In November 2009, Lloyd Blankfein, the CEO of Goldman Sachs, told the New York Times that he was just a banker, “doing God’s work.” If true, then the financial crisis of 2008 proves that God does indeed work in mysterious ways.
The extent of the damage done by that financial crisis is mind-numbing in its scale. In 2009 the International Monetary Fund put the loss of household wealth in the United States at $11 trillion, three years later the Treasury raised the figure to $19.2 trillion, and some independent estimates put the amount even higher at $22 trillion. But numbers alone do not tell the story of the millions of lost jobs, the millions of lost houses, and the millions of lives torn apart by the crash of 2008.
Adam Tooze does a masterful job in explaining how the catastrophe happened and how the contagion eventually spread across the globe. With the benefit of ten years perspective and a hefty 700-plus-pages canvass, Tooze has written an essential book about the Great Recession and its consequences. What he hasn’t done is to write a thorough critique of
the underlying cause of the disaster: capitalism. For this analysis the reader must look elsewhere.
Crises, big and small, are the sine qua non of capitalist history. The solution to one crisis often becomes the harbinger of the next. The end of the Bretton Woods Agreement in 1971, the Volcker Shock of the late 1970s, and the failure of one-third of the savings and loan associations in the late 1980s all would play their role in the 2008 meltdown. More recent examples include the Alan Greenspan sponsored cuts to the Federal Reserve discount rate. Eventually the cuts settled at a near-historic low of 1 percent. Lasting between 2000 and 2004, this rate became the accelerant that fueled the out-of-control housing boom that reached its peak in 2008.
While that firestorm was growing to biblical proportions, the “custodians” of the US economy were looking elsewhere for the inevitable downturn. Tooze recounts the early history of the Robert Rubin inspired Hamilton Project, an offshoot of the Brookings Foundation, and its impact on economic doctrine and on how the economic future should be predicted.
The Hamilton Project is important primarily because of the people it involved, notably future President Barack Obama and the man he made his budget director, Peter Orszag. The Hamilton Project predicted that the coming crisis would be centered on public debt, and the solution must include drastic cuts to entitlement programs. Although the analysis was proven wrong, (the coming smash-up was entirely the doing of private debt), the principal lesson learned by the coming Obama administration remained the same: austerity was the answer to all economic problems. This worldview contributed to his administration’s failure to aid the victims of the Great Recession.
For a lay person following the fast-moving crisis of 2008 and its immediate aftermath is like jumping into a sophisticated video game. The first thing you would notice in the game is the constantly moving dollars––not yuan, and rarely euros, but dollars. Dollars moving in all directions at near the speed of light. This money goes by the initials of manufactured derivatives and money transfer mechanisms: CDS, CDOs, Repos, SIVs, ABCPs, and my favorite CDOs-Squared.
The dirty little secret is that none of this is money in the conventional sense, but rather it is all credit and credit’s flip side, debt. If these things stop moving, the financial world stops with it. One senior bank executive put it this way: “It was as if your entire life you turned on the spigot and the water came out. And now there was no water.” Preventing that dry tap from happening became the heart and soul of the “recovery” effort.
How this fictitious capital was tethered to the real world was through real estate. Tooze points to the duel importance of real estate as “not only the largest single form of wealth, it is also the most important form of collateral for borrowing.” By utilizing this collateral, and taking advantage of the seemingly impermeable nature of real estate, there seemed to be no limit to the money to be made through packaging mortgages into complicated derivatives, or as Warren Buffett called them, weapons of mass (financial) destruction. Start with this irrational faith in derivatives, add the gold standard of inflated AAA bond ratings, throw in sub-prime mortgages with adjustable rates, and stir with a frantic competition for market share and you have the recipe for the disaster of 2008.
When Crashed turns to the bailout the focus shifts from the purely financial to the political. Tooze asks the million dollar question: “The great political ‘might-have-been’ of the early Obama administration is, alongside TARP and the fiscal stimulus, the White House did not start by pushing a comprehensive relief program for homeowners.” Obama was elected largely because voters expected Franklin Roosevelt redux, but what they got instead was a warmed-over Bill Clinton.
Stacked with advisors and cabinet members trained and vetted by Robert Rubin and Goldman Sachs, there was little chance the Obama administration would bailout the 9.3 million American families who lost their homes to foreclosure. According to Tooze, Larry Summers, head of the National Economic Council for Obama, “insisted that the question of home owner relief was a constant debate within the administration.” I’m sure knowing this will be a great consolation to people who lost their homes.
On March 27, 2009, the CEOs of the most powerful financial institutions in the world came to the White House expecting to be taken to the woodshed for creating the mess they had wrought. Instead Barack Obama reassured them, “My administration is the only thing between you and the pitchforks.” It was at this moment that the Trump victory in 2016 became a done deal.
Like a recessive gene that skips a generation, the sense of being betrayed by Obama laid dormant in 2012 only to reappear in 2016. Tooze puts it this way: “Four years later Obama was out of the picture and the Republican field was wide open. As a result, the presidential race of 2016 turned out to be more about the financial crisis of 2008 than 2012 had been. The upshot was explosive and unpredictable.”
Crashed makes the argument that the main axis of world finance in 2008 was not the expected Sino-American one, but rather one between the US and Europe. I was surprised to learn just how large European banks were, and just how exposed they were by overleveraging. Using the criterion of assets the three largest banks in the world were all European. RBS, Deutsche Bank, and BNP had combined balance sheets in 2007 equal to 17 percent of global GDP. Tooze remarks on the extent of European vulnerability, “By this standard every member of the Eurozone was at least three times more ‘overbanked’ than the US. . . . Furthermore, European banks were far more dependent on volatile wholesale market based funding than their US counterparts.”
In the years following 2008, the countries of Europe fluctuated between going all in for a collective solution or reverting to individual action to solve their financial problems. One of the few things they seemed to agree on was the need to make an example of Greece. The people of Greece had to pay for their banks’ overextension, primarily dating back to the 1980s and 1990s, no matter what the cost in human misery.
The one panacea the capitalist class had in Europe was to impose austerity on the people of Greece. Expecting the Greek economy to climb out of massive debt while drastically cutting back the standard of living of the Greek people is like putting a world-class weightlifter on a yearlong 1,200 calories a day diet and then expecting him to perform well at the Olympics.
Six years into the recession the social crisis in Greece was all-pervasive. By 2014 unemployment stood at 27 percent and the figure was even worse for young people, spiraling over 50 percent. Tooze captures the depth of the punishment meted out to the Greek people: “By 2015 half the population was relying on the pension of a senior citizen to get by.” The Troika’s (i.e., the European Union, the European Central Bank, and the IMF) tactic of extend-and-pretend had gone on for a decade. All the while the solution, serious restructuring of the Greek debt, was in its reach, but no one in authority had the political courage to even propose it.
Other countries on the periphery of Europe––Latvia, Ireland, and Iceland, for example––have harrowing stories of their own to tell, but Greece is the proverbial canary in the mineshaft. Greece, along with such cities in the American heartland as Detroit, where 36 percent of the population lives below the far-from-generous Michigan poverty line, are examples of the inevitable logic of late capitalism. Until and unless the working people of the world take their fate into their own hands, the future points to barbarism.