In I.O.U., author John Lanchester explains how the 2008 economic collapse occurred, and critically, why nobody saw it coming. With an analysis that delves into the workings of our global financial system, the book shows how greed, confusion and irresponsibility brought the economy to its knees.
What caused the global financial crash in 2008?
Although things like poor government regulations and financial greed played a role, to truly understand why the crash happened, we need to look at the bigger picture.
The excesses of our modern financial system were born from a certain political climate that emerged after the fall of the Berlin Wall in 1989.
Let’s look at the climate before the fall, to better understand what came afterward.
During the Cold War, the United States and the Soviet Union represented two competing political and economic systems, capitalism and communism, respectively. And as it happens, the capitalist West actually benefitted from its conflict with the communist world.
That’s because the United States and its allies were essentially competing in an ideological beauty contest. Capitalists and communists alike strove to persuade the world that their system produced a better way of life.
Thus, capitalist systems supported by democratic governments did everything possible to show the advantages of their side. This led to unprecedented benefits for the middle and lower classes (groups not naturally favored by the free market), such as free education, steadily growing incomes, a strong welfare system and so on.
But when the Berlin Wall fell, the communist system fell too and the beauty contest came to an abrupt end. And thus victorious capitalists no longer had to act as if they cared for the poor and dispossessed.
In other words, there was no longer a political incentive to limit inequality.
And so, the wealth of the people at the very top – the 0.1 percent – exploded. Since 1980, the average income for this group has jumped by more than 700 percent. And meanwhile, the income of everyone else stayed more or less the same.