Crashed: How a Decade of Financial Crises Changed the World
Tags: #economics #finance #history #globalization #politics
Authors: Adam Tooze
_thumbnail.jpg)
Overview
My book, Crashed, examines the political and geopolitical consequences of the 2008 global financial crisis. It challenges the conventional view that the crisis was simply an American or even Anglo-Saxon phenomenon and a sign of America’s declining global power. Instead, I argue that the crisis was deeply intertwined with the history of European integration and that its impact was felt unevenly but globally, reshaping the political landscape of both East and West. To understand the significance of the crisis we need to do two things: First, we need to place the banking crisis in its wider political and geopolitical context. And, at the same time, we have to get inside its inner workings. That means understanding not just the toxic subprime mortgages that lay at the heart of the crisis but also the complex web of global financial interconnections that allowed a seemingly local crisis in the American housing market to bring the world economy to its knees. The crisis revealed the fundamental weakness of a political order that was built on the idea of self-regulating markets. And the solutions adopted, despite their dramatic short-term effectiveness, did little to address the underlying problems of inequality and financial instability. Indeed, in the years that followed, the financial crisis morphed into a crisis of democracy and the liberal world order itself. This book offers an anatomy of that transformation and a warning about the dangers that lie ahead.
Book Outline
1. The “Wrong Crisis”
Many observers, particularly in the United States, interpreted the 2008 crisis as a sign of America’s declining global power and China’s ascendance. However, this interpretation overlooks the crucial role of European banks in the crisis and the deep financial integration of the transatlantic economy. The crisis originated not in a clash between China and America but within the heart of Western capitalism.
Key concept: The “wrong crisis”: This phrase, coined by economist Bradford DeLong, encapsulates the fundamental misreading of the 2008 crisis by the American policy-making elite. They were fixated on the threat of a Chinese dollar sell-off triggering an American sovereign debt crisis, but the real danger lay in the fragility of the Western financial system itself.
2. Subprime
The roots of the 2008 crisis lay not in government deficits or trade imbalances but in the American housing market. Securitization, a process of packaging mortgages into bonds and selling them to investors, was meant to spread risk. However, it also created perverse incentives that led to a race to the bottom in mortgage lending quality, fueling the subprime boom.
Key concept: Subprime mortgages: These high-risk loans, extended to borrowers with poor credit histories, became the fuel for a massive expansion of mortgage lending in the United States in the early 2000s. When the housing bubble burst, it was the default of these subprime mortgages that triggered the financial crisis.
3. Transatlantic Finance
It is a mistake to view the 2008 crisis as solely an American phenomenon. European banks, particularly those in Germany, were deeply entangled in the American mortgage market. They borrowed dollars on Wall Street to fund their investments in US mortgage securities. This created a transatlantic financial system that would prove highly vulnerable.
Key concept: Transatlantic financial axis: This term describes the close interconnectedness between the financial systems of the United States and Europe. European banks, lacking large dollar deposit bases, relied heavily on wholesale dollar funding from American money markets to finance their investments in US mortgage securities. This created a dangerous dependence of European banks on the American financial system.
4. Eurozone
While Europe celebrated the introduction of the euro, the reality was that the eurozone was an unfinished project. It lacked many of the institutional features that would have made it more resilient to a financial crisis. And the German political class, preoccupied with its own internal divisions, showed little urgency in addressing these shortcomings.
Key concept: The euro as an “unfinished project”: Despite the introduction of the euro as a single currency in 2002, the eurozone lacked a common fiscal policy, a unified regulatory structure for banking, and a mechanism for fiscal redistribution to address regional imbalances. The eurozone’s vulnerability to crisis would become apparent from 2010 onward.
5. Multipolar World
The rise of China and the perceived weakness of Russia dominated Western discussions of global geopolitics in the early 2000s. But the events of 2008 would reveal the disruptive potential of another power: the resurgence of Russia in the wake of the commodity boom and the fragility of the post-Soviet order in Eastern Europe. In the lead-up to the Ukraine crisis of 2014, Russia would challenge Western efforts to incorporate Ukraine into its orbit. And it would find support from an unlikely quarter: the United States.
Key concept: “Madame Non”: This nickname captures Angela Merkel’s posture in European affairs. Given Germany’s economic strength and its historical anxieties, Merkel favored a minimal, demanding, and often arbitrary and self-serving posture in European affairs, acting as a veto player in crucial decisions.
6. “The Worst Financial Crisis in Global History”
As the American housing bubble deflated and bank failures multiplied in the late summer of 2007, a crisis of confidence spread through the global financial system. It started with a freeze in interbank lending. It escalated with the collapse of Bear Stearns in March 2008. And it culminated with the failure of Lehman Brothers on September 15, 2008, triggering the worst financial crisis in global history.
Key concept: “The worst financial crisis in global history”: This was Ben Bernanke’s assessment of the situation in September and October of 2008. The collapse of Lehman Brothers on September 15 triggered a chain reaction that threatened to bring down the entire global financial system. Only massive and unprecedented intervention by the Fed and the Treasury prevented a complete meltdown.
7. Bailouts
The massive bailouts of the financial system in 2008-2009 marked a dramatic reversal of the neoliberal agenda of the previous decades. But the interventions were more ad hoc than systemic. The aim was to shore up existing institutions and practices, not to challenge the power of the financial industry. The measures were designed to avoid “nationalizing” the banks. But they were also deeply unpopular, creating a political backlash that would have a lasting impact.
Key concept: “The nationalization of nothing”: This phrase captures the approach taken by the Bush administration in its bailouts of the financial system. The aim was to use public funds to incentivize private action, not to take ownership of banks or to fundamentally restructure the system.
8. “The Big Thing”: Global Liquidity
The financial crisis revealed a fundamental weakness in the organization of the global dollar system. As European banks faced a shortage of dollar funding, the Fed stepped in with a program of liquidity provision that matched the global reach of the offshore dollar banking system. By means of “liquidity swap lines” the Fed provided dollars to foreign central banks on an unprecedented scale. This innovative response was essential to preventing a full-blown global financial meltdown, but it also had far-reaching implications for the global role of the dollar and the authority of the Fed.
Key concept: Liquidity swap lines: These agreements, first established in the 1960s to manage the Bretton Woods system of fixed exchange rates, were revived and expanded on a massive scale in 2007-2008 by the Fed to provide dollar funding to foreign central banks. This unprecedented act of transnational monetary policy prevented a global dollar liquidity crisis and effectively made the Fed into the lender of last resort for the world.
9. Europe’s Forgotten Crisis: Eastern Europe
In the wake of the 2008 crisis the financial fragilities of Eastern Europe were brought into sharp focus. While Western European banks had poured trillions of dollars into the region, there was no common European facility to backstop a systemic crisis. The IMF provided some assistance. But when the crisis escalated in 2009, it was Eastern European countries that suffered the most severe economic damage. Their economies were tightly integrated with Western Europe and as their currencies plunged in value, they faced a wave of defaults on their foreign currency loans.
Key concept: “Suicidal step”: This was the phrase used by the Russian government in November 2013 to warn Ukraine against signing an Association Agreement with the EU. For Moscow, Ukraine’s decision was a geopolitical challenge that could not be left unanswered.
10. The Wind from the East: China
While Western commentators were preoccupied with the collapse of the financial system, the Chinese government embarked on an unprecedentedly large stimulus program. Driven by fears of social unrest triggered by the collapse of the export sector, the stimulus was designed to sustain China’s economic growth. But the structure of the Chinese economy meant that the stimulus had perverse effects, amplifying existing imbalances and increasing reliance on investment and the state-owned sector.
Key concept: Scientific developmentalism: This term, coined by political scientists, captures the emphasis in China on technocratic planning and management from the top down, aimed at achieving rapid economic growth while maintaining social stability and political control.
11. G20
Despite the massive scale of its stimulus spending, China did not emerge as an autonomous center of global economic power. It remained deeply integrated with the global economy, and its recovery depended crucially on the Fed’s provision of dollar liquidity and the willingness of the US government to support the GSEs. This reinforced the idea of a G2, a new world order led by China and America, that was both promising and alarming.
Key concept: G2: This shorthand term captured the notion of a new world order led by China and America. It was a vision that resonated with some commentators in the West, but it was also deeply unsettling to those who valued a more multilateral approach to global governance.
12. Stimulus
The economic stimulus measures that dominated headlines in 2009-2010 were dwarfed by the huge impact of the “automatic stabilizers” built into the tax and welfare systems of modern economies. As government spending rose and tax revenues fell, this provided a massive boost to demand. But it also created huge budget deficits, triggering a global backlash against government spending and paving the way for the austerity policies that would follow.
Key concept: Automatic stabilizers: These “unsung heroes of modern fiscal policy” are the non-discretionary elements of government spending and revenue that automatically increase aggregate demand during a recession as tax revenues fall and entitlement spending rises. Their impact in 2009-2010 was decisive in stabilizing demand in the US and European economies. But it was also politically explosive, leading to a global backlash against budget deficits and government spending in the years that followed.
13. Fixing Finance
In response to the banking crisis of 2008-2009, the US government adopted a strategy of recapitalizing and restructuring banks to restore their financial health. This was accompanied by a new regime of stress tests designed to identify and address systemic risks. Though this approach was successful in stabilizing the American financial system, it also increased the entanglement between the state and the banks, creating a new system of liberal corporatism.
Key concept: Stress tests: Pioneered by the New York Fed in 2009 and then turned into a systematic policy tool by the Obama administration, stress tests are a mechanism for evaluating the resilience of banks by subjecting their balance sheets to hypothetical scenarios of extreme financial stress. They became the template for a new, more interventionist model of financial regulation known as macroprudential supervision.
14. Greece 2010: Extend and Pretend
In 2010 Greece slid into an unsustainable budgetary situation. But the prospect of a sovereign default in the eurozone was so alarming to the ECB and to those concerned with the stability of Europe’s banks that rather than forcing Greece into an immediate restructuring of its debt, they opted for a strategy of “extend and pretend.” Greece would receive new loans from the IMF and the EU in exchange for a promise to implement harsh austerity measures. But the budgetary adjustment required was unrealistic, and the Greek economy continued to contract. As the crisis escalated, it became ever more apparent that the strategy of extend and pretend was making the problem worse, not better.
Key concept: Extend-and-pretend: This term captures the strategy adopted by European policy makers in the face of the Greek debt crisis. Rather than facing up to the need for debt restructuring, the eurozone chose to provide Greece with new loans to pay off its existing debts, while imposing harsh austerity measures. This approach only postponed the inevitable and made the crisis worse.
17. Doom Loop
As the Greek crisis escalated, it spread to other vulnerable members of the eurozone, first Ireland and then Portugal. The mechanism was the so-called doom loop. Sovereign debt crises weakened the banks, and weakened banks further undermined the credit of the sovereigns. The EU was forced into increasingly larger bailout operations to break the vicious cycle, but Berlin continued to block any decisive move toward a higher level of European integration. It was the mounting crisis in Italy, the eurozone’s third-largest economy, that forced a fundamental shift in strategy.
Key concept: The Doom Loop: This term describes the vicious cycle in which a sovereign debt crisis in the eurozone weakens banks holding large amounts of that debt, which further undermines confidence in the sovereign, triggering a self-reinforcing downward spiral. The doom loop was at the heart of the eurozone crisis from 2010 onward.
18. Whatever It Takes
Faced with a crisis of confidence that threatened to engulf the eurozone as a whole, Mario Draghi, the ECB’s new president, realized the need for a bold gesture. On July 26, 2012, in a speech delivered in London, Draghi pledged that the ECB would do “whatever it takes” to preserve the euro. The promise was deliberately ambiguous. It referred to bond buying. But it also hinted at a new determination to find a European solution to the crisis. Backed by the newly elected president of France, Francois Hollande, Draghi’s intervention helped to stabilize the markets and set the stage for the next, even more challenging phase of European integration.
Key concept: “Whatever it takes”: This phrase, uttered by Mario Draghi in a speech on July 26, 2012, in London, became the turning point of the eurozone crisis. What Draghi was promising was that the ECB would do whatever was necessary to prevent a breakup of the eurozone. The statement restored confidence in the markets, and it set in motion a chain of events that led to the creation of a more robust institutional framework for the eurozone.
19. American Gothic
The slow and uneven recovery of the US economy after 2008 focused attention on the deep structural problems of American society. For those who lived in marginalized communities like Detroit, the crisis had exposed a toxic combination of deindustrialization, racial disadvantage, and predatory finance. But the pain was not confined to the inner cities or to minorities. Across the Rust Belt and in rural communities like Appalachia, the lived reality was one of stagnating incomes, declining living standards, and a widespread sense of despair. It was a long-running trend that had been masked by the credit boom of the 2000s but which now reappeared in full force.
Key concept: “Deaths of Despair”: This bleak phrase, coined by economists Anne Case and Angus Deaton, captures the alarming rise in mortality among working-class white Americans in the 21st century. It pointed to the deeply unsettling social consequences of America’s long-running economic decline.
20. Taper Tantrum
The Fed’s decision to start tapering its QE program in 2013 triggered the so-called “taper tantrum.” Bond yields surged, and emerging markets experienced a wave of capital flight. It was a dramatic reminder of the Fed’s pivotal role in the global financial system. But it also created a dilemma. As the recovery in the US economy proceeded, the Fed needed to unwind its extraordinary monetary policies. But doing so risked destabilizing the rest of the world.
Key concept: Taper Tantrum: This phrase refers to the market reaction to the Fed’s announcement in May 2013 that it would begin to taper its bond-buying program. Bond yields surged and emerging markets, facing a sudden outflow of capital, experienced a sharp sell-off. It was a dramatic demonstration of the interconnectedness of global financial markets and the sensitivity of emerging markets to shifts in US monetary policy.
21. “F*** the EU”: The Ukraine Crisis
The Ukraine crisis of 2014 brought into sharp relief the deep divisions within Europe about how to respond to Russia. While Eastern European states, led by Poland, saw Russia as a threat and demanded a forceful response, Germany and other Western European countries favored a more cautious approach. The United States, preoccupied with its “pivot to Asia,” was initially reluctant to get involved. But the downing of Malaysian Airlines flight MH17 by a Russian-backed militia forced the Obama administration to take a tougher stance, pushing the EU to adopt sanctions against Russia.
Key concept: “F*** the EU”: This blunt exclamation by Assistant Secretary of State for European and Eurasian Affairs Victoria Nuland captured the Obama administration’s frustration with Europe’s slow response to the Ukraine crisis. It also underscored the priority Washington placed on its relationship with the Ukrainian government over the sensibilities of its European partners.
22. #Thisisacoup
In 2015, with Greece’s economy on the brink of collapse, the Syriza government found itself locked in a bitter battle with the Eurogroup over the terms of a new bailout. The EU, with backing from the IMF, demanded further austerity measures and refused to countenance any talk of debt restructuring. This triggered a popular backlash in Greece, as well as widespread criticism from the Left across Europe, who saw the troika’s demands as a “coup” against Greek democracy. In the end, faced with the threat of a financial meltdown and expulsion from the eurozone, the Syriza government capitulated. But the crisis had exposed the deep fault lines within the EU and the limits of European solidarity.
Key concept: “#Thisisacoup”: This hashtag, launched by Syriza supporters in Barcelona in July 2015, captured the sense of outrage felt by many on the left at the brutal terms imposed on Greece by its creditors. It was a stark reminder that the eurozone crisis was not simply a matter of economics but also of politics and power. And that the balance of power was heavily tilted toward the creditors and their interests.
23. The Fear Projects
In 2016, after years of political maneuvering, British Prime Minister David Cameron called a referendum on whether Britain should stay or leave the EU. The referendum campaign exposed a deep divide within British society and its political class over the question of Britain’s place in the world. The Remain campaign, backed by big business and the political establishment, ran on a platform of economic fear mongering, warning of the dire consequences of a Brexit vote. This strategy backfired. On June 23, 2016, to the astonishment of the world, Britain voted to leave the EU.
Key concept: “Project Fear”: This was the name given to the strategy adopted by the Remain campaign in the Brexit referendum. Rather than making a positive case for EU membership, the Remainers sought to frighten voters into voting to stay by emphasizing the dire economic consequences of a Brexit vote. This strategy backfired spectacularly.
24. Trump
The election of Donald Trump as president of the United States in 2016 marked a dramatic turning point in American politics. The Republican Party, long divided over the question of globalization and the role of the state, was now united behind a populist agenda of economic nationalism, immigration restriction, and America First. The victory revealed the deep fault lines within American society and the failure of the political establishment to address the anxieties of a large section of the American population. It also threw into question the future of American global leadership and the world order that had been built upon it.
Key concept: “Make America Great Again”: This slogan, trademarked by Donald Trump in 2014, captured the powerful appeal of nostalgia to a white, working-class America that felt left behind and disenfranchised in the 21st century. It tapped into a deep well of resentment at globalization, immigration, and the perceived loss of American power and status in the world.
25. The Shape of Things to Come
The upheavals of 2016 did not, however, produce the global economic meltdown that some had feared. The Trump administration might talk tough, but it faced countervailing pressure from business interests at home and from the reality of global financial market dynamics. For the moment, as in the 2000s, there was no alternative to the dollar as a safe asset, and this meant that the US Treasury market could absorb even the risk of a US government shutdown. And as American leadership receded, a new candidate stepped forward to offer reassurance: China’s Xi Jinping, in a speech at Davos in January 2017, presented China as the new “anchor of globalization.” But appearances could be deceiving. Only a year earlier the world had been on the brink of a China crisis, and in responding to that challenge the Chinese government had revealed both its vulnerability and its determination to retain control.
Key concept: “Anchor of globalization”: This phrase, widely used to describe China’s new role in the world economy, captures the sense that in an era of American retrenchment and European uncertainty, it is China that now stands as the defender of globalization and the liberal world order.
Essential Questions
1. Was the 2008 crisis solely an American crisis, or was it something more complex?
The 2008 crisis was widely perceived as an American crisis, but it was, in fact, a crisis of the transatlantic financial system, driven by the excessive reliance of European banks on wholesale dollar funding from American money markets. This created a dangerous dependence of European banks on the US financial system, which became evident when the American housing bubble burst, and European banks faced a sudden stop in dollar funding.
2. Why did the American policy-making elite focus on the “wrong crisis”?
The American policy-making elite, preoccupied with the “wrong crisis” of a Chinese dollar sell-off triggering an American sovereign debt crisis, failed to recognize the real danger posed by the fragility of the Western financial system itself. This misreading of the crisis led them to focus on the wrong solutions, such as promoting fiscal discipline and neglecting the need for more robust financial regulation.
3. Why was the eurozone so vulnerable to the 2008 crisis?
The eurozone, despite adopting a single currency, was an “unfinished project” lacking crucial institutional features such as a common fiscal policy, a unified banking regulatory structure, and a mechanism for fiscal redistribution. This made the eurozone particularly vulnerable to the 2008 crisis, and the lack of a comprehensive European response led to a protracted and agonizing crisis that would unfold over the following years.
4. How did the 2008 crisis affect China?
China, while a major beneficiary of globalization, was not immune to the 2008 crisis. The collapse of global trade and the withdrawal of Western capital forced the Chinese government to embark on a massive stimulus program that, while effective in averting a domestic crisis, had unintended consequences for China’s economic model and its relationship with the West.
5. How did the 2008 crisis expose the limitations of global governance?
The crisis revealed the inadequacy of existing global governance institutions, such as the IMF and the G20, in dealing with a crisis of this magnitude. The IMF was underfunded and lacked the authority to impose its will on the major players. The G20, while more representative than the G8, was still dominated by the major Western powers and lacked the capacity for effective coordinated action.
Key Takeaways
1. The 2008 crisis was a crisis of globalization, not just of finance.
The crisis was not simply a technical malfunctioning of the financial system. It was a product of a particular model of financial globalization that had been deliberately constructed over several decades, a model that was deeply intertwined with political choices, ideological assumptions, and the interests of powerful actors.
Practical Application:
In developing AI products, it is crucial to consider not just the technical aspects but also the wider social, economic, and political context in which the technology will be deployed. Failure to do so could lead to unintended consequences, and even exacerbate existing social and economic divisions.
2. The crisis revealed the inadequacy of global governance institutions.
The crisis exposed the inadequacy of existing global governance institutions, both in preventing the crisis and in managing the response. The IMF was underfunded and lacked the authority to impose its will on the major players. The G20, while more representative than the G8, was still dominated by the major Western powers and lacked the capacity for effective coordinated action.
Practical Application:
When developing complex AI systems, it is essential to have a robust system of governance and risk management in place to ensure that the technology is used responsibly and ethically. This includes not just technical safeguards but also clear lines of accountability and effective mechanisms for oversight and control.
3. The crisis had profound geopolitical consequences.
The crisis was not simply an economic event; it had profound geopolitical consequences. It accelerated the shift in global power toward the East. It exposed the fragility of the post-Soviet order in Eastern Europe. And it laid bare the deep divisions within the transatlantic alliance, creating opportunities for both cooperation and conflict.
Practical Application:
AI product engineers need to understand that their work has geopolitical implications and must be aware of the potential for their creations to be used for purposes beyond their intended application. This requires engaging with policymakers and ethicists to ensure that the technology is developed and deployed responsibly.
4. The crisis led to a dramatic reassertion of the role of the state.
The crisis forced a dramatic rethinking of the role of the state in the economy. The massive bailouts of the financial system and the unprecedented intervention by central banks marked a decisive break with the neoliberal orthodoxy of the previous decades. The crisis fighters were forced to improvise and to act with extraordinary speed and decisiveness.
Practical Application:
For AI product engineers, the 2008 crisis and its aftermath offer a valuable case study in crisis management and the importance of adaptability and improvisation in the face of unexpected challenges. It underscores the need to design systems that are robust and resilient to a wide range of potential shocks.
5. The crisis highlighted the dangers of inequality and financial instability.
The solutions adopted to address the crisis, despite their short-term effectiveness, did little to address the underlying problems of inequality and financial instability. Indeed, in the years that followed, the crisis morphed into a crisis of democracy and the liberal world order itself.
Practical Application:
In the development of AI, there’s a risk of creating systems that exacerbate existing inequalities and concentrate power in the hands of a few. AI product engineers must be aware of these dangers and work to develop technologies that are inclusive and equitable.
Suggested Deep Dive
Chapter: Chapter 8: “The Big Thing”: Global Liquidity
This chapter offers a profound and detailed explanation of the Fed’s role as the global lender of last resort, which has crucial implications for understanding the power dynamics in a dollar-denominated financial system and the potential risks and opportunities for AI product engineers working in this space.
Memorable Quotes
Introduction. 15
“The world is no longer a unipolar world with one super-Power, nor is it a bipolar world with the East and the West. It’s a multipolar world now.”
Introduction. 23
For all the pressure that classic “macroeconomic imbalances”—in budgets and trade—can exert, a modern global bank run moves far more money far more abruptly.
Chapter 2: Subprime. 37
“Rubin and us spear carriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But what we turned out to have done . . . was to enable George W. Bush’s right-wing class war: his push for greater after-tax income inequality.”
Chapter 3: Transatlantic Finance. 81
It was the spinning motion of this transatlantic financial axis that impelled the surge in financial globalization in the early twenty-first century.
Chapter 18: Whatever It Takes. 439
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.” Then, pausing for effect, he added: “And believe me, it will be enough.”
Comparative Analysis
While “Crashed” shares common ground with other notable works on the 2008 financial crisis, such as “The Big Short” by Michael Lewis, “Too Big to Fail” by Andrew Ross Sorkin, and “Fault Lines” by Raghuram Rajan, it offers a unique perspective by emphasizing the role of European banks and the transatlantic financial system. Unlike Lewis’s focus on individual actors and Sorkin’s account of the American policy response, Tooze’s analysis highlights the deep interconnectedness of the global financial system and the crucial role of the Fed as the lender of last resort for the world. Rajan, while insightful in his analysis of the underlying causes of the crisis, does not provide the same level of detail on the European dimension of the crisis. Tooze’s “Crashed” thus offers a more comprehensive and nuanced understanding of the crisis as a global phenomenon with far-reaching geopolitical consequences.
Reflection
Tooze’s ‘Crashed’ masterfully dissects the intricate web of financial interconnections and political decisions that led to the 2008 crisis and its turbulent aftermath. His focus on the transatlantic financial system and the often-overlooked role of European banks provides a crucial counterpoint to the prevailing narrative of American decline and Chinese ascendance. He convincingly argues that the crisis was not simply a financial event, but a watershed moment in global geopolitics, with lasting consequences for the balance of power and the future of the liberal world order. While the book’s dense and detailed narrative may be challenging for readers unfamiliar with financial jargon, it is essential reading for anyone seeking a deeper understanding of the forces that are shaping the world today. However, one should also consider that the book’s emphasis on the role of the state and the necessity of technocratic intervention may not resonate with those who advocate for more market-based solutions or for a more radical rethinking of the global financial system. Tooze’s focus on the “Davos mindset” can be seen as a form of intellectual elitism that overlooks the role of broader social and political forces in shaping the crisis and its aftermath.
Flashcards
What were subprime mortgages, and what role did they play in the 2008 crisis?
These high-risk loans, extended to borrowers with poor credit histories, fueled a massive expansion of mortgage lending in the United States in the early 2000s. Their default triggered the financial crisis.
Define the term “Transatlantic financial axis.”
The close interconnectedness between the financial systems of the United States and Europe, where European banks relied heavily on wholesale dollar funding from American money markets.
Why was the euro considered an “unfinished project” at the time of the crisis?
It lacked a common fiscal policy, a unified banking regulatory structure, and a mechanism for fiscal redistribution, making it vulnerable to the crisis.
What is meant by the term “extend-and-pretend,” and what were its consequences?
This was the strategy adopted by European policymakers to address the Greek debt crisis, involving providing Greece with new loans to pay off existing debts while imposing harsh austerity measures. This delayed necessary restructuring and exacerbated the crisis.
Explain the concept of the “Doom Loop” and its relevance to the 2008 crisis.
The vicious cycle where sovereign debt crises weaken banks, further undermining confidence in the sovereign, leading to a downward spiral. It was a key driver of the eurozone crisis.
What are liquidity swap lines, and why were they crucial in 2008?
Agreements between central banks to exchange currencies, revived and expanded by the Fed in 2007-2008 to provide dollar funding to foreign central banks and prevent a global dollar liquidity crisis.
What was the “Taper Tantrum,” and what did it reveal about global financial markets?
It refers to the market panic in 2013, triggered by the Fed’s announcement that it would begin tapering its bond-buying program, leading to a surge in bond yields and a sell-off in emerging markets.
What is meant by the phrase “The ‘wrong crisis’?”
This phrase, coined by economist Bradford DeLong, highlights the American policy-making elite’s misdiagnosis of the crisis, focusing on a potential Chinese dollar sell-off instead of the fragility of the Western financial system.