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Crashed

How a Decade of Financial Crises Changed the World

By Adam Tooze
16-minute read
Audio available
Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Crashed (2018) unpacks the metaphorical seismograph to take the measure of an economic earthquake whose tremors can still be felt today – the 2008 financial crisis. Written with an eye to the global effects of what’s now known as the “Great Recession,” Adam Tooze traces the crash’s shockwaves from their epicenter in the American financial markets to their conclusions in Crimea, London, Athens and other geopolitical hotspots.

  • Economists, policymakers and anyone in financial trading
  • History buffs fascinated by the links between economics and politics
  • Disgruntled citizens wondering how politicians and bankers landed us in such a mess

British historian Adam Tooze is a professor and the director of the European Institute at Columbia University, New York. His previous books include the Wolfson History Prize-winning The Wages of Destruction (2006), a study of Nazi Germany’s economic policies, and The Great Deluge (2014), an analysis of the Great War and the creation of a new international order.

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Crashed

How a Decade of Financial Crises Changed the World

By Adam Tooze
  • Read in 16 minutes
  • Audio & text available
  • Contains 10 key ideas
Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze
Synopsis

Crashed (2018) unpacks the metaphorical seismograph to take the measure of an economic earthquake whose tremors can still be felt today – the 2008 financial crisis. Written with an eye to the global effects of what’s now known as the “Great Recession,” Adam Tooze traces the crash’s shockwaves from their epicenter in the American financial markets to their conclusions in Crimea, London, Athens and other geopolitical hotspots.

Key idea 1 of 10

The mortgage industry in the US was a house of cards waiting to collapse.

Crises explode in a flash, but they usually have long, slow-burning fuses. The 2008 crash was no different. The financial dynamite that ripped apart the global banking system that year had been primed way back in the 1970s. That’s when US lending markets were first deregulated, making them both hugely lucrative and incredibly risky.

Between 1996 and 2006, something else happened – US house prices almost doubled, while household wealth surged by $6.5 trillion as Americans cashed in on their properties. Demand for houses was sky-high. That’s when money lenders made the fateful decision to get in on the action and make it easier than ever before to get a mortgage.

Borrowers previously deemed too likely to default on their repayments jumped at the opportunity to finally buy their own homes. The high-risk loans they were offered became known by a name that’s now notorious – “subprime” mortgages.

So, why was anyone willing to take this risk? Well, that’s where securitization came in. That basically meant bundling huge numbers of mortgages together and selling shares in these “bundles.” In theory, that should have spread investors’ risk if borrowers ended up defaulting. As long as more people were servicing their loans than weren’t, the folks buying up the bundles would be fine.

But that’s not how it panned out. In 2008, the American housing bubble burst. Homeowners didn’t just default on their loans, however. The value of their properties – the collateral underpinning the whole system – also plummeted! That created the perfect storm. Lenders were now repossessing houses worth a whole lot less than the mortgages on them. Unsurprisingly, shifting these properties was a tall order, and the mortgages themselves became worth little more than the paper on which they were printed.

Banks that had heavily invested in subprime bundles now found themselves on the hook. On September 15, 2008, the investment bank Lehman Brothers became the first domino to fall. It’s not hard to see why: a shocking two-thirds of its $133 billion worth of securities were in subprime mortgages!

The irony of it all? The financial industry was warned that taking too many risks would end in tears back in August 2005, when the Indian economist Raghuram Rajan addressed a gathering of top economic policymakers in Wyoming. The title of his presentation was “Has Financial Development Made the World Riskier?” Needless to say, Rajan’s warning fell on deaf ears.

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