Historian and author Adam Tooze talks to ProMarket about how the financial crisis “remade” American capitalism, why the US response to the crisis was “nakedly oligopolistic,” and how Europe could have solved its own crisis if it had an organized oligopoly of its own.
“If you seek his monument, look around.” These words, inscribed in Latin (Si monumentum requiris, circumspice) on the tomb of Sir Christopher Wren at St. Paul’s Cathedral, could very well be applied to the 2008 financial crisis: Donald Trump is president, the US is waging a trade war with China, Europe is in shambles, Russia is on the rise; meanwhile, inequality is soaring, an ascendant far-right is putting the institutions of liberal democracy to the test across Europe and the Americas, and another financial crisis might be looming around the corner.
Tracing how the events that unfolded on both sides of the Atlantic in 2008-2009 influenced these complicated economic and geopolitical developments in complex and different ways is a monumental task. This, however, is exactly what Columbia historian Adam Tooze set out to do with Crashed, a 900-page tome that follows the reverberations of the financial crisis through the main inflection points of the past decade, from the eurozone crisis, through the rise of China and Russia’s annexation of Crimea, to the election of Trump and proliferation of “anti-establishment” politics.
Meticulously researched and resisting easy explanations, Tooze’s book reads at times like a history of the present, which wasn’t the author’s original intent. Initially, Tooze intended for it to be a work of history, a recap of a crisis that had a beginning and an end. What he found, and what the book shows, is that the ramifications of the 2008 crisis are deep, profound and lingering. In other words, if you seek its legacy—look around.
To learn more about the complicated legacy of the 2008 crisis and its impact on the world today, we recently interviewed Tooze, the Kathryn and Shelby Cullom Davis Professor of History at Columbia. In his interview with ProMarket, Tooze explained how American capitalism was “remade” in the aftermath of crisis, why the US response to the crisis was “nakedly oligopolistic,” and how Europe could have solved its own crisis if it had an organized oligopoly of its own.
The following interview has been edited and condensed for length and clarity:
Q: If we had to distill it to a few main points, what would say is the legacy of the crisis?
In the US, the financial fix of 2008-9 was effective in stabilizing the system. I think the questions that follow after that are really about the price that was paid for that stabilization effort, and how did it contribute to subsequent destabilization. In the eurozone, unemployment in Spain and Italy is still hugely elevated relative to what it was in 2007, and the European project as such is being put in question. With regard to Asia, the extraordinary thing really is how China managed to push through.
It’s a little bit like the Cuban missile crisis. The world could really have disintegrated quite fundamentally. We’ve managed to pull ourselves back from that, but the world is never really quite the same again afterwards. We now know what it looks like when the heart of the global financial system is about to implode. We also know what will work to prevent that from happening, at least in the iteration that we saw in 2008.
There’s also the continuation, essentially, of the oligopolistic system in banking, with a more sophisticated, more intrusive, more ambitious regulatory system to manage those risks—at least until the rollback under the Trump administration. That would be the technical extension of the Cuban missile crisis analogy, in the sense that we didn’t end the Cold War or abolish nukes. We set about trying to manage them more effectively, and that didn’t prevent further escalations in the arms race. So the risk is still with us and the systems that generate that risk are still very much ongoing, with some of them expanding.
Q: One running theme throughout the book is the return of power, as a concept, to discussions around economics and policymaking. You quote Greenspan, who in 2007 declared that “thanks to globalization…it hardly makes any difference who will be the next president. The world is governed by market forces.” And Tony Blair, who in 2005 said there’s no need to debate globalization, “you might as well debate whether autumn should follow summer.”
To me, the big juxtaposition is them against Abba Lerner, who said that “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.” One of the meta themes [of the book] is that yes, power has come back, and we have to reckon with that. The crisis explicitly exposed something that was implicit in the Great Moderation, which is that the capacity for political resolution and political argument have become massively atrophied and indeed degenerated in key respects.
Q: How did that dismissal, or ignorance, of power come into play during and following the crisis?
The big, big story about 2008 is the transatlantic implosion. What’s staggering to my mind about that is that there was basically a tacit assumption on the part of central bankers in the US and Europe that the banks would not implode and that even if they were, there would simply be no issue with the supply of dollars. The amazing thing about that is just the presumption that this doesn’t raise any issues, that this is a politically neutral field, a technical operation. And of course, when the Fed actually had to start implementing the swap program, they immediately became aware of the fact that this is clearly a geopolitical or geoeconomic issue and handled it intelligently. They immediately recognized that there is clearly a power aspect to this and contacted the State Department to start making lists of who’s going to be in and who’s going to be out. It’s not naked power, it’s not the kind of power that Russia exercised in Georgia in August of 2008, but it’s nevertheless a systemic interdependence that puts America at the center of the entire system.
Another element of this is the bruising way in which the question of who gets to do what and who gets to decide what within the eurozone played out.
|“The meeting of October 13th, 2008, seems to be about as stark an instance of government by an oligopoly, for an oligopoly as one can possibly imagine.”|
Q: The response to the crisis in the US, you argue, had a “class logic”—“Protect Wall Street first, worry about Main Street later.” Was it different in Europe?
The bailout in America had a clear class logic that lacked in Europe. One can evidently criticize the United States’ policy on grounds of social bias, of exacerbating inequality, and for being literally the product of an elite cabal. The meeting on the 13th of October, 2008, [in which the CEOs of America’s nine largest banks were forced to sell shares to the government in exchange for TARP money—AS] was literally like an executive committee of the American bourgeoisie—under the auspices of the Treasury, but with the treasury secretary being a former CEO of Goldman Sachs.
The problem in Europe is that one wishes there had been such a meeting. Had there been such a meeting, surely no group or European business would have opted for the solution that they ended up with. Why would anyone choose to have a Texas-sized piece of the eurozone economy be as depressed as the Spanish economy? That’s not good business. No one makes a profit from doing that.
Q: How did this “class logic” manifest in the response to the crisis?
I think Dodd-Frank is the logical expression of that. Dodd-Frank is as much of this conception as you could get realized against some pretty serious pushback—not by lefties of any substantial weight, but by people like Sheila Bair from the FDIC who didn’t want the resources of the American federal government put at the disposal of an oligopolistic bailout again.
What’s impressive about the American solution is twofold. First, they managed to place the state squarely at the disposal of the bailout of the banks. The second thing they managed to do was they, the banks, articulated that they’ve got two problems. One is “Can we instrumentalize the state?” And the other one is, “Can we avoid the collective action problems that were so prevalently in Europe?”
Europe had both these problems in 2008-2009. It’s just that they weren’t able to ensure the kind of collective discipline of the October 13th model.
Q: You write that “though it is hardly a secret that we inhabit a world dominated by business oligopolies,” the crisis has left this reality, and the true priorities of governments, “nakedly exposed.” In what ways did this oligopolization shape the response to the crisis?
I think given the preexisting structure of the American and the European economies, in the course of the crisis itself there was no option but to work with the system as it is. That did indeed produce the most successful of the crisis management efforts, which is the American one—a nakedly oligopolistic solution. The meeting of October 13th, 2008, seems to be about as stark an instance of government by an oligopoly, for an oligopoly as one can possibly imagine. Of course, the ultimate justification for that (and I’m not denying that this is the theory of the actors themselves) is that those banks are systemically important and the system needs to be fixed, that the reality is the system is built around these too-big-to-fail actors, with massive network effects and externalities if they fail.
This is true across the board: All of the governments of the world offered various types of sweetheart deals in the interest of stabilizing the banking system. The difference is really between the systems which managed to do this comprehensively, like the French and the Americans, or the ones which basically just ended up providing support for the weakest oligopolists whilst the stronger oligopolists were free riding on the stability provided by the government bailout and then produced extra benefit by stigmatizing the people who took the bailout—all the while, of course, relying on the Fed as a lender of last resort for the entire system.
Q: What would a non-oligopolistic response to the crisis have looked like?
Given the preexisting structure, I don’t think there was a viable non-oligopolistic crisis response. The question really is whether you can have a non-oligopolistic solution after you’ve done the initial bailout. And then this becomes basically a question about why Dodd-Frank and the European regulatory systems put in place were so unambitious in regards to structural change.
A non-oligopolistic solution would have been one which actually broke up the larger entities and imposed caps on their size, or frankly even one that would have really been tough about capital requirements. The most modest version would be the sort of change we’ve seen in Switzerland, which hadn’t of course abolished Credit Suisse and UBS, but has forced them into a dramatic reconsideration of their business model and a pretty dramatic shrinking of their balance sheets.
Q: In the aftermath of the crisis, you argue, American capitalism was “remade” as more monopolistic and concentrated. How did the crisis and the response to it contribute to the rising economic concentration?
In the banking system itself, there was a weeding out, with JP Morgan and Wells Fargo emerging as the absolute dominant players in the system. But more generally, the availability of astonishingly cheap funding has been one of the driving factors in a massive M&A boom which, along with other such M&A booms that we’ve seen in the US over the last half century, resulted in a very dramatic concentration of corporate power.
I think one really interesting shift is the political fallout from the crisis, all the way through to Occupy [Wall Street] was centered on Wall Street. But then very rapidly, in the years since, the awareness of this oligopolistic concentration has ramified outwards. I think the period between 2011 and 2013 is rather significant for this double realization: on the one hand, realization of oligopolistic power, especially tech and the pharma companies; on the other hand, the new focus and interest in inequality, which is personified by Piketty of course, but goes well beyond him.
|“A non-oligopolistic solution would have been one which actually broke up the larger entities and imposed caps on their size, or frankly even one that would have really been tough about capital requirements.”|
Q: The distribution of costs and benefits in the US response to the crisis was “outrageous,” you write, but at least it worked. On the other hand, you heap scorn on European policymakers, who couldn’t formulate a coherent response.
Europe, I think, oscillates between two illusions. One of them is that the EU can act as a political democratic counterweight to global financial capitalism, or global corporations, and that this is a viable position for the EU to adopt over the long run. I’m skeptical about that, but that’s the attractive vision: an autonomous state that’s able to look at mega corporations and regulate them effectively. And you can see instances of that, but it’s very, very unclear to me whether that’s really a sustainable model, because it basically just positions Europe is a big rich market which you can use to gain leverage over major corporations.
Down the other end of the scale is the story which says that the eurozone is basically a vehicle for nothing other than capital accumulation on the part of European business—that would be the United States. That’s exactly what I think the crisis management at the United States exemplifies—highly effective crisis management that allowed American capital to go on accumulating rather effectively in the aftermath of the crisis.
Europe sits incredibly uncomfortably between those two poles. There are certainly politicians and state institutions motivated to sustain and improve the conditions of accumulation of European business, just like the United States. But the political logic of the eurozone, the incredibly complex mediated way in which interest rates are interrelated, the lack of centralized state structures around which capital could impart articulated interests, are relatively severe firewalls between the European political elite and business, meaning that coordination of policy simply failed.
So if the fantasy of an autonomous democratic state ruling effectively over big business and disciplining it is our first best world, and the American model of a highly effectively organized oligarchy or oligopoly is a second or third best world, than the reality of the real existing eurozone is a fourth or fifth best world in which neither of those two things is realized.
Q: A disorganized oligarchy, of sorts.
Yeah, a disorganized oligarchy with democratic elements.
Q: One notion that perished with the crisis, you write, is that we live in an era of small government, that we live very much in an era of big government.
For me, it goes back to the Cuban missile crisis analogy: We escaped the disaster, but the result and the solution was not to scale back the risk. After the Cuban missile crisis, they built bigger and bigger strategic arsenals and then amplified them with medium intermediate range missiles. You don’t stop the process, but you expand and improve your ability to manage it, at least in the eyes of people like Paulson and Geithner. And as the scale of global capitalism expands, what 2008 teaches is that only entities with truly effective state institutions with the capacity and will to act can cope.
Q: Another running theme is the failure of centrist technocratic elites to comprehend the political forces they were tampering with and unleashing when they skewed the response so heavily towards bankers.
When they set up this system of freewheeling finance from the 1990s onward, there was really an assumption that it would take care of itself, that you didn’t need to worry about the domestic repercussions, the fiscal implications, [or] about geopolitics, that if there was a problem, it was constraining public finance.
Most astonishing, of course, is how quickly and how assertively that story of public finance comes roaring back, given half a chance. It just refuses to die, even in the face of the evidence that the problem is actually not the politics of public finance, but that the far more difficult thing is political economy—in other words, the politics-private economic relationship is actually the problem. That’s a really difficult thing for centrist liberalism to digest because that’s really what the crisis has shown, that private economic activity is not neutral, either in its political or its geopolitical effects. They have struggled and still struggle, I think, to really articulate an effective response.
|“In the wake of 2008, you can’t ignore the influence of big business on economic policy. Even the most starry-eyed neoliberal would have to concede that the meeting of the 13th of October 2008 happened, and that isn’t in any neoliberal playbook.”|
Q: Europeans have insisted on treating “their” crisis as a sovereign debt crisis that’s completely separate from the financial crisis in the US. Why?
Europeans have a really hard time dealing with the real existing eurozone crisis as it actually happened. It’s extraordinary. I’ve done a couple of interviews in Germany and the first thing they’ll tell you is you didn’t need Lehman to produce the eurozone crisis, which I’d actually happily agree with, because all that was needed to produce the eurozone crisis was the Spanish and the Irish real estate bubbles. Greece by itself could obviously have produced the crisis, Ireland and Spain by themselves could have actually produced the crisis. But in fact it was all these things: Ireland and Spain and Greece and Lehman. The idea that Ireland and Spain are separable from the general north-Atlantic credit boom, that’s just silly.
Q: In the aftermath of 2008, the crisis was reframed as something else than what it was, both in Europe and in the US: a sovereign debt crisis in Europe, a crisis of fiscal policy in the US. Was it a political choice to reframe it in this way?
It’s the locking-back-in of consolidation programs that were formulated in the 1990s. My Marxist students will say to me, “Adam, that’s where the business interest re-intrudes,” and I would concede that. It’s politics and interest politics mediated by a whole bunch of political intellectual entrepreneurs who were pushing a conservative agenda.
There are also countervailing tendencies. This process, which was pursued very unsuccessfully in Europe and much more successfully in the US, also summons up against itself—particularly because it’s so stark. In the wake of 2008, you can’t ignore the influence of big business on economic policy. Even the most starry-eyed neoliberal would have to concede that the meeting of the 13th of October 2008 happened, and that isn’t in any neoliberal playbook. There is, as I show in the book, from 2011, ‘12, ’13 onward, a quite remarkable pushback against corporations as power centers, which rapidly extends out away from finance to focus above all on tech, but pharma as well. You have thoroughly mainstream people like [Jason] Furman and [Peter] Orzsag writing these rather powerful critiques of corporate America and the tendency towards oligopoly, which we’ve now seen endorsed at the latest Jackson Hole meeting [of the Fed].
That, to me, is the denouement of the crisis. This was a crisis that came out of an oligopolistic private sector. To fix it, you have to address it at its own level. In other words, by means of effectively articulating that oligopoly around the resources of a big state. That’s what the Americans managed to do, and then in Dodd-Frank they enshrined it as a permanent crisis regime. But in the process of doing so, they have stripped away the euphemisms, the ideological cover. And, of course, this isn’t the only area where this has happened. It also happened with trade policy and it happened with the famous distributional chart, which shows you that America’s economy may have experienced growth since the bicentennial, but the median income of working men has barely increased since 1976.
In all these different dimensions, simultaneously, the coherence of the political enframing of national economic policy has been blown apart. You can fail the way the Europeans did, which is to fail to provide the basic ingredients of good national economic management, or you can fail the way the Americans did, which is in a sense to succeed too well, to the point where you just blatantly expose the underlying power relationships to a degree where it becomes virtually impossible to politically legitimate them. To my mind, that would be the kind of broad story that we’ve seen in the US.
When Warren Buffett can openly say, “Yes, there’s been class war, my side’s been waging it and we’ve won,” I don’t know how you go back that from that. What is the political defense of that position?
|“You can fail the way the Europeans did, which is to fail to provide the basic ingredients of good national economic management, or you can fail the way the Americans did, which is in a sense to succeed too well, to the point where you just blatantly expose the underlying power relationships to a degree where it becomes virtually impossible to politically legitimate them.”|
Q: What role the crisis play a part in the rise of far-right nationalism in the US and Europe?
The analogy that I found most helpful to explain my position is to say it’s like an earthquake. An earthquake strikes, how much of a shock [you experience] depends on how close to the epicenter you are. If the distance from the epicenter is the same for everyone, the question whether your building survives or not is a question of architecture, engineering and maintenance. Some political systems have bad architecture, are poorly maintained and are run by people who are aggressive political entrepreneurs. Viktor Orbán is a brilliant nationalist and ideologue who could turn this crisis to his benefit quite connectedly. But there are also ways of trying to contain that pressure. It does depend on the underlying stability and structure of your political system.
Q: The connection between the 2008 financial crisis and the rise of far-right politics seems pretty intuitive. And yet, some resist it.
Several journalists have claimed that the book draws a line from 2008 to Trump, as though this was a straightforward thing. Of course this isn’t a straight line—this is complex modern history. This isn’t some cookie cutter correlation where you stick a bunch of variables and deduce one thing from the other. Good social science doesn’t do that anyway.
On the other hand, Occupy and the Tea Party were clearly a response to the financial crisis. Do we seriously think the 2016 presidential election would have been the same without the Tea Party and Occupy in the background? Definitely not. Steve Bannon’s entire construction of his politics comes out of 2008. And the fracturing and fissuring within the Republican party already manifested with their refusal to vote for TARP and for the Fannie Mae and Freddie Mac bailouts and their extraordinary partisanship in opposition to the stimulus.
Q: If it’s not a straight line, then what is it? If it’s not that the crisis discredited political elites, eventually leading to…
That I actually do buy. I think the crisis definitely broke the link between the Republican Party base and the Republican Party elite. And without that happening, it’s pretty difficult to see how Trump gets to be president. To me, that seems to be obvious. I think that’s true. I don’t see how you would argue about that. It happened to the Democrats too. The difference between them, in a sense, is that the Democratic Party elite managed to maintain control and the Republicans didn’t. And that shouldn’t be surprising, given their track record over the previous eight years.
|“The post-truth problem didn’t start with Trump. Post-truth is endemic to any system which is as shot through with fundamental contradictions as ours is.”|
Q: There’s a very a telling quote from Jean-Claude Juncker you use in the book: “When it becomes serious, you have to lie.” Is “post-truth” also one of the legacies of the crisis?
Absolutely. The post-truth problem didn’t start with Trump. Post-truth is endemic to any system which is as shot through with fundamental contradictions as ours is. Keynes has an absolutely brilliant analytic of post-truth in the aftermath of World War I. This is an endemic problem in societies that are as conflictual and contradictory as ours.
As you’ve correctly identified, the austerity move is a post-truth politics. I think the entire management of the eurozone crisis is post-truth politics. How else do we describe the current analyses of the debt sustainability of Greece, which do their very best to hide the fact that their sustainability assumptions require Greece to conform to fiscal discipline through 2064 or something? That’s just crazy.
Q: You argue in the book that embracing this kind of post-truth approach to public discourse is what the governance of capitalism today demands. Can you explain?
That’s one of the ways in which we manage the tensions of globalization and democracy. Dani Rodrik postulates all of these fundamental problems, in which you can’t reconcile the expectation of democratic sovereignty with the constraints of an international economic system. One way to manage that tension is post-truth politics. It’s called ideology. It’s called false consciousness: You persuade people that the world is different from the way it actually is and that they do have autonomy in ways they don’t, or you persuade them that the bits of autonomy they do have, which are small, are important as opposed to the zones where they don’t have autonomy and can’t have it, which you discount or attribute to other forces. It’s not just Orbán and people like that who engage in that kind of politics. Most systems faced with real problems engage with some elements of that kind of shaping of the narrative so as to make the problems manageable.
For further discussion of the 2008 financial crisis, listen to this three-part series of the Capitalisn’t podcast about its causes and lessons:
Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.