…What the World should have learned in 2008
By Adam Tooze
“SEPTEMBER and October of 2008 was the worst financial crisis in global history, including the Great Depression.”
Ben Bernanke, then the chair of the U.S. Federal Reserve, made this remarkable claim in November 2009, just one year after the meltdown. Looking back today, a decade after the crisis, there is every reason to agree with Bernanke’s assessment: 2008 should serve as a warning of the scale and speed with which global financial crises can unfold in the twenty-first century.
The basic story of the financial crisis is familiar enough. The trouble began in 2007 with a downturn in U.S. and European real estate markets; as housing prices plunged from California to Ireland, homeowners fell behind on their mortgage payments, and lenders soon began to feel the heat. Thanks to the deep integration of global banking, securities, and funding markets, the contagion quickly spread to major financial institutions around the world. By late 2008, banks in Belgium, France, Germany, Ireland, Latvia, the Netherlands, Portugal, Russia, Spain, South Korea, the United Kingdom, and the United States were all facing existential crises. Many had already collapsed, and many others would before long.
Worst economic disaster
The Great Depression of the 1930s is remembered as the worst economic disaster in modern history—one that resulted in large part from inept policy responses—but it was far less synchronized than the crash in 2008. Although more banks failed during the Depression, these failures were scattered between 1929 and 1933 and involved far smaller balance sheets. In 2008, both the scale and the speed of the implosion were breathtaking. According to data from the Bank for International Settlements, gross capital flows around the world plunged by 90 percent between 2007 and 2008.
As capital flows dried up, the crisis soon morphed into a crushing recession in the real economy. The “great trade collapse” of 2008 was the most severe synchronized contraction in international trade ever recorded. Within nine months of their pre-crisis peak, in April 2008, global exports were down by 22 percent. (During the Great Depression, it took nearly two years for trade to slump by a similar amount.) In the United States between late 2008 and early 2009, 800,000 people were losing their jobs every month. By 2015, over nine million American families would lose their homes to foreclosure—the largest forced population movement in the United States since the Dust Bowl. In Europe, meanwhile, failing banks and fragile public finances created a crisis that nearly split the eurozone.
Ten years later, there is little consensus about the meaning of 2008 and its aftermath. Partial narratives have emerged to highlight this or that aspect of the crisis, even as crucial elements of the story have been forgotten. In the United States, memories have centered on the government recklessness and private criminality that led up to the crash; in Europe, leaders have been content to blame everything on the Americans.
In fact, bankers on both sides of the Atlantic created the system that imploded in 2008. The collapse could easily have devastated both the U.S. and the European economies had it not been for improvisation on the part of U.S. officials at the Federal Reserve, who leveraged trans-atlantic connections they had inherited from the twentieth century to stop the global bank run. That this reality has been obscured speaks both to the contentious politics of managing global finances and to the growing distance between the United States and Europe. More important, it forces a question about the future of financial globalization: How will a multipolar world that has moved beyond the transatlantic structures of the last century cope with the next crisis?
One of the more common tropes to emerge since 2008 is that no one predicted the crisis. This is an after-the-fact construction. In truth, there were many predictions of a crisis—just not of the crisis that ultimately arrived.
Macroeconomists around the world had long warned of global imbalances stemming from U.S. trade and budget deficits and China’s accumulation of U.S. debt, which they feared could trigger a global dollar selloff. The economist Paul Krugman warned in 2006 of “a Wile E. Coyote moment,” in which investors, recognizing the poor fundamentals of the U.S. economy, would suddenly flee dollar-denominated assets, crippling the world economy and sending interest rates sky-high.
But the best and the brightest were reading the wrong signs. When the crisis came, the Chinese did not sell off U.S. assets. Although they reduced their holdings in U.S.-government-sponsored enterprises such as the mortgage lenders Fannie Mae and Freddie Mac, they increased their purchases of U.S. Treasury bonds, refusing to join the Russians in a bear raid on the dollar. Rather than falling as predicted, the dollar actually rose in the fall of 2008. What U.S. authorities were facing was not a Sino-American meltdown but an implosion of the transatlantic banking system, a crisis of financial capitalism.
And the crisis was general, not just American, although the Europeans had a hard time believing it. When, over the weekend of September 13–14, 2008, U.S. Treasury Secretary Henry Paulson and other officials tried to arrange the sale of the failed investment bank Lehman Brothers to the British bank Barclays, the reaction of Alistair Darling, the British chancellor of the exchequer, was telling. He did not want, he told his American counterparts, to “import” the United States’ “cancer”—this despite the fact that the United Kingdom’s own banks were already tumbling around him.
The French and the Germans were no less emphatic. In September 2008, as the crisis was going global, the German finance minister, Peer Steinbrück, declared that it was “an American problem” that would cause the United States to “lose its status as the superpower of the world financial system.” French President Nicolas Sarkozy announced that U.S.-style “laissez faire” was “finished.” To Europeans, the idea of an American crisis made sense. The United States had allowed itself to be sucked into misguided wars of choice while refusing to pay for them. It was living far beyond its means, and the crisis was its comeuppance.
But confident predictions that this was a U.S. problem were quickly overtaken by events. Not only were Europe’s banks deeply involved in the U.S. subprime crisis, but their business models left them desperately dependent on dollar funding. The result was to send the continent into an economic and political crisis from which it is only now recovering.
Even today, Americans and Europeans have very different memories of the financial crisis. For many American commentators, it stands as a moment in a protracted arc of national decline and the prehistory of the radicalization of the Republican Party. In September 2008, the Republican-led House of Representatives voted against the Bush administration’s bailout plan to save the national economy from imminent implosion (although it passed a similar bill in early October); a few months later, after a lost election and at a time when 800,000 Americans were being thrown out of work every month, House Republicans voted nearly unanimously against President Barack Obama’s stimulus bill. The crisis ushered in a new era of absolute partisan antagonism that would rock American democracy to its foundations.
Europeans, meanwhile, remain content to let the United States shoulder the blame. France and Germany have no equivalent of The Big Short—the best-selling book (and later movie) that dramatized the events of 2008 as an all-American conflict between the forces of herd instinct and rugged individualism, embodied by the heterodox speculators who saw the crisis coming. Germans cannot ignore that Deutsche Bank was a major player in those events, but they can easily explain this away by claiming that the bank abandoned its German soul. And just as the Europeans have chosen to forget their own mistakes, so, too, have they forgotten what the crisis revealed about Europe’s dependence on the United States—an inconvenient truth for European elites at a time when Brussels and Washington are drifting apart.
Confidente. Lifting the Lid. Copyright © 2015