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Name: Crashed
Rating: 4.4 (109 reviews)
Author: Adam Tooze

Adam Tooze

How a Decade of Financial Crises Changed the World

4.4 (109 ratings)

29 mins

What is Crashed about?

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.

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Crashed
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What’s in it for me? A crash course on the 2008 financial crisis.

The end of the Cold War ushered in a period of consensus in Western societies. Old political divisions between left and right were replaced by a shared emphasis on letting markets do their thing.

That consensus was smashed in 2008 as the global financial crisis threatened to tank the global economy. Politics was back. Republicans and Democrats wrangled over the details of the largest bailout deal in American history, and European governments watched on as a banking crash morphed into a political crisis.

These upheavals, Adam Tooze argues, can be traced back to the 2008 financial crisis. All in all, it’s been the greatest period of turmoil to have rocked the Western world in 30 years. So where does that leave us – is there a path back to economic and political stability, or will we be locked into our current predicament for the foreseeable future?

The answers to those questions, Tooze argues, depend on getting the history of the crisis right. And that’s just what these blinks set out to do.

Along the way, you’ll learn

Why bankers speculated on the high-risk mortgages that first triggered the 2008 crisis;
How policymakers responded, what they got right and what they messed up; and
Why the political center has lost so much ground in the decade since the crash.

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.

The European financial crisis was a direct consequence of the US crash.

As the crisis began to unfold, it became clear that European banks were in deep on some of the American financial sector’s riskiest lending practices. Not one to look on from the sidelines, the European banking industry had thrown itself into the US housing boom with gleeful abandon. If the banks didn’t have their own cash, they simply borrowed it from Wall Street lenders.

Huge sums of European money soon ended up in American mortgage securities. By 2008, a full quarter of all securitized US mortgages were held by foreign banks – most of them European. Meanwhile, European banks held 29 percent of high-risk securities. The British bank HSBC alone pumped a cool $70 billion into mortgages in the US before 2005.

The Eurozone failed to emulate the successful response of the US.

Global financial markets couldn’t handle the 2008 housing crash. Soon enough, the whole system was imploding. By the end of the year, trade between the world’s wealthiest countries had fallen from $17 trillion to just over $1.5 trillion – the largest drop since the Great Depression. Over the winter starting that year, around 800,000 Americans lost their jobs every month.

The US government didn’t hang around to find out how much worse things could get. The Federal Reserve nationalized large parts of the mortgage finance system and launched a program of painful but increasingly effective quantitative easing. That’s essentially a policy of printing dollars and using them to buy up mortgage-backed securities in order to reassure anxious investors. All in all, the Reserve injected $1.85 trillion into the cash-starved banking system.

The lack of European unity meant that smaller countries couldn’t cope with the consequences of the 2008 crash.

With major European leaders like Merkel unwilling to sacrifice political capital and extend debt relief to smaller members of the Eurozone, states like Greece and Ireland soon found themselves in over their heads.

It’s easy to see why. Take Ireland, a nation just half the size of New York City. Its leading banks had racked up debts worth more than 700 times as much as the country’s total GDP! As a bank run became more and more likely, the government stepped in and assured creditors that it would guarantee the debt of Ireland’s six largest banks. Keeping that promise was of course impossible, and attempting to do so bankrupted the state.

Russia exploited the economic vulnerability of the former Eastern Bloc, pitting it against the West.

The recession didn’t just affect the Eurozone – it also spread into the former Eastern Bloc. Economic upheaval led to the reemergence of old tensions – above all in Ukraine – as Russia and the West competed for influence.

By the 2000s, the economies of ex-Eastern Bloc countries like Poland, Latvia and Estonia were heavily reliant on foreign investment. Take carmaking, for example. In the 1990s, 15 percent of European motor vehicle production was based in Eastern Europe, but 90 percent of the industry was foreign-owned. Caught in the middle of the historic rivalry between Russia and the West, these countries had to choose which side to draw that investment from: NATO in the West or the Russian-led Eurasian Customs Union.

London lost its status as a global trading hub after the crash.

The aftershock of the global crash was also felt in one of the EU’s largest non-Eurozone members: the UK. Its tremors undermined the foundations of London’s financial sector and changed the face of the country, possibly forever.

But before explaining that, let’s look at how London became the world’s number one financial hub in the first place. Between 1944 and 1971, the Bretton Woods Agreement regulated trading relationships between 44 countries. The system aimed to promote growth, simplify trade rules and reduce economic volatility, and one of its most essential parts concerned currency conversion.

The Brexit referendum was initially a way of forcing the EU to protect London’s status as an offshore hub.

With Brexit negotiations proving such a headache and so many gloomy forecasts about what’ll happen once they’re over, plenty of people have been asking themselves why the UK ever decided to leave the EU.

The answer has two facets. Firstly, there’s a long-standing tradition of Euroscepticism, both in the country as a whole and within the Conservative party in particular. There’s also a widespread worry that the EU will undermine London’s status as a global financial hub.

Angry American voters abandoned the political center as a result of the financial crash.

The legacy of the crash of 2008 was just as divisive on the other side of the Atlantic. The main sticking point? A growing sense among the recession’s victims that the people who caused the crisis didn’t just get off scot-free – they were actually rewarded.

In 2008, $18.4 billion in bonuses were paid out by Wall Street. Some of the most notorious executives in the business were among those cashing cheques that year.

Anger at the unequal division of pain and profit in the post-crash US spread to the ballot box.

Mounting resentment against the “establishment” finally boiled over in the 2016 US presidential election. Why did it take so long for alienated voters to vent their frustrations? Well, the 2012 elections hadn’t provided much of an outlet for disaffected Americans.

Obama had a few choice words to say about Wall Street bonuses back in 2009, but he’d always made it clear that his priority was to prop up rather than punish failing banks. That’s hardly surprising – his administration was packed with people like Larry Summers – the senior government economist and Wall Street alumni who’d dismissed Rajan’s warning before the crash.

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Best quote from Crashed

Lets hope we are all wealthy and retired by the time this house of cards falters. – Leaked 2006 email from one mortgage rating expert to another

—Adam Tooze

About the Author

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.

Who should read Crashed?

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

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