Adam Tooze's Crashed is arguably the first historical narrative of the financial crisis. It is an ambitious account of the crisis and its global economic, financial, political, and geopolitical causes and implications. Crashed is organized chronologically in four parts—the “Gathering Storm,” “The Global Crisis,” “Eurozone,” and “Aftershocks”—and focuses more on the macrolevel structures, processes, and decisions than on the microlevel and the people suffering from the crisis. Except, that is, in aggregate numbers and a few empathic comments such as this: “As house prices fell, equity dwindled, and the hardest hit slid into negative equity. Families scrambled to slash spending and pay down credit card and other short-term debt. The result was a smothering recession in consumer demand” (p. 143).Footnote 1
Tooze's history of the Great Financial Crisis is published simultaneously in English, German, and Spanish, and, as befits a rising academic superstar, it has already been (mostly) well received and reviewed by a group of distinguished people in influential newspapers and magazines such as Financial Times, the Guardian, the New York Times, and the Economist. Tooze, a self-confessed “left-liberal historian,” with a certain besserwisser attitude, is professor of history at Columbia University, seriously active on Twitter (@adam_tooze), and a contributor to and reviewer for the Guardian, the New York Times, and Financial Times, among others (p. 21).
Tooze's knowledge of economics and financial practices is evident throughout the book, as is his polemic nerve. He is the author of highly acclaimed books on German and interwar history, including The Deluge: The Great War and the Remaking of the Global Order, 1916–1931.Footnote 2 Crashed represents a great leap forward in time from his earlier publications. Given that Tooze, an economic historian, has written extensively on the interwar period one might have expected comparisons with the Great Depression, but that is not the case, a fact to which I will return later.
Content and Main Points
Crashed is the story of “our crisis”—ours because the financial crash and the radical uncertainties that accompanied it are likely to remain chiseled into the memory of a whole generation of young people worldwide who grew up in its shadow.Footnote 3 Tooze's narrative of the most dramatic financial meltdown ever is an important contribution to our understanding of the crisis that forced states and central banks to provide more than $7 trillion to troubled banks in the shape of loans, recapitalization, asset purchases, and state guarantees (p. 167). The bailout of banks in the United States, the United Kingdom, and the European continent “violated maxims of fairness and good government,” Tooze argues, and he goes on to ask, “Given the risk of contagion, how could states not act? Having done so, however, how could they ever go back to the idea that markets were efficient, self-regulating and best left to their own devices?” (p. 166). No more talk of the Great Moderation, please.
Our crisis closed down thousands of businesses, sent millions of workers into unemployment, and government budgets into the red. And thanks to a deeply compromised austerity policy, youth unemployment in Greece and Spain reached levels above 50 percent. Today, Greek GDP is still only 75 percent of its precrisis level and close to 400,000 mostly highly educated young people have left the country, maybe for good.Footnote 4
Beyond economic and social consequences, Tooze stresses that the financial crisis changed international geopolitics, unseated governments, and strengthened nationalist movements in one country after another. Brexit, the rise of the Tea Party, and the election of Donald Trump as the forty-fifth president of the United States were among the results. In Europe, too, nationalism and illiberal governments emerged. That has been the case in Poland, Hungary, and Italy, among others, and in Germany the nationalist party Alternative für Deutschland emerged in 2013 as a protest against what it considered German weakness toward the European Central Bank (ECB).
The overall narrative in Crashed is that the Eurozone debt crisis, the geopolitical conflicts between the West and Russia over Georgia and Ukraine, and the nationalist and populist waves should all be seen as integrated parts of the financial crisis. One of Tooze's main points is that even though the crisis may have originated in the United States, it was not an American crisis that contaminated the rest of the world. Rather, it was a North Atlantic or Euro-American crisis based on deep financial integration in an ever more financially globalized world. This interconnectedness through interbank markets was based on large international banks funding their assets through short-term so-called repos and loans against Asset Backed Commercial Paper rather than deposits. These practices made global finance unstable, and the crisis hit every financially integrated nation in the world, either through financial links or through product and investment goods markets—or both.
Nevertheless, European leaders including Angela Merkel and Nicolas Sarkozy circulated a victim narrative, arguing that Europe had nothing to do with the crisis. For instance, at a G20 meeting as late as June 2012, José Barroso, then chairman of the European Commission, argued that “this crisis was not originated in Europe. . . . [T]his crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market” (p. 433). Four years later, Barroso accepted the position as nonexecutive chairman at Goldman Sachs. The revolving door was still turning.
Tooze pours scorn on European bankers and politicians who constructed this victim narrative of the crisis as something that came to them from America. He makes it painfully clear how Europe's much-too-big-to-fail banks themselves were very capable of taking on too much risk while being highly leveraged. “The idea that ‘social Europe’ had deviated in any essential way from the logic of turbocharged ‘financial capitalism’ as exemplified by America was an illusion,” Tooze writes (p. 116). He also shows in painstaking and painful detail how lack of leadership and internal disagreements and conflicts within the European Union worked to prolong and worsen the crisis, as did ECB's Jean-Claude Trichet's conservatism in monetary policy matters, which was dominated by the views of the German Bundesbank. It wasn't until Mario Draghi's improvised “whatever it takes” comment during a talk in London in July 2012 that problems were dealt with in terms of monetary policy and Quantitative Easing programs as in the United States.
In stark contrast to European incompetence, the United States demonstrated leadership in dealing with the crisis. It was the Federal Reserve, chaired by Ben Bernanke with support from Tim Geithner at the Treasury, that saved not only America's but also Europe's large banks and financial system. The American story including the Fed's Quantitative Easing programs is well known, but Tooze also demonstrates the inner workings of how the European financial system was saved from disaster. During the crisis, European banks were short of trillions of U.S. dollars they had used for short-term funding of their assets including U.S. mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) stuffed with subprime mortgages.
The U.S. government and Federal Reserve not only stress-tested and recapitalized American banks, but also held the European financial system together by lending U.S. dollars directly to banks and by arranging euro–dollar swaps. These currency-swap arrangements with European central banks reached the astonishing amount of $4.45 trillion, and the dollars obtained by central banks were used to support banks in their area (p. 214). Without this supply of U.S. dollars, everything financial and economic would have crashed completely.
Despite Republican resistance, the Bush and Obama administrations managed to get the American financial system back on track, but there were political costs to be paid—not least by the Democrats, who never managed to benefit from saving the system. It was leadership of the kind that Europe sorely missed. In a painfully detailed account, Tooze demonstrates how the European leaders constantly kicked the can farther down the road in an “extend and pretend” policy. Unfortunately, as we know, the problems did not go away. As a result, to this day some European banks remain undercapitalized and the European Banking Authority, established as a result of the crisis, is still hampered by the fragmentation of national laws.Footnote 5
The European inability to agree to force banks to write off bad assets, including southern European government bonds, and to recapitalize led to a blame game, which, through reframing, transformed the banking crisis into a European debt crisis and made any fiscal stimulus illegitimate and unthinkable.Footnote 6 It was governments that transmogrified a European banking crisis into a European debt crisis when they bailed out banks and turned their losses into massive public debt burdens in a number of countries, including the United Kingdom, Ireland, Portugal, and Spain. Tooze is quite critical of Niall Ferguson's and Kenneth Rogoff and Carmen Reinhart's teaming up with fiscal hawks in criticizing the use of fiscal policy to stimulate demand during the crisis (pp. 347–48, 368). It should be mentioned that Rogoff comes down hard on Tooze in his it's payback time review of Crashed, in which he sharply disagrees with Tooze on his assessment of austerity and the political room for action.Footnote 7
The successful reframing of the crisis legitimized a deflationary policy in the countries with big budget deficits: “Controlling the debt-to-GDP ratio would become a mantra. After the largesse of the 2008 bailouts came austerity, though not for the same people, of course” (p. 321). It was pure ideology, symbolized by David Cameron's statement that the purpose was to “make the state ‘leaner’” (p. 350). Austerity left the citizens of southern Europe, Ireland, and the United Kingdom with a seemingly endless reduction of wages, pensions, public expenses, and so on. The financial crisis was “solved,” Tooze makes clear, by bailing out the financial institutions that had caused it while the citizens who lost their houses and jobs were made to pay through social misery on a scale not seen since the Great Depression.
In Greece, in particular, where the debt problem dated back to before the crisis, the austerity measures required by the so-called Troika (the European Commission, the ECB, and the IMF) perversely increased the debt burden by depressing GDP to such an extent that by August 20, 2018—the date when Greece's utterly misnamed “bailout” program finally ended—it was 25 percent below its precrisis level. Even the IMF ended up realizing that austerity did little good for Greece, raising the question: Who was actually bailed out, the Greek people or the European banks that held massive amounts of southern European government bonds on their balance sheets?
Tooze is clear and emphasizes the role of power. “Which system was it that needed to be saved in the autumn of 2008? Who was being hurt? Who was included in the circle of those who needed to be protected? And who was not?” (p. 164). This is the political economy of the crisis, Tooze argues, and he insists that “the political in ‘political economy’ demands to be taken seriously” (p. 614). Of course, like most of Tooze's narrative, this is not really new information or new judgments. Many commentators and scholars including Barry Eichengreen and Mark Blyth have made the same argument at least as forcefully that austerity was bad economics with deeply problematic social effects.Footnote 8
Indeed, the question of fiscal policy has been and remains one of the main areas of conflict in Europe and the United States. Before the shift in narrative in 2010, the Obama administration implemented a forceful fiscal stimulus package in 2009; however, in January 2010 in his second State of the Union address President Obama made a U-turn: “Families across the country are tightening their belts and making tough decisions. The Federal Government should do the same.” Tooze comments that “it was the simple householder analogy that drove economists to despair” (p. 351).
In terms of fiscal stimulus, it was China that implemented a gigantic fiscal stimulus package that “carried the entire world economy” and that “together with the huge liquidity stimulus delivered by the US Federal Reserve . . . was the main force counteracting the global crisis” (p. 251). In the United States, an early recovery was aborted—not to mention Europe, whose fiscal policy effort was “derisory” (p. 275). To make matters worse, at the June 2010 G20 meeting in Toronto, “after the worst economic crisis since the 1930s . . . the members of the G20 committed themselves to simultaneously halving their deficits over the next three years. It was the householder fallacy expanded to the global scale. It was a recipe for an agonizingly protracted and incomplete recovery” (p. 354).
This leads to another important point made in Crashed. Tooze takes issue with a traditional Keynesian macroeconomic approach, which has focused on global imbalances and a global savings glut in explaining the financial crisis. Instead, Tooze argues, we must focus on gross capital flows between international financial institutions in order to understand the crisis. Tooze subscribes to Bank for International Settlements (BIS) economists Claudio Borio's and Hyun Song Shin's ideas about a “banking glut” and a macrofinancial focus on gross global capital flows between private banks and companies as the underlying cause of financial instability and the financial crisis.Footnote 9 The immediate crisis was a result of a “run on repo” in the financially integrated interbank market, as Gary Gorton has also analyzed in detail.Footnote 10 The short-term funding of long-term and potentially illiquid assets such as MBSs and CDOs was the basic maturity mismatch that brought the financial system to a halt.
It should be mentioned that Tooze manages to explain both the various advanced financial products and the economic issues in a very competent way. The macrofinancial approach does indeed seem to better explain the crisis, and it has led to the rise of macroprudential regulation in recent years.Footnote 11 It also helps us, and Queen Elizabeth II, understand why no one saw the crisis coming. It's not that macroeconomists did not expect a financial crisis; it's that they expected the “wrong crisis,” as they feared a sudden stop in China's funding of U.S. fiscal deficits that would lead to a dollar crisis and rising inflation (pp. 9–10, chap. 1). Thus, the macroeconomic approach worked as a cognitive frame that averted attention from the real risks related to macrofinancial instability. This narrative makes sense, but it is also not entirely new, since Eichengreen and sociologist Neil Fligstein and coauthors have argued along similar lines.Footnote 12
And then, by way of saltwater macroeconomists, we finally arrive at Tooze's naming of the culprits. Obviously, bankers are among them, of course, but, apart from heavy lobbying, they really couldn't help themselves: “It was not that the key players were completely oblivious to risk. But they believed in their capacity to manage it and were totally committed to maximizing the rate of return” (p. 89). So they levered up and mistook the ability to borrow in the interbank market for liquidity.
But, looking back, it was the Clinton administration with Treasury secretary Robert Rubin and macroeconomists such as Larry Summers that had made the financial crisis possible by deregulating finance. Tooze argues with some intensity that the saltwater macroeconomists, who went back and forth through the Wall Street–Washington swing door, misunderstood the economy. The Clinton administration's “finance for growth” view legitimized the massive deregulation of the industry and continued through the Bush administration to “the Obama team [, which] was profoundly committed to the legacy of their mentor, Robert Rubin. Summers, Geithner and Peter Orszag . . . were all veterans of the 1990s Treasury” (pp. 281–82). They worried about fiscal deficits but not so much about financial instability.
Tooze also argues that the geopolitical conflicts of the period from the Iraq war in 2003 to the conflict between the West and Russia over Georgia and Ukraine were related to the financial crisis and financial integration developed over the last forty years. The argument, as I understand it, is that to the extent countries were part of the financially integrated global economy, as Russia was, finance and geopolitics cannot be separated. I am not an expert on geopolitics, but in terms of narrative coherence, I am not entirely convinced by the argument. Much more convincing is Tooze's insistence put forward in Part 4, pages 447–599, and going right up to December 2017 that there is a direct line from the financial crisis to the nationalist and populist turns in Europe and the United States, including Brexit and the election of Trump as U.S. president. Certainly, this development did not begin with the financial crisis, but there is no doubt that it gained momentum through it.Footnote 13
So, according to Tooze, the crisis was North Atlantic or Euro-American and driven by the fiat money system after Bretton Woods, financial deregulation, and a strong belief in the ability of unrestricted finance to manage risk and secure growth. The result was increased financial integration that enrolled many countries in its grip in the worst financial meltdown ever. The Clinton administration provided the institutional framework that large financial institutions and their lobby organization Institute of International Finance understood to profit from, until the world turned upside down.Footnote 14 For a while, anyway.
In the conclusion, Tooze briefly compares 2008 to 1914 arguing that the two events raise the same kind of questions, such as how “great tectonic shifts in the global order” unfold, but it is not clear to me why this is a telling analogy (p. 615). More to the point, he discusses the Chinese currency crisis in 2015 and argues that it was a result of China becoming part of the global financial integrations after 2008. Tooze asks a chilling question: Who can imagine a Trump administration stepping in and saving the world from the next financial meltdown? Thus, we are left with a cliffhanger but not a lot of answers with regard to avoiding the next crisis.
Discussion and Conclusion
In his 2015 review of Eichengreen's Hall of Mirrors—perhaps deliberately ambiguously titled “How to Mishandle a Crisis”—Tooze lambastes Eichengreen's comparison of the Great Depression and the Great Recession. The search for patterns and attempt to learn lessons are, apparently, reductionist, irrelevant, and misleading.Footnote 15 As already shown, Tooze is extremely critical of the generation of “saltwater macroeconomists,” which includes Summers, Paul Krugman, Bernanke, Peter Temin, Bradford DeLong, Christina Romer, and Eichengreen, who were all influenced by Charles Kindleberger at MIT to think they could learn from the Great Depression.
Eichengreen's argument that monetary and fiscal stimulus should have continued beyond 2010 and until “business as usual” was resumed is met with an “as if the latter were unproblematic.”Footnote 16 That depends, of course, on one's worldview, but it takes me to what I find to be missing in Crashed. Throughout the book, there are, as shown above, many indications that Tooze is not happy with the political economy developed over the last forty years. However, other than what we can deduce ourselves, we are left none the wiser with regard to any lessons to take away from this 700-page narrative.
Tooze's conflict with, even contempt for, the saltwater generation seems to me to frame much of his narrative in Crashed. Many of his points are also made in numerous other books and articles on the financial crisis, including Hall of Mirrors, of which Tooze is so critical. That Kindleberger's students (and the Europeans) screwed up is also the closest we get to an overall interpretive theory, although it is never made quite explicit. It is also, I suspect, one way in which we can understand Tooze's reluctance, indeed resistance, to draw direct comparisons with the Great Depression and to consider similarities with the Great Financial Crisis and the Great Recession. Based on the Federal Reserve's swap lines, he argues that they and the crisis “cannot be understood on the assumption that financial crises are essentially repetitive phenomena with an unchanging basic logic.”Footnote 17
Interestingly, in his classic Manias, Panics and Crashes, Kindleberger argued that “historians view each event as unique. In contrast, economists search for the patterns in the data, and the systematic relationships between an event and its antecedents.”Footnote 18 This seems to me to be a precise description of the contrast between Tooze's and Eichengreen's approaches. Tooze analyzes the financial crisis in its specificity and does a great if somewhat too lengthy job, but he doesn't offer any assistance in understanding what went wrong from a diachronic point of view. Is Tooze prepared to argue that there are no recognizable patterns across financial crises and that we cannot, therefore, generalize even just a little bit? As is well known, Kindleberger's “model of financial crises” was based on Hyman Minsky's work, and it seems to me that Minsky's financial instability hypothesis would be relevant for understanding much of the financial crisis of 2008 also as it is laid out by Tooze. However, no theories of financial crises are used as analytical tools in Crashed.
Related to this issue is the omission from Crashed of any systematic discussion of the role of the ideology and culture of modern finance and the financial industry. There are many signs in Crashed that Tooze is well aware of the discussion about the role of financialization and the shift from a Keynesian grand narrative to a neoliberal one with a focus on short-termism and shareholder value. However, we are left with very little discussion of these developments and their role as drivers of the financial integration pointed out by Tooze as instrumental. A discussion and integration of the abundant literature on the shift from managerial capitalism to shareholder capitalism and a “new” economic paradigm would have further increased the value of Tooze's contribution to our understanding of the financial crisis.Footnote 19
More generally, while reading I couldn't help thinking that a theoretical framework beyond the heuristically applied idea of a macrofinancial view would have improved the explanatory power of the book as would, I believe, a comparison with the Great Depression. This applies not only to the search for an understanding of where the crisis came from, but also to understand the policy responses in terms both of the United States acting as a hegemon (another Kindleberger-related hypothesis) and of how the idea of austerity took hold. Moreover, it is hardly a coincidence that the two worst financial and economic crises in world history happened in periods where finance had come to dominate the economy.Footnote 20
Crashed represents an impressive amount of work. The book's detailed narrative runs the risk of losing sight of the woods for trees, and it might well have been an even better book had it been shorter and more focused on the main argument. It would also have been more satisfying for scholars had it engaged more directly with the literature and systematically discussed the empirical material, all of which is treated equally, whether scholarly articles and books, newspaper articles, or partisan accounts of various episodes. The fact that there is no bibliography makes it difficult to get a critical and systematic overview of the material on which the book's argument rests.
All that being said, Crashed is an excellent, thorough, and readable history of the financial crisis from a global perspective. Students of financial crises may not find much new information, but Tooze's historical narrative offers more than the sum of its parts. It is not a synthesis, but a comprehensive account encompassing both the bird's-eye view and the minute details that most historians will know to appreciate. While Crashed will not be the final word on the subject, it will stand for a very long time. In due course new perspectives will open up and future young scholars of the “our crisis” generation will look at the subject through a new lens. Closed archives will be made accessible and allow for different narratives and analyses of the crisis than the one told in Crashed. Nevertheless, any future historian who wants to write about or just understand the Great Financial Crisis and the Great Recession and all the problems that came from it will have to include Tooze's book on the reading list.
