History is not the forte of governments. You don’t need Trump’s tweets – like a recent one retweeted by the fake account of the deceased 37th president Richard Nixon, saying that a presidential campaign spying on a rival campaign has “never been done” – to know this.
It was not much of a surprise then that, in an April interview with Spanish newspaper Expansión this year, Single Resolution Board chair Elke König said the Banco Popular liquidation “proved that a bank can also fail due to a lack of liquidity”, as opposed to insolvency. Lehman Brothers, Northern Rock and pretty much every other bank that failed in the aftermath of the 2008 financial crisis offered no such confirmation, apparently.
Liquidity is the financial narrative that runs through Adam Tooze’s ‘Crashed: How a decade of financial crises changed the world’. The important benefit of this focus is to give the lie to the many politicians, regulators and commentators who see international economic crises simply as national diseases, born of unhealthy fiscal and financial structures indigenous to those nations, which spread to innocent, healthier nations through macroeconomic imbalances such as budget and trade deficits.
By focusing on the severe dependence of international governments and institutions on dollar liquidity in the aftermath of the sub-prime debacle – and the huge transmission of that dollar liquidity from the Federal Reserve to banks around the world – Tooze is able to bring the profoundly international nature of the crisis to the fore, while also demonstrating how national politics framed reactions to the crisis, even in supposedly apolitical institutions such as central banks.
The Federal Reserve’s execution of trillions of dollars in swap lines to the central banks of 14 governments from 2007 to late 2010 (and others during the taper tantrum of 2013) took place in a depoliticized context. It was an acknowledgement that the world’s economies are interdependent.
It was also an acknowledgment that it is huge and rapid movements of money across sovereign boundaries that constitute the real threat – not necessarily macroeconomic imbalances. While distortions and cracks in its own financial system were building and spreading, the administration of George W Bush was distracted by the growing macroeconomic imbalance between the US and China.
But those swap lines only narrowly escaped being politically hijacked. (As Tooze noted in a recent talk, an official he spoke to said that, at the time, the lack of political debate made it seem like there was “an angel on our shoulders”.) They were not secret, the governments involved all knew about them, although it was beneficial for most not to draw too much attention to these lines. This was particularly true of the European Central Bank, which was the recipient of most of those trillions of dollars when Europe’s banks were frozen out of US money markets, where they did much of their short-term funding.
Liquidity provision, in all its forms throughout the decade following the crisis, seems to have largely escaped being overly politicized. Among the ECB’s first reactions was to supply cheap liquidity to its banks, which then entered into the carry trade of higher-yielding sovereigns that would result in the ‘doom loop’ of the sovereign crisis.
As the intensity of the crisis increased, it would be highly political arguments over states’ financial integrity and fiscal responsibility that would bring the eurozone to the brink.
One of the arguments of the book is that the actions of central banks are always politicized – that there are no ‘independent’ central banks. Jean-Claude Trichet and Germany’s deeply political resistance to embarking on a Fed-style backing of the European banking system was not only unsuccessful in the end, but it also threatened the fabric of the EU itself in the long run. Moreover, it allowed European governments to reframe the sovereign crisis as one stemming from profligate state borrowing, rather than as an effect of the delay in real action.
In Tooze’s account, much blame can be laid on the ECB’s feeble initial response to the crisis and Trichet’s very political managing of the institution, including allowing the pressure building up in bond markets to act as a substitute for the eurozone’s non-existent federal structures of fiscal and economic governance.
It was fortunate in retrospect that there was just enough cross-party willingness in the US to support the measures the Fed and Treasury took to combat the crisis more successfully than their European peers.
At a talk at Prospect magazine’s headquarters in London in August, Tooze, who is not overly sympathetic to central bankers, was nonetheless emphatic about the need to depoliticize monetary policy.
“We need to shift the political discourse so it is better understood that it’s one of these technical aspects of government that we probably don’t want politicized,” he argued.
Tooze’s primary contribution with ‘Crashed’ is that he compiles a coherent and comprehensive account of the financial crash and its aftermath with an economic historian’s eye. As the title suggests, the 2008 crisis and the European crisis that ensued, as well as all the political upheaval that has resulted on both sides of the Atlantic, are all still a great chaotic narrative jumble.
It is the clarity he bestows on the narrative, as in his work on World War I, ‘The Deluge’, that renews and enriches our understanding of just how global the crisis was, and how interconnected the fates of seemingly disparate actors are.
Much of the current political upheaval in Europe and the US is the result of that lack of narrative coherence. Far from being a crisis of Anglo-Saxon finance, as European politicians and commentators suggested at the time, it was over-leveraged European banks that overwhelmingly turned to the US Federal Reserve for emergency liquidity support. The banks most active in the Fed’s second round of quantitative easing were European, offloading their portfolios of US securities and building up cash balances with the Fed. Tooze points out that no central bank benefited more from the Fed’s swap lines than the ECB.
The book, which is enjoyable to read and convincing in its argument, demands that we rethink how we understand the global economy. Traditional analyses of crises like those of the last decade focus on macroeconomic imbalances in trade and budgets.
In adopting a ‘macrofinancial’ narrative of the crisis, Tooze filters the waters of the debate, replacing national economic aggregates with the real movers of the global economy: corporate balance sheets. In Tooze’s words: “For all the pressure that classic ‘macroeconomic imbalances’… can exert, a modern global bank run moves far more money far more abruptly” across national lines.
The approach allows us to understand better the international scope and pace of modern financial crises, and helps unmask where politics infiltrates supposedly apolitical processes and institutions.
It is at those times when a ‘national economy to national economy’ approach to understanding money flows allows commentators to start slinging blame across the lines of the geopolitical map. But in a world where Deutsche Bank can foreclose on homes in Cleveland and the Fed can pump $10 trillion dollars into foreign banks, that’s clearly not the right map to help us understand how we got here.