In the years leading up to the 2008 financial crash, an influential sub-section of the American political class became convinced that a major economic crisis was on its way. Serious Washington players like Robert Rubin, who served as head of Bill Clinton’s National Economic Council from 1993 to 1995, Peter Orszag, another heavyweight Clintonite economist, and Larry Summers, who completed a brief stint as Treasury Secretary between 1999 and 2001, all raised the alarm.
The crisis would have two causes, they claimed: the federal government’s mounting budget shortfall (the Bush administration was pouring billions of tax dollars into the War on Terror at the time) and America’s trade imbalance with China, which had grown exponentially over the past decade or so. These ‘twin deficits’, Rubin and Orszag argued in a 2004 paper, had the potential to trigger a ‘fundamental shift in market expectations and a related loss of confidence both at home and abroad’. If they weren’t addressed soon, ideally through a combination of spending cuts and reduced domestic demand for cheap Chinese goods and money, the world’s largest economy was destined for ‘fiscal or financial disarray’.
In the broadest sense possible, of course, this pessimistic analysis was ultimately vindicated. On 15 September 2008, Lehman Brothers – the fourth largest investment bank in the United States – filed for bank-ruptcy. After that, America spiralled into a deep and punishing recession, dragging the rest of the world along in its wake. But on the specifics, the experts were wrong: it wasn’t government indebtedness or Chinese trade policy that initiated the collapse. It was Wall Street. In fact, it was the vast network of North Atlantic finance that a generation of elite US policymakers – Rubin, Orszag and Summers included – had aggressively lobbied to deregulate since at least the mid-1980s.
This strange and depressing parable is relayed by the British academic Adam Tooze in his superb and wide-ranging new history of the period, Crashed: How a Decade of Financial Crises Changed the World. Before 2008, the economic consensus in Western countries was so overwhelming that our political leaders were simply incapable of perceiving its flaws. As a result, when the warning signs of a real crash began to emerge – in the form of skyrocketing house prices, rising levels of private debt, flatlining wages, and a dangerously inflated banking sector – they went blissfully unseen.
If anything, the myopia was more acute in Britain than in the States. ‘All told, the City of London was home to 250 foreign banks and bank branches, twice as many as operated out of New York,’ Tooze writes. ‘Of an annual turnover in interest rate derivatives in excess of $600 trillion, London claimed 43 per cent to New York’s 24 per cent.’ Tooze traces the origins of the 2008 crisis back to the rise of the US sub-prime mortgage industry in the 1970s, the emergence of the Anglo-American financial nexus in the 1980s, and the open door policy that successive governments in London and Washington extended to the banking sector throughout the 1990s and early 2000s.
The bond between Wall Street and the top of the Democratic Party was particularly tight. Before joining the Clinton administration, Robert Rubin was co-chair of Goldman Sachs. After completing his controversial tenure as Treasury Secretary under Barack Obama, Timothy Geithner became president of the private equity firm Warburg Pincus. Geithner’s successor, Jack Lew, was the chief operating officer at Citigroup from 2006 to 2008. And Larry Summers is now a managing partner at a New York hedge fund. But Tooze doesn’t blame any single administration for the ‘40-year deregulatory push’ that made the catastrophe possible. Instead, he holds the entire transatlantic political establishment to account. ‘By the early ’80s both Britain and the US had abolished all restrictions on capital movements and this was followed in October 1986 by Thatcher’s ‘Big Bang’ deregulation. The UK’s liberalisation not only freed up UK markets but acted as a crowbar to dislodge regulations worldwide.’
One of the central themes of Crashed is the increasingly strained relationship between the structures of Western democracy and the demands of the free market. Tooze believes this relationship reached breaking-point in Europe in the years after the crash. The meltdown may have originated in London and New York, but the integrated nature of the global financial system (coupled with Europe’s own ‘deregulatory push’) ensured that large European institutions like Deutsche Bank and Allied Irish were every bit as exposed as their British and American counterparts. So when these banks began to reel, so too did the European economy.
The key difference, however, is that while Britain and America reacted to the crisis with comprehensive, coordinated stimulus packages, the European response was hesitant and incoherent. The Germans, especially, were reluctant to mutualize eurozone debt and insisted instead that individual member states confront the deficit crisis on their own terms, with round after round of lacerating fiscal cutbacks. Any government that resisted Berlin’s austerity diktats was either sanctioned and brought to heel, like SYRIZA in Greece, or replaced, like the Berlusconi administration in Italy, with a more compliant and technocratic alternative. ‘We do regime change better than the Americans,’ one German official is quoted as saying. The result, inevitably, was deepening public hostility towards an international political and economic order that seemed utterly indifferent to basic democratic norms.
Tooze is not optimistic about how the stand-off between global capital and national sovereignty is likely to end. Traditionally, the role of mainstream political parties has been to mediate between the two. But in the age of populist extremes, the ideological centre ground is weak and the electorate’s appetite for compromise has all but vanished. This, Tooze says, raises some menacing historic parallels: ‘There is a striking similarity between the questions we ask about 1914 and 2008. How does a great moderation end? Did we sleepwalk into crisis, or were there dark forces pushing? How do the passions of popular politics shape elite decision making? These are the questions that haunt the great crises of modernity.’
As it happens, these were also the questions that haunted the great crises of pre-capitalist modernity. In Adam Smith: What He Thought and Why It Matters, the Conservative MP and Parliamentary Under Secretary of State for Transport Jesse Norman draws a detailed and engaging profile of the Scottish philosopher’s life and intellectual legacy. Norman is keen to dispel the image of Smith as the high-priest of neoliberal capitalism – a caricature he attributes to the overzealous disciples of free-market economics that emerged out of Chicago University in the 1940s and ’50s and went on to shape American monetary policy at the highest levels of government.
Ironically, in 2005, Gordon Brown invited Alan Greenspan, then chairman of the US Federal Reserve, to deliver a lecture on Smith in Kirkcaldy. Greenspan didn’t study in Chicago but was a dedicated acolyte of the Chicago School and rigorously applied its libertarian nostrums throughout his 18-year tenure at the Fed. In late 2008, as the American financial system was imploding, Greenspan admitted that he had been ‘partially wrong’ about his economic doctrine. ‘I have found a flaw,’ he said. ‘I don’t know how significant or permanent it is. But I have been very distressed by that fact.’
According to Norman, Smith is best understood as a profoundly moral thinker who believed that free trade and open markets were the key to shared prosperity and social cohesion. Smith’s Presbyterian sensibilities, Norman argues, would not have sat well with the turbocharged individualism of neoclassical economics or bonus-driven excesses of the modern financial sector. Norman points out that Smith’s approach to economic development was shaped by another large-scale financial disaster. In 1772, Douglas, Heron, & Co. – or Ayr Bank, as it was more widely known – collapsed when the Scottish economy entered a sharp recession. In the preceding years, the firm had over-expanded by providing cheap lines of credit to Scotland’s growing agricultural sector and other ‘favoured clients’. When the downturn hit, liquidity dried up and Ayr was left with £660,000 worth of debt – a massive sum in those days. In total, just four Scottish private banks survived the slump, leaving the nascent Scottish financial industry in a broken state.
In The Wealth of Nations, Smith – whose friend and former pupil the Duke of Buccleuch was a partner in Ayr Bank – identifies the dangers of allowing finance to assume too prominent a role in the economy, particularly at the expense of more tangible forms of growth and production: ‘The commerce and industry of the country cannot be altogether so secure, when they are thus… suspended upon the Daedalian wings of paper money, as when they travel upon the solid ground of gold and silver.’
For Norman, this is evidence that Smith viewed the ‘Ayr Bank debacle’ as indicative of the risks associated with speculative lending and a hyper-competitive banking industry. Even at such an early stage of capitalist development, Smith grasped the ‘economic logic of a financial bubble of the way in which social and political factors can quickly turn a smaller problem into a larger one, and, when the money ran out, of [the bubble’s] ultimately disastrous consequences.’
It’s tempting to conclude from Norman’s account that Smith would have advocated tighter supervision of global market forces than our current political leadership seems willing to accept. And no doubt he would have been appalled by the catastrophic laissez-faire approach to international finance that prevailed among North Atlantic policy elites prior to the 2008 crash. But he might have been less inclined to agree that capitalism itself had the potential radically to undermine our collective democratic interests. Yet a decade on from the financial crisis, that is exactly what has happened. Under Donald Trump, the modest set of regulations imposed on Wall Street by Barack Obama have been cast aside. Many of the banks implicated in the 2008 crash are bigger today than they were ten years ago. House prices remain prohibitively high. Rates of consumer debt have breached their pre-crisis levels. And a growing number of economists expect another financial crisis to materialize at some point very soon. When it does, at least we can all be absolutely sure of one thing: the technocrats are not going to save us. They won’t even see it coming.