The Crash That Failed | by Robert Kuttner | The New York Review of Books - 0 views
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the financial collapse of 2008. The crash demonstrated the emptiness of the claim that markets could regulate themselves. It should have led to the disgrace of neoliberalism—the belief that unregulated markets produce and distribute goods and services more efficiently than regulated ones. Instead, the old order reasserted itself, and with calamitous consequences. Gross economic imbalances of power and wealth persisted.
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In the United States, the bipartisan financial elite escaped largely unscathed. Barack Obama, whose campaign benefited from the timing of the collapse, hired the architects of the Clinton-era deregulation who had created the conditions that led to the crisis. Far from breaking up the big banks or removing their executives, Obama’s team bailed them out.
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the economic security of most Americans dwindled, and the legitimacy of the system was called into question. One consequence has been the rise of the far right; another is Donald Trump.
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Germany insisted that the struggling countries had to practice austerity in order to restore the confidence of private financial markets. In a deep recession, even orthodox economists at the International Monetary Fund soon recognized that austerity was a perverse recipe for economic recovery.
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Europe, because of Germany’s worries that these policies would lead to inflation, had no way to extend credit to struggling nations or to raise money through the sale of bonds, which would have allowed the ECB to provide debt relief or to invest in public services.
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The political result was the same on both sides of the Atlantic—declining prospects for ordinary people, animus toward elites, and the rise of ultra-nationalism
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Not so in Europe. Parties such as the German Social Democratic Party, the British Labour Party, and the French Socialists disgraced themselves as co-sponsors of the neoliberal formula that brought down the economy.
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In his masterful narrative, the economic historian Adam Tooze achieves several things that no other single author has quite accomplished. Tooze has managed to explain a hugely complex global crisis in its multiple dimensions, and his book combines cogent analysis with a fascinating history of the political and economic particulars
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when the collapse came, it was “a financial crisis triggered by the humdrum market for American real estate.”
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the collapse reinforced the financial supremacy of Washington and New York. “Far from withering away,” he writes, “the Fed’s response gave an entirely new dimension to the global dollar.”
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When the entire structure of borrowed money collapsed, the losses more than wiped out all the capital of the banking system—not just in the US but in Europe, because of the intimate interconnection (and contagion) of American and European banks. Had the authorities just stood by, Tooze writes, the collapse would have been far more severe than the Great Depression:
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While insisting to Congress that the emergency response was mainly to shore up US finance, Bernanke turned the Fed into the world’s central bank. “Through so-called liquidity swap lines, the Fed licensed a hand-picked group of core central banks to issue dollar credits on demand,” Tooze writes. In other words, the Fed simply created enough dollars, running well into the trillions, to prevent the global economy from collapsing for lack of credit.
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Bernanke instigated government action on an unimagined scale to prop up a private system that supposedly did not need the state
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Using deposit guarantees, loans to banks, outright capital transfers, and purchases of nearly worthless securities, the Fed and the Treasury recapitalized the banking system. To camouflage what was at work, officials invented unlimited credit pipelines with disarmingly technical names.
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The blandly named policy of quantitative easing, which drove interest rates down to almost zero, was a euphemism for Fed purchases of immense quantities of private and government securities.
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The crisis, Tooze writes, “was a devastating blow to the complacent belief in the great moderation, a shocking overturning of the prevailing laissez-faire ideology.” And yet the ideology prevailed
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In a reversal of New Deal priorities, most of the relief went to the biggest banks, while smaller banks and homeowners were allowed to go under
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Banks were permitted to invent complex provisional loan “modifications” with opaque terms that favored lenders, rather than using their government subsidies to provide refinancing to reduce homeowner debts
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How did a nominally center-left administration, elected during a financial crisis caused by right-wing economic ideology and policy, end up in this situation?
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Turning to Europe, Tooze explores the fatal combination of Germany’s demands for austerity with the structural weakness of the ECB and the vulnerability of the euro.
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Portugal or Greece now enjoyed interest rates that were only slightly higher than Germany’s, and markets failed to take account of the risk of default, which was more serious than that of devaluation.
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instead of treating the Greek situation as a crisis to be contained and helping a genuinely reformist new government find its footing, Brussels and Berlin treated Greece as an object lesson in profligacy and an opportunity to insist on punitive terms for financial aid
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A central player in this tragedy was the European Central Bank. Tooze does a fine job of explaining the delicate dance between the bank’s leaders and its real masters in Germany. Since Germany opposed continent-wide recovery spending, the bank could only pursue monetary policy. The model was the Fed. Yet while the Fed has a congressional “dual mandate” to target both price stability and high employment, the ECB’s charter allowed for price stability only
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The ECB, with the consent of the Germans, came up with one of those bland-sounding names, Outright Monetary Transactions, for its direct purchases of government bonds. But the program, at the insistence of the Germans, was restricted to nations in compliance with Merkel’s rigid fiscal terms, which limited national deficits and debts. In other words, the money could not go to the very nations where it was needed most, since the hardest-hit countries had to borrow heavily to get themselves out of the recession
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Reading Tooze, you realize that it’s a miracle that the EU and the euro survived at all—but they did so at terrible human cost.
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the ideal of liberalized trade, and the use of trade treaties to promote deregulation or privatized regulation of finance, is a major element of the story of how neoliberal hegemony promoted the eventual collapse. But except for a passing reference, trade and globalized deregulation get little mention here.
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he has almost nothing to say about Janet Yellen. Her nomination as Fed chair in 2013 to succeed Bernanke was an epochal event and an improbable defeat for the proponents of austerity, deregulation, and bank bailouts who influenced Obama’s policymaking. Yellen, a left-liberal economist specializing in labor markets, was the only left-of-center Fed chair other then FDR’s chairman Marriner Eccles. She also believed in tough regulation of banks. The extension of quantitative easing well beyond its intended end was substantially due to Yellen’s concern about wages and employment, and not just price stability, since low interest rates can also help promote recovery.
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Tooze ends the book with a short chapter called “The Shape of Things to Come,” mainly on the ascent of China, the one nation that avoided all the shibboleths of economic and political liberalism, though it also, of course, does not have a political democracy.