Crashed - the book
Adam Tooze's book Crashed: How a Decade of Financial Crisis Changed the World, is a good reminder of how much about international economics I don't know. And probably never will. However, for anyone interested in the events that caused the 2008 recession, why that recession was an international event, and its repercussions, the book is worth struggling through.
For a non-economist I have a pretty good understanding of the mechanism that led to the 2008 recession. During that difficult financial time, articles from NPR, the New York Times, Rolling Stone and Bloomberg did a good job of explaining how the housing crisis developed. The creation of mortgages that required no down payment and no collateral, the combining these into MBSs (mortgage backed securities) and CDOs (collateralized debt obligations), and all the insurance that went with them in case they failed, the CDSs (credit default swaps), are explained and amplified in Tooze's narrative. What was new to me was the international interdependence of the largest banks that were creating this towering, unstable, and misrepresented market.
Who knew that London was the center of international banking. Back in the late 80s it had deregulated its banks in a move called the Big Bang. This attracted large investors and bankers from all over the world. London displaced Wall Street as the center of unregulated banking and as a result tied together Russian oligarch money, large eurozone banks, Wall Street and China. A failure of a large financial institution such as Lehman Brothers was not just an 'America' event. It may have started in America but its repercussions were world wide. The introduction of insurance in the form of CDSs to give a level of comfort when making large investment in MBS and bonds, amplified the leverage of all these institutions. Rather than generating a level of assurance, they generated another floor on the house of cards that would come tumbling down in 2008 and 2010.
Parts of Tooze's book were, for me, almost unreadable. The endless pages of the arguments between Merkel, Sarkozy, and the various Greek governments over the massive Greek debt problem, were more than I wanted to know or was capable of understanding. It would have required research into international sovereign bond markets, international currency trading, debt refinancing and a bunch of other international financial mechanisms.
But to make a long and difficult story short, probably too short, the European conflict was over whether austerity (German) or increasing the money supply (American) were the best options to fix the Greek, Portugal, Italy and Spain balance sheets. In Europe a much more austere plan won out and resulted in a prolonged recovery: unemployment, reduced safety net spending, increased taxes and, in some cased, deflation. America responded to the crisis with two tools (that I remember): TARP which put about $750 billion dollars into supporting the banks, and, something that I had never heard of, the Feds swap line (I think that is the correct term). Apparently the Fed traded huge amounts of dollars for foreign currency to ease the difficulty of repaying debt in dollars, the world reserve currency. According to Tooze these swaps amounted to about a trillion dollars, and kept many European institutions afloat. The Feds loosening of the money supply gave America and Europe the capacity to not default on dollar debts.
The ten years of recovery from this long recession, the worst since 1930, has helped create the political shift to the right in Europe and America. The formation of the Tea Party was really a backlash at the bailing out of the economic institutions with the TARP funds. With some justification I must admit. Bankers taking bonuses after receiving tax payer money to keep them afloat was pitiful. Unemployment promoted the idea that big government and big business were in cahoots against the middle class. The Republicans amplified this outrage by refusing to allow the Obama administration to increase the stimulus package that might have eased both mortgage failures and unemployment. The unemployed and free-marketeers blamed Obama, but it was the Republican majority elected in 2010, that obstructed correction of the economic problems and swung the electorate even farther to the right with the ultimate goal of electing a Republican president. Well they got what they deserved in terms of a president: a clown.
When jobs are scarce, immigrants are looked on as a threat. Unfortunately the Arab spring and central American migration arose at at time of high American and European unemployment. People who might have, in better times, have been welcomed were fenced out of the civilized world.
The bottom line from Tooze's book, for me, was that the world is tied together financially in a way that no single government can influence. Globalization is a fact. China owns part of America, Russia owns part of England, the Eurozone countries are tied together with a single currency, everyone is dependent on the economic situation of its neighbors. No matter how isolationist Trump becomes he can't undo corporate entanglement. This is good in many ways. As the world population grows we will all need to work together (such as on climate change) to make our planet, as small as it seems to be getting, a stable and comfortable place for all of us human beings. Perhaps the ruling institutions of the future will be large corporations rather than governments. I guess as long as we, the citizens, get to elect the board members, it wouldn't be much different than what is happening in the world right now.
For a non-economist I have a pretty good understanding of the mechanism that led to the 2008 recession. During that difficult financial time, articles from NPR, the New York Times, Rolling Stone and Bloomberg did a good job of explaining how the housing crisis developed. The creation of mortgages that required no down payment and no collateral, the combining these into MBSs (mortgage backed securities) and CDOs (collateralized debt obligations), and all the insurance that went with them in case they failed, the CDSs (credit default swaps), are explained and amplified in Tooze's narrative. What was new to me was the international interdependence of the largest banks that were creating this towering, unstable, and misrepresented market.
Who knew that London was the center of international banking. Back in the late 80s it had deregulated its banks in a move called the Big Bang. This attracted large investors and bankers from all over the world. London displaced Wall Street as the center of unregulated banking and as a result tied together Russian oligarch money, large eurozone banks, Wall Street and China. A failure of a large financial institution such as Lehman Brothers was not just an 'America' event. It may have started in America but its repercussions were world wide. The introduction of insurance in the form of CDSs to give a level of comfort when making large investment in MBS and bonds, amplified the leverage of all these institutions. Rather than generating a level of assurance, they generated another floor on the house of cards that would come tumbling down in 2008 and 2010.
Parts of Tooze's book were, for me, almost unreadable. The endless pages of the arguments between Merkel, Sarkozy, and the various Greek governments over the massive Greek debt problem, were more than I wanted to know or was capable of understanding. It would have required research into international sovereign bond markets, international currency trading, debt refinancing and a bunch of other international financial mechanisms.
But to make a long and difficult story short, probably too short, the European conflict was over whether austerity (German) or increasing the money supply (American) were the best options to fix the Greek, Portugal, Italy and Spain balance sheets. In Europe a much more austere plan won out and resulted in a prolonged recovery: unemployment, reduced safety net spending, increased taxes and, in some cased, deflation. America responded to the crisis with two tools (that I remember): TARP which put about $750 billion dollars into supporting the banks, and, something that I had never heard of, the Feds swap line (I think that is the correct term). Apparently the Fed traded huge amounts of dollars for foreign currency to ease the difficulty of repaying debt in dollars, the world reserve currency. According to Tooze these swaps amounted to about a trillion dollars, and kept many European institutions afloat. The Feds loosening of the money supply gave America and Europe the capacity to not default on dollar debts.
The ten years of recovery from this long recession, the worst since 1930, has helped create the political shift to the right in Europe and America. The formation of the Tea Party was really a backlash at the bailing out of the economic institutions with the TARP funds. With some justification I must admit. Bankers taking bonuses after receiving tax payer money to keep them afloat was pitiful. Unemployment promoted the idea that big government and big business were in cahoots against the middle class. The Republicans amplified this outrage by refusing to allow the Obama administration to increase the stimulus package that might have eased both mortgage failures and unemployment. The unemployed and free-marketeers blamed Obama, but it was the Republican majority elected in 2010, that obstructed correction of the economic problems and swung the electorate even farther to the right with the ultimate goal of electing a Republican president. Well they got what they deserved in terms of a president: a clown.
When jobs are scarce, immigrants are looked on as a threat. Unfortunately the Arab spring and central American migration arose at at time of high American and European unemployment. People who might have, in better times, have been welcomed were fenced out of the civilized world.
The bottom line from Tooze's book, for me, was that the world is tied together financially in a way that no single government can influence. Globalization is a fact. China owns part of America, Russia owns part of England, the Eurozone countries are tied together with a single currency, everyone is dependent on the economic situation of its neighbors. No matter how isolationist Trump becomes he can't undo corporate entanglement. This is good in many ways. As the world population grows we will all need to work together (such as on climate change) to make our planet, as small as it seems to be getting, a stable and comfortable place for all of us human beings. Perhaps the ruling institutions of the future will be large corporations rather than governments. I guess as long as we, the citizens, get to elect the board members, it wouldn't be much different than what is happening in the world right now.
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