Crashed: How a Decade of Fi­nan­cial Crises Changed the World by Adam Tooze

The New York Review of Books - - Contents - Robert Kut­tner


How a Decade of Fi­nan­cial Crises Changed the World by Adam Tooze.

Vik­ing, 706 pp., $35.00

The his­to­rian G. M. Trevelyan said that the demo­cratic rev­o­lu­tions of 1848, all of which were quickly crushed, rep­re­sented “a turn­ing point at which mod­ern his­tory failed to turn.” The same can be said of the fi­nan­cial col­lapse of 2008. The crash demon­strated the empti­ness of the claim that mar­kets could reg­u­late them­selves. It should have led to the dis­grace of ne­olib­er­al­ism—the be­lief that un­reg­u­lated mar­kets pro­duce and dis­trib­ute goods and ser­vices more ef­fi­ciently than reg­u­lated ones. In­stead, the old or­der re­asserted it­self, and with calami­tous con­se­quences. Gross eco­nomic im­bal­ances of power and wealth per­sisted. We are still ex­pe­ri­enc­ing the re­ver­ber­a­tions.

In the United States, the bi­par­ti­san fi­nan­cial elite es­caped largely un­scathed. Barack Obama, whose cam­paign ben­e­fited from the tim­ing of the col­lapse, hired the ar­chi­tects of the Clin­ton-era dereg­u­la­tion who had cre­ated the con­di­tions that led to the cri­sis. Far from break­ing up the big banks or re­mov­ing their ex­ec­u­tives, Obama’s team bailed them out. None of the lead­ing bankers whose fraud­u­lent prod­ucts caused the econ­omy to crash went to jail; crim­i­nal pros­e­cu­tion took a back seat to the sta­bil­ity of the sys­tem. Obama’s tepid pro­gram pro­vided just enough stim­u­lus, via a mod­est pub­lic-spend­ing pro­gram and cheap un­lim­ited credit for bankers, for a slow re­cov­ery. But the eco­nomic se­cu­rity of most Amer­i­cans dwin­dled, and the le­git­i­macy of the sys­tem was called into ques­tion. One con­se­quence has been the rise of the far right; an­other is Don­ald Trump.

In Europe the af­ter­math was worse. Frag­mented into twenty-eight mem­ber

states, the EU could not pur­sue even the min­i­mal poli­cies of Obama. Ger­many had al­ready spent some €1.3 tril­lion on the eco­nomic in­te­gra­tion of the for­mer DDR and was in no mood to un­der­write the re­cov­ery of the en­tire con­ti­nent. Ger­many in­sisted that the strug­gling coun­tries had to prac­tice aus­ter­ity in or­der to re­store the con­fi­dence of pri­vate fi­nan­cial mar­kets. In a deep re­ces­sion, even or­tho­dox econ­o­mists at the In­ter­na­tional Mon­e­tary Fund soon rec­og­nized that aus­ter­ity was a per­verse recipe for eco­nomic re­cov­ery.

But the Ger­man de­mands dic­tated pol­icy for the con­ti­nent. In ad­di­tion, the Eu­ro­pean Cen­tral Bank (ECB) had nei­ther the for­mal pow­ers nor the po­lit­i­cal con­sent of its na­tional mas­ters to be­come a lender-of-last-re­sort, as the Fed has been in the US since 1932. Af­ter the crash, the Fed kept in­ter­est rates down and made credit eas­ily avail­able to the fi­nan­cial in­dus­try, which pre­vented the col­lapse from be­com­ing a gen­eral de­pres­sion. The US govern­ment took on debt to pay for ser­vices with­out hav­ing to raise taxes (a pol­icy known as fis­cal stim­u­lus), and it could ex­tend credit to keep mar­kets liq­uid. But Europe, be­cause of Ger­many’s wor­ries that these poli­cies would lead to in­fla­tion, had no way to ex­tend credit to strug­gling na­tions or to raise money through the sale of bonds, which would have al­lowed the ECB to pro­vide debt re­lief or to in­vest in pub­lic ser­vices. The po­lit­i­cal re­sult was the same on both sides of the At­lantic—declining prospects for or­di­nary peo­ple, an­i­mus to­ward elites, and the rise of ul­tra­na­tion­al­ism. In the US, there is at least a left-wing op­po­si­tion in wait­ing, with a co­her­ent ex­pla­na­tion for what went wrong and a pro­gres­sive al­ter­na­tive to Trump­ism. Pro­gres­sives have been gain­ing in­flu­ence in the Demo­cratic Party, and it’s pos­si­ble that a neoRoo­sevel­tian left that sup­ports fi­nan­cial reg­u­la­tion, pub­lic in­vest­ment, and re­dis­tri­bu­tion will come to power in 2020.

Not so in Europe. Par­ties such as the Ger­man So­cial Demo­cratic Party, the Bri­tish Labour Party, and the French So­cial­ists dis­graced them­selves as cospon­sors of the ne­olib­eral for­mula that brought down the econ­omy. The Eu­ro­pean left to­day is weaker than at any time since World War II. There is just one EU mem­ber na­tion with a left-wing govern­ment and a work­ing ma­jor­ity in the na­tional par­lia­ment— Por­tu­gal—and it is a tricky three-party coali­tion. In Greece, the rad­i­cal left­wing party Syriza os­ten­si­bly leads the gov­ern­ing coali­tion, but its sovereignty has been crushed by Athens’s min­ders in Brus­sels; to­day Syriza’s poli­cies are in­dis­tin­guish­able from those of the cen­ter-right. In na­tion af­ter na­tion, the main op­po­si­tion to the party of Davos is ne­o­fas­cism.

There have been hun­dreds of il­lu­mi­nat­ing books on the great fi­nan­cial col­lapse. Crashed, writ­ten to mark its tenth an­niver­sary, will stand for a long time as the au­thor­i­ta­tive ac­count. In his mas­ter­ful nar­ra­tive, the eco­nomic his­to­rian Adam Tooze achieves sev­eral things that no other sin­gle au­thor has quite ac­com­plished. Tooze has man­aged to ex­plain a hugely com­plex global cri­sis in its mul­ti­ple di­men­sions, and his book com­bines co­gent anal­y­sis with a fas­ci­nat­ing his­tory of the po­lit­i­cal and eco­nomic par­tic­u­lars. In Tooze’s ac­count, the sur­vival of ne­olib­er­al­ism is one of sev­eral re­lated ironies. Be­fore the crash, econ­o­mists had thought that the next cri­sis would be caused by Amer­ica’s bud­get deficit and its trade deficit, as well as the shak­i­ness of its code­pen­dency with China, which both ben­e­fited from the trade deficit and bought Trea­sury bonds to off­set it. But when the col­lapse came, it was “a fi­nan­cial cri­sis trig­gered by the hum­drum mar­ket for Amer­i­can real es­tate.”

The US hous­ing bub­ble was pumped up by sub­prime mort­gage de­riv­a­tives that al­lowed lenders to sell off high­risk loans home­own­ers were un­likely to pay back. These were in­vented on Wall Street be­gin­ning in the 1980s, ac­cepted by US reg­u­la­tors, and dis­sem­i­nated like fi­nan­cial tox­ins glob­ally. And this raises a fur­ther irony. The cri­sis was thought by many Euro­peans to have shaken Amer­i­can fi­nan­cial hege­mony and the dom­i­nant sta­tus of the US dol­lar. Tooze be­gins his tale at the an­nual con­ven­ing of the UN Gen­eral Assem­bly in New York on Septem­ber 23, 2008, a week af­ter the col­lapse of Lehman Broth­ers. “One af­ter an­other, the speak­ers at the UN con­nected the cri­sis to the ques­tion of global gov­er­nance and ul­ti­mately to Amer­ica’s po­si­tion as the dom­i­nant world power,” he writes. French pres­i­dent Ni­co­las Sarkozy poured scorn on the Amer­i­cans: “It’s a mul­ti­po­lar world now.” Yet as Tooze ex­plains, the col­lapse re­in­forced the fi­nan­cial supremacy of Wash­ing­ton and New York. “Far from with­er­ing away,” he writes, “the Fed’s re­sponse gave an en­tirely new di­men­sion to the global dol­lar.”

Dis­tilled to its essence, the cri­sis was an im­plo­sion of bank bal­ance sheets. Com­mer­cial and in­vest­ment banks had got­ten over­lever­aged—car­ry­ing too much debt—and were bor­row­ing money in overnight mar­kets to in­vest in ex­otic se­cu­ri­ties that were them­selves over­lever­aged. When the en­tire struc­ture of bor­rowed money col­lapsed, the losses more than wiped out all the cap­i­tal of the bank­ing sys­tem—not just in the US but in Europe, be­cause of the in­ti­mate in­ter­con­nec­tion (and con­ta­gion) of Amer­i­can and

Eu­ro­pean banks. Had the au­thor­i­ties just stood by, Tooze writes, the col­lapse would have been far more se­vere than the Great De­pres­sion: “In the 1930s there was no mo­ment of such mas­sive syn­chro­niza­tion, no mo­ment in which so many of the world’s largest banks threat­ened to fail si­mul­ta­ne­ously.”

Fed Chair­man Ben Ber­nanke, a scholar of the Great De­pres­sion, un­der­stood the stakes. While in­sist­ing to Con­gress that the emer­gency re­sponse was mainly to shore up US fi­nance, Ber­nanke turned the Fed into the world’s cen­tral bank. “Through so-called liq­uid­ity swap lines, the Fed li­censed a hand-picked group of core cen­tral banks to is­sue dol­lar cred­its on de­mand,” Tooze writes. In other words, the Fed sim­ply cre­ated enough dol­lars, run­ning well into the tril­lions, to pre­vent the global econ­omy from col­laps­ing for lack of credit. This re­sponse, he ob­serves, “con­tra­dicted the con­ven­tional nar­ra­tive of eco­nomic his­tory since the 1970s,” which claimed that mar­kets thrived when states re­frained from reg­u­lat­ing them. Ber­nanke in­sti­gated govern­ment ac­tion on an unimag­ined scale to prop up a pri­vate sys­tem that sup­pos­edly did not need the state. How to ex­plain the con­tra­dic­tion? The state had been hi­jacked by pri­vate fi­nance—both in the per­mis­sive­ness that caused the crash and in the sub­se­quent poli­cies that con­tained it but did lit­tle to spoil the bankers’ party. Tooze is es­pe­cially good at ex­plain­ing the many Fed in­ven­tions that pumped tril­lions of dol­lars into ev­ery ob­scure cor­ner of the fi­nan­cial in­dus­try. He de­mys­ti­fies the im­pen­e­tra­bly tech­ni­cal con­trivances used by both pri­vate com­pa­nies and cen­tral banks. Tooze com­putes the stag­ger­ing sums, run­ning into the tens of tril­lions of dol­lars. Us­ing de­posit guar­an­tees, loans to banks, out­right cap­i­tal trans­fers, and pur­chases of nearly worth­less se­cu­ri­ties, the Fed and the Trea­sury re­cap­i­tal­ized the bank­ing sys­tem. To cam­ou­flage what was at work, of­fi­cials in­vented un­lim­ited credit pipe­lines with dis­arm­ingly tech­ni­cal names.

The Term Auc­tion Fa­cil­ity, for in­stance, pro­vided banks with funds they could no longer get in the frozen mar­ket for com­mer­cial pa­per—un­se­cured, short-term cor­po­rate loans—even­tu­ally com­mit­ting a to­tal of $6.18 tril­lion. To restart that mar­ket, the Fed in­vented the Com­mer­cial Pa­per Fund­ing Fa­cil­ity, which pumped $737 bil­lion into it. The largest ben­e­fi­ciary was the Swiss bank UBS. Vir­tu­ally un­lim­ited cap­i­tal also guar­an­teed fund­ing for re­tail stock­bro­kers and much more. The blandly named pol­icy of quan­ti­ta­tive eas­ing, which drove in­ter­est rates down to al­most zero, was a eu­phemism for Fed pur­chases of im­mense quan­ti­ties of pri­vate and govern­ment se­cu­ri­ties.

The cri­sis, Tooze writes, “was a dev­as­tat­ing blow to the com­pla­cent be­lief in the great mod­er­a­tion, a shock­ing over­turn­ing of the pre­vail­ing lais­sez­faire ide­ol­ogy.” And yet the ide­ol­ogy pre­vailed. Home­own­ers, both those de­frauded by sub­prime mort­gages and mil­lions of oth­ers whose houses were sud­denly worth less than their debt, were the real vic­tims of the col­lapse. But they got lit­tle help. In a re­ver­sal of New Deal pri­or­i­ties, most of the re­lief went to the big­gest banks, while smaller banks and home­own­ers were al­lowed to go un­der. Obama’s $75 bil­lion mort­gage-re­struc­tur­ing pro­grams, known as HAMP and HARP, were used to ben­e­fit bank bal­ance sheets, not hard-pressed home­own­ers, as in­tended by Con­gress. Banks were per­mit­ted to in­vent com­plex pro­vi­sional loan “mod­i­fi­ca­tions” with opaque terms that fa­vored lenders, rather than us­ing their govern­ment sub­si­dies to pro­vide re­fi­nanc­ing to re­duce home­owner debts. The Dodd–Frank Act, passed in 2010 and meant to limit abuses in the fi­nan­cial in­dus­try, was too weak to be­gin with, and its im­ple­men­ta­tion was largely crip­pled by the in­dus­try’s in­flu­ence, years be­fore Don­ald Trump’s dereg­u­la­tory cru­sade. Long be­fore the re­ces­sion was over, the bud­get hawks around Obama, who op­posed govern­ment spend­ing, suc­ceeded in pre­ma­turely chang­ing the ad­min­is­tra­tion’s pri­or­ity from re­cov­ery to deficit re­duc­tion. So com­pro­mised was the ad­min­is­tra­tion that the fi­nan­cial com­men­ta­tor Rick San­telli, speak­ing from the Chicago Board of Trade in 2009, could de­pict the bailout pro­gram as a cor­rupt al­liance be­tween the lib­eral rich and the un­de­serv­ing poor meant to de­fraud mid­dle-class Amer­i­cans, and then is­sue the first call for a new Tea Party. How did a nom­i­nally cen­ter-left ad­min­is­tra­tion, elected dur­ing a fi­nan­cial cri­sis caused by right-wing eco­nomic ide­ol­ogy and pol­icy, end up in this sit­u­a­tion? Tooze re­minds us of the Hamil­ton Project, a small unit at the Brook­ings In­sti­tu­tion cre­ated in 2006 by Robert Ru­bin, for­mer co-chair­man of Gold­man Sachs and Clin­ton’s trea­sury sec­re­tary, and his pro­tégés. The project, which had sub­stan­tial in­flu­ence on Obama’s think­ing, his pro­gram, and his ap­pointees, pro­moted bud­getary or­tho­doxy, no in­ter­fer­ence with Wall Street, and small-scale so­cial in­vest­ment ini­tia­tives such as re­train­ing pro­grams and sup­port for small busi­ness. “When the econ­o­mists linked to the Hamil­ton Project en­vi­sioned dis­as­ter,” Tooze writes, “they wor­ried about ex­ces­sive pub­lic debt, un­der­per­form­ing schools and a Chi­nese sell-off. What they did not put in ques­tion was the ba­sic func­tion­ing of the Amer­i­can econ­omy, its banks and fi­nan­cial mar­kets.”

Turn­ing to Europe, Tooze ex­plores the fa­tal com­bi­na­tion of Ger­many’s de­mands for aus­ter­ity with the struc­tural weak­ness of the ECB and the vul­ner­a­bil­ity of the euro. In Europe, be­cause of bad pol­icy, the im­plo­sion of pri­vate fi­nan­cial as­sets led to a cri­sis of sov­er­eign debt. Be­fore the col­lapse, cheap debt caused risky in­vest­ments to flow into South­ern Europe. Coun­tries such as Greece and Italy had, be­fore the in­tro­duc­tion of the euro in 1999, been prone to in­fla­tion be­cause of high deficits, and the gov­ern­ments, cor­po­ra­tions, and cit­i­zens of those coun­tries had been made to off­set the risk of de­val­u­a­tion by pay­ing higher in­ter­est rates to lenders. But in the 2000s there was no risk of de­val­u­a­tion; Por­tu­gal or Greece now en­joyed in­ter­est rates that were only slightly higher than Ger­many’s, and mar­kets failed to take ac­count of the risk of de­fault, which was more se­ri­ous than that of de­val­u­a­tion.

Af­ter the cri­sis be­gan, mis­guided re­sponses com­pounded the dam­age. In Ire­land, a badly cor­rupted govern­ment took bank losses onto the state’s own bal­ance sheet, sud­denly putting Ire­land in re­ceiver­ship to Brus­sels and Ber­lin, which pro­vided cap­i­tal in ex­change for strin­gent con­di­tions. In Greece, be­fore the crash, the bud­get books had been al­tered by a cen­ter-right govern­ment (with help from Gold­man Sachs, which cre­ated spe­cial se­cu­ri­ties that al­lowed Athens to dis­guise the in­creased pub­lic debt). In 2009 the newly elected so­cialdemo­cratic govern­ment of Ge­orge Pa­pan­dreou and his Pa­sok party du­ti­fully re­ported the faked books and the real num­bers to Brus­sels and the world. Greece’s bud­get deficit was not 3.7 per­cent, as the out­go­ing govern­ment had falsely claimed. It was more like 12 per­cent, or four times the per­mit­ted limit un­der EU rules.

Fi­nan­cial mar­kets re­sponded by spec­u­lat­ing against Greek sov­er­eign debt, re­quir­ing Greece to pay much higher in­ter­est. But in­stead of treat­ing the Greek sit­u­a­tion as a cri­sis to be con­tained and help­ing a gen­uinely re­formist new govern­ment find its foot-

ing, Brus­sels and Ber­lin treated Greece as an ob­ject les­son in profli­gacy and an op­por­tu­nity to in­sist on puni­tive terms for fi­nan­cial aid. This mainly served to bail out Greece’s cred­i­tors and pushed the Greek econ­omy deeper into de­pres­sion. To qual­ify for the mea­ger pro­gram of what Tooze terms “ex­tend and pre­tend” from the EU, the ECB, and the IMF, the Greeks were made to pur­sue ex­cru­ci­at­ing cuts in pub­lic ser­vices and pen­sions as well as auc­tions of pub­lic as­sets at fire-sale prices. At one point in the aus­ter­ity bar­gain­ing with the Greek govern­ment, Tooze re­ports, the Ger­man fi­nance min­is­ter, Wolf­gang Schäu­ble, “sug­gested that per­haps it would be bet­ter for the Greeks not to hold elec­tions.” Schäu­ble knew how un­pop­u­lar these poli­cies were. His words sug­gested that he would sac­ri­fice Greek democ­racy in or­der to get the Greek govern­ment to ac­cept the aus­ter­ity de­mands. This was a co­erced ver­sion of the ne­olib­er­al­ism that had al­ready been dis­cred­ited by the col­lapse.

A cen­tral player in this tragedy was the Eu­ro­pean Cen­tral Bank. Tooze does a fine job of ex­plain­ing the del­i­cate dance be­tween the bank’s lead­ers and its real mas­ters in Ger­many. Since Ger­many op­posed con­ti­nent-wide re­cov­ery spend­ing, the bank could only pur­sue mon­e­tary pol­icy. The model was the Fed. Yet while the Fed has a con­gres­sional “dual man­date” to tar­get both price sta­bil­ity and high em­ploy­ment, the ECB’s char­ter al­lowed for price sta­bil­ity only. In the Maas­tricht Treaty, which was signed in 1992 and cre­ated the euro, Ger­many’s re­quire­ment for giv­ing up its cher­ished deutsche mark was an agree­ment that the euro would be pro­tected from in­fla­tion. The ECB in­her­ited the Ger­mans’ fear of in­fla­tion. The treaty was made even more aus­tere by the 2011 fis­cal com­pact de­manded by Merkel, which added more penal­ties to en­force the lim­its placed on debts and deficits. Thus Greece, a na­tion hit by se­vere re­ces­sion and loss of pri­vate in­vestor con­fi­dence, had no choice but to pur­sue aus­ter­ity to re­as­sure cred­i­tors.

A cen­tral bank with the pre­rog­a­tives of the Fed­eral Re­serve might have pre­vented this out­come. But the ECB could not legally pur­chase the sov­er­eign debt of mem­ber na­tions. The first two pres­i­dents of the ECB, the Dutch­man Wim Duisen­berg and JeanClaude Trichet of France, took pains to be more Ger­man than the Ger­mans. In 2011, how­ever, Mario Draghi of Italy got the job. Draghi was far from a rad­i­cal. He was trained at MIT and had spent three years as a man­ag­ing di­rec­tor at Gold­man Sachs. Draghi, a foe of in­fla­tion, had been viewed as the most “Ger­man” of the avail­able can­di­dates. But as the cri­sis deep­ened, he grad­u­ally ex­panded the bound­aries of the ECB’s re­mit, cut­ting in­ter­est rates and mak­ing two rounds of loans to Eu­ro­pean banks. In 2012, Tooze re­counts, Draghi, speak­ing off the cuff in an ur­gent ef­fort to re­as­sure mar­kets, de­clared that the ECB “is ready to do what­ever it takes to pre­serve the euro.” No­body was sure what that meant, not even Draghi. “As usual, the in­fla­tion hawks at the Bun­des­bank were aghast at the idea of ECB bond buy­ing,” Tooze tells us. “But for Merkel it was the bet­ter of two bad op­tions.” The ECB, with the con­sent of the Ger­mans, came up with one of those bland­sound­ing names, Out­right Mon­e­tary Trans­ac­tions, for its direct pur­chases of govern­ment bonds. But the pro­gram, at the in­sis­tence of the Ger­mans, was re­stricted to na­tions in com­pli­ance with Merkel’s rigid fis­cal terms, which lim­ited na­tional deficits and debts. In other words, the money could not go to the very na­tions where it was needed most, since the hard­est-hit coun­tries had to bor­row heav­ily to get them­selves out of the re­ces­sion. And so, de­spite Draghi, Europe con­tin­ued to tread wa­ter rather than make progress to­ward re­cov­ery. The banks, how­ever, sur­vived.

Tooze ex­cels at ex­plain­ing the byzan­tine po­lit­i­cal bar­gain­ing that led to pol­icy com­pro­mises that avoided out­right de­pres­sion but sti­fled the Eu­ro­pean econ­omy. These were the con­se­quences of shift­ing al­liances among na­tional lead­ers, with the French, Ital­ians, and Span­ish, who were less op­posed to in­fla­tion, against the con­ser­va­tive Ger­mans and Dutch, as well as com­plex in­fight­ing within the po­lit­i­cal lead­er­ship in in­di­vid­ual na­tions. The in­fight­ing was com­pounded by the in­ter­ests of dif­fer­ent na­tional and in­ter­na­tional politi­cians and in­sti­tu­tions, above all the banks. Much of the pressure was on Merkel, whip­sawed be­tween her own fis­cal con­ser­vatism, the hos­til­ity of the Ger­man elec­torate to bail­ing out the sup­pos­edly prof­li­gate south­ern na­tions, and her need to hold the EU to­gether. At one ex­cru­ci­at­ing all-night ne­go­ti­a­tion at which she felt am­bushed by other na­tional lead­ers, Tooze re­ports, Merkel broke down and de­clared, “Ich will mich nicht selbst um­brin­gen.” (I do not want to kill my­self.) Read­ing Tooze, you re­al­ize that it’s a mir­a­cle that the EU and the euro sur­vived at all—but they did so at ter­ri­ble hu­man cost.

Crashed does have some mi­nor blem­ishes. One is its struc­ture. Tooze gen­er­ally pro­ceeds chrono­log­i­cally. For the most part, this strat­egy works. How­ever, be­cause he picks up, drops, and then re­sumes sev­eral im­por­tant sub­plots—such as the euro, the Fed, and China—the text oc­ca­sion­ally loops back on it­self, lead­ing the reader to won­der, “Didn’t I read this be­fore?” Con­versely, there are some as­pects of the story that are omit­ted or glossed over. For ex­am­ple, the ideal of lib­er­al­ized trade, and the use of trade treaties to pro­mote dereg­u­la­tion or pri­va­tized reg­u­la­tion of fi­nance, is a ma­jor el­e­ment of the story of how ne­olib­eral hege­mony pro­moted the even­tual col­lapse. But ex­cept for a pass­ing ref­er­ence, trade and glob­al­ized dereg­u­la­tion get lit­tle men­tion here.

Sim­i­larly, while Tooze writes ex­ten­sively about the cen­tral bankers Ben Ber­nanke and Mario Draghi, he has al­most noth­ing to say about Janet Yellen. Her nom­i­na­tion as Fed chair in 2013 to suc­ceed Ber­nanke was an epochal event and an im­prob­a­ble de­feat for the pro­po­nents of aus­ter­ity, dereg­u­la­tion, and bank bailouts who in­flu­enced Obama’s pol­i­cy­mak­ing. Yellen, a left­lib­eral econ­o­mist spe­cial­iz­ing in la­bor mar­kets, was the only left-of-cen­ter Fed chair other then FDR’s chair­man Mar­riner Ec­cles. She also be­lieved in tough reg­u­la­tion of banks. The ex­ten­sion of quan­ti­ta­tive eas­ing well be­yond its in­tended end was sub­stan­tially due to Yellen’s con­cern about wages and em­ploy­ment, and not just price

sta­bil­ity, since low in­ter­est rates can also help pro­mote re­cov­ery.

The story of how Yellen got the job is also em­blem­atic of deeper power strug­gles. Obama had all but promised the Fed chair to Larry Sum­mers, who dearly wanted it. But the newly elected pro­gres­sive se­na­tor El­iz­a­beth War­ren, who had tan­gled re­peat­edly with Sum­mers in her pre­vi­ous po­si­tion as chair of the Con­gres­sional Over­sight Panel for the bank bailout pro­gram, or­ga­nized fel­low Se­nate Democrats to warn Obama that Sum­mers would not be con­firmed. War­ren and the lib­er­als also openly lob­bied for Yellen. In Tooze’s book, we first meet Yellen in pass­ing on page 503, in a brief ref­er­ence to the grad­ual phase-out of quan­ti­ta­tive eas­ing, with no ex­pla­na­tion of how she got to the Fed or who she was, and not much on her sub­se­quent work. An­other odd omis­sion is the sav­ings and loan scan­dal of the 1980s. Tooze writes only that many sav­ings and loans went broke in that decade be­cause, while they lent money at fixed rates, they had to pay ris­ing in­ter­est rates on de­posits from con­sumers. But far more im­por­tant were their reck­less spec­u­la­tive in­vest­ments, which had noth­ing to do with mort­gages, plus their ex­ces­sive bor­row­ing, al­lowed by the Garn–St. Ger­main Act of 1982, for which the sav­ings and loan in­dus­try had lob­bied. The folly was com­pounded by ex­ten­sive cor­rup­tion, for which hun­dreds of sav­ings and loan ex­ec­u­tives were crim­i­nally pros­e­cuted. The scan­dal pre­fig­ured the deeper cor­rup­tion to come.

What, fi­nally, are we to make of this saga? Tooze ends the book with a short chap­ter called “The Shape of Things to Come,” mainly on the as­cent of China, the one na­tion that avoided all the shib­bo­leths of eco­nomic and po­lit­i­cal lib­er­al­ism, though it also, of course, does not have a po­lit­i­cal democ­racy. But as Tooze re­minds us, coali­tions in the US that fought for govern­ment over­sight of cap­i­tal­ism pre­vented the dis­as­ters of lais­sez-faire poli­cies, mak­ing “The dif­fer­ence be­tween the Treaty of Ver­sailles and the Mar­shall Plan, or Herbert Hoover’s and FDR’s re­sponses to the Great De­pres­sion.” He aptly adds, “The po­lit­i­cal in ‘po­lit­i­cal econ­omy’ de­mands to be taken se­ri­ously.”

Wil­liam Powhida: Griftopia, 2011; a ten-foot-wide ‘vis­ual trans­la­tion’ of the 2008 fi­nan­cial cri­sis based on Matt Taibbi’s 2010 book of the same ti­tle

‘Mi­das, Trans­mut­ing All, Into Gold Pa­per’; draw­ing by James Gill­ray, 1797

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