside the ECB is seriously worrying about inflation at that point. Ben Bernanke’s QE isn’t anyone’s idea of an efficient means of stimulating the economy. It's a policy of last resort. But it is political economy working in an intelligible way.
And then you contrast that with the Eurozone, where there are apparently people who think that a 50% youth unemployment rate in a country of the size of Spain is an acceptable state of affairs. When you explain this to Americans, when you make it concrete, they stare at you in disbelief. Spain is the size of Texas. Imagine how the Federal government in the US would respond if there was a 50% unemployment rate in Texas, not among disadvantaged black kids, but white kids coming out of Texas public schools. If half of them were unemployed, the state of Texas would likely declare an emergency and launch a local fiscal and monetary stimulus.
Of course Spain was going to hit the buffers because of the implosion of the real estate bubble. But given that it was facing this massive local asymmetric shock, why the hell isn’t there a regional work creation policy for the areas hit by the real estate bust rather than the draconian one-size-fits-all fiscal pact? The EU can spend big on regional policy. It has done so in Eastern Europe, in Poland notably. We know the answer, of course. It lies in Schäuble’s apparently inescapable logic of rules and rule-following and Germany’s own contorted domestic political economy. The resulting contrast is stark: between an oligarchic system in the US that delivers reasonably competent crisis management, and one whose political wiring provokes an extension of the crisis in the Eurozone beyond 2009 all the way down to the present.
Rail: In the book you talk a lot about how the crisis shows that, although it appears as a massive self-propelling machine, there is actually a lot of agency involved, a lot of politics involved. But my question is this: this agency seems to be confined to top players and institutions. What kind of agency would you give to social movements, especially the ones we saw in countries severely hit by the crisis management?
Tooze: To start with, we should definitely not underestimate the mobilization of the grassroots of the American conservative party. It is the single most powerful (and most destructive) force to come out of this and it is also, to all intents and purposes, a social movement. And they have understood what they are doing as a broad-based hegemonic project.
Also in the US, one should not underestimate the Sanders wing of the Left, which is unprecedented. The DSA has 65.000 members now, whereas it only had around 6,000 just two years ago. For my daughters’ cohort of kids, socialism is what you are. It’s a matter of identity. This is hardly going to become majoritarian, or even close, but what they have learned from the Right is that you do not need to be. You just need to be a really dangerous minority who will fuck with the senior Congressional leadership. Alexandra Ocasio-Cortez killed off one of the expected successors of Nancy Pelosi. All this sends a message that in places like New York, California, and some of the Midwestern states, mainstream Democrats are not safe anymore.
In Europe, there was a familiar picture of Podemos, Syriza, FiveStar, Mélenchon and Momentum and the Corbynites, and then their counterparts from the Right, in each case. That also means that this is a five to six party world now, with each one somewhere between 15 and 25%, far right or far left, depending on the country. The question then is how on earth can one organize government coalitions against that backdrop? And how do you prevent these spiraling discourses of crisis, where the rise of a right-wing party from obscurity to 20% is all of a sudden the end of the world and apocalyptic, rather than just an honest admission of the fact that those bastards were always there and anyone in their right mind always knew it? It was just that they were voting for the Christian Democrats. Franz - Josef Strauss [politician of the conservative Christian Social Union in Germany] was honest enough to say “Niemand rechts von uns” [“no one is to our right”], which meant, “They were all in our camp.”
For the elite crisis mangers, this registers as another side of the crisis, because for them it is. It directly challenges their ability to assemble these big coalitions that need to do difficult things at moments of crisis. Instead, the crisis dynamites this, by putting huge pressure on the fragile links between the centrist, globalist, technocratic elites and their respective right and left bases, a conflict that is hugely accelerated by the specific, unreasonable demands of crisis management of 2008 - 2012. You don’t have to be a radical to hate the effects of austerity, nor do you need to be a radical to think that bailouts were crazy.
Rail: The process of delegitimization you describe can be easily observed in countries such as Greece. In Germany, however, although the pre-existing consensus is still alive, although you have not had a crisis or austerity (at the same level, in any case), you still have the AfD, the right wing Alternative for Germany.
Tooze: Well, it has not felt severe, simply because the economy and nominal growth has been moving along just fine, but the fiscal shift in Germany is crazy. There simply is not any other G20 country running such a surplus. But there is more. The assumption that everything is working fine in Germany ignores its eastern part. Is everything totally cool in Chemnitz? Is Chemnitz a prosperous town? Is East Germany bubbling along? When you look at the map of Germany you see massive inequality between the West and the East, especially with regards to assets. There simply are no rich people in the East, it’s quite amazing.
What happened is that the crisis created the possibility of a fracture within the CDU, which allowed a different set of people to arrive, who could voice complaints from a position of relative credibility close to the CDU. And then, you had 2015. That was the explosive charge that was tossed into this very combustible mixture, because it made clear that in the richest European country, and the most powerful one, some feel structurally disadvantaged and fundamentally pissed off. There is, in fact, a crisis in Germany. It is not an immediate, 2008-type crisis, but the undigested consequences of the re-unification and of the Hartz IV reforms of the social welfare system, followed by the long struggle over the Eurozone which the German conservatives feel they have lost.