Simon Johnson is former chief economist at the IMF and a professor at MIT’s Sloan School of Management. He is co-author with Jonathan Gruber of “Jumpstarting America,” which will be published in April 2019.
In October 2008, the wildfire of financial crisis spread chaos and destruction from the American mortgage market to the world. The Treasury Department, under first George W. Bush and then Barack Obama, designed generous bailout programs primarily focused on preventing the failure of large global banks. Congress, faced with the choice of providing unsavory support for big-time Wall Street gamblers or enduring a global cataclysm, chose the former. The world was saved, but the consequences included a prolonged recession in the United States, a dragged-out existential European crisis and President Trump.
The events of 2008 spawned a vast amount of news coverage, as well as enough quickly written books to constitute a small library. Ten years on, you can replace at least some of that library with “Crashed: How a Decade of Financial Crises Changed the World” by Adam Tooze. Think of this as the second draft of history.
Tooze, a professor at Columbia University, is an authority on the economy of Nazi Germany; his most prominent work on that topic, “Wages of Destruction,” is a modern classic. He is also the author of “The Deluge,” a well-crafted book about an earlier episode of worldwide economic disorder — the aftermath of World War I — and other careful analysis of the period from 1918 through 1945.
“Crashed” is an impressive narrative history, weaving together events from around the world with a light touch and a great deal of helpful explanation. Sometimes it feels like Tooze has read every official working paper, memoir and substantive news article on macroeconomics and finance over the past decade. Even for readers who have attempted to follow the twists and turns of events, Tooze adds significant value.
Parallels to the interwar period seep through. Part I of “Crashed” is called “Gathering Storm,” an implicit reference to the first volume of Winston Churchill’s history of World War II. Post-2008, we have not gotten the rise of fascism or world war, but we have experienced the rise of right-wing populism — feeding in part on economic frustration but also fed through cynical manipulations that Tooze documents well. There is probably more to come. As Tooze points out, a 10-year retrospective on the Great Crash of 1929, if published before September 1939, would have missed some points.
Tooze moves back and forth across the Atlantic better than anyone, and he is extremely good on how the Europeans constructed large banks and allowed them to become so leveraged (with very high debt relative to shareholder equity). He also adds incisive material on the Chinese economy.
For some readers, this global scope might feel a bit distracting, and sometimes the sequence in Tooze’s rendition can be confusing, particularly at the start of the book, where Europe enters the story before the main flow of American events is fully established. Eastern Europe also gets a lot of attention, although it turns out to be a sideshow. Still, this is a great reference volume that you can dip into to check your facts or see what other plausible interpretations of particular events are available.
Tooze clearly has plenty of well-thought-out views, although he could have been more explicit with some of these. On the history of deregulation in the United States — encouraging banks and other highly leveraged firms to take major risks — Tooze treads gently and is perhaps too elliptical. In contrast, on the machinations of European political decision-makers he is quite direct and admirably clear.
Tooze has a clear understanding of how mortgage lending madness became dangerous forms of securitization, and why this created the potential for enormous financial instability, with the Europeans providing an assist. He is also convincing on how the political power of big banks — the point of being “too big to fail,” after all — enabled them to negotiate better outcomes for the famous stress tests that were used to assess solvency in early 2009.
The people who get off lightest are senior officials at the Federal Reserve, including Timothy Geithner, president of the New York Fed during the go-go years and first secretary of the Treasury under Obama. Tooze is impressed by Geithner’s forcefulness in the crisis, referring to him as having “hard-boiled insight,” combined with “intensity and single mindedness.” Some of Geithner’s statements are taken too much at face value, including a remarkable claim that protecting the big banks in their entirety was necessary to shield the Federal Reserve from its critics.
Future historians will need to look more closely at the record, once key documents become available. The archives of the New York Fed are notoriously difficult to access, as that organization is not subject to the usual Freedom of Information Act rules for government bodies. Most likely, a full and fair examination of the record will find that the New York Fed, Geithner and all his colleagues in Washington (at the Board of Governors and the Treasury Department) were simply asleep at the wheel before 2008 — metaphorically drugged by the illusion that unfettered markets would necessarily produce sensible outcomes.
To be fair, Tooze has very few illusions about the world today and gets Trump exactly right on finance. A comprehensive gutting of the post-crisis Dodd-Frank financial reform is underway, facilitated by bank lobbyists and their donations. As “Crashed” carefully documents, congressional Republicans refused to be partners in managing the crisis and have devoted a decade of effort to denying that deregulation and private-sector malfeasance played any role. In that mistaken worldview, bank regulation is nothing but an impediment to economic prosperity. Say goodbye to consumer protection for financial products, to restrictions on the risk-taking of global megabanks and to reasonable levels of bank capital (a measure of shareholder equity relative to permissible debts).
Tooze reports a classic quote from 2005, in which Larry Kudlow is scathing about “all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.” Kudlow is now a senior economic adviser to Trump. Irresponsible deregulation will always and everywhere give your economy a sugar high. The bigger the boom in asset prices, the more devastating the bust. Presumably, Tooze is already at work on “The Economic Consequences of Mr. Trump.”
By Adam Tooze
Viking. 706 pp. $35