What really went wrong in the 2008 financial crisis? >>>
“There is a striking similarity between the questions we ask about 1914 and 2008,” writes Adam Tooze. “How does a great moderation end? How do huge risks build up that are little understood and barely controllable? . . . How do the passions of popular politics shape elite decision-making? Is there any route to international and domestic order? Can we achieve perpetual stability and peace? Does law offer the answer? Or must we rely on the balance of terror and the judgment of technicians and generals?”
This, then, is a complex story, financially, economically and also politically. Yet some things are now clear. The crisis marked the end of the dominant consensus in favour of economic and financial liberalisation. It shifted political energy towards populist extremes, particularly towards the xenophobic right. It weakened the legitimacy of European integration. The world of the established high-income countries fell into flux. Anything now seems possible.
Furthermore, because the banking systems had become so huge and intertwined, this became, in the words of Ben Bernanke — Fed chairman throughout the worst days of the crisis and a noted academic expert — the “worst financial crisis in global history, including the Great Depression”. The fact that the people who had been running the system had so little notion of these risks inevitably destroyed their claim to competence and, for some, even probity.
Given the scale of the crisis, no alternative to a comprehensive state-backed rescue existed. And, given that this was a dollar-based financial system, it had to be led by the Americans. Moreover, because political pressure had already mobilised against fiscal policy action by as early as 2010, central banks, not elected representatives, had to take most of the needed action. But their policy actions, particularly “quantitative easing” — the buying of assets held by the private sector, especially government bonds — became noxious to those who viewed these actions as an unnatural distortion of markets, an unwarranted reduction in returns to savers, or an unjustified boost to the wealth of the already wealthy. Nevertheless, these actions were both appropriate and successful.
The scale and nature of the required response had significant political consequences. The public was enraged by the size of support for the banks and, even worse, by the payment of the bonuses apparently due to the bankers. This was made more infuriating by the fact that hundreds of millions of ordinary people suffered by losing their homes and jobs, or by being the victims of post-crisis fiscal austerity. Many were also enraged that so few senior individuals were charged. The trust that must exist in any democracy between elites and everybody else collapsed. With trust gone, conspiracy-mongers and political mountebanks had their day.
Perhaps most startlingly, conservative politicians in the US, the UK and Germany successfully reframed the crisis as the result of out-of-control fiscal policy rather than the product of an out-of-control financial sector. Thus, George Osborne, chancellor of the exchequer in the UK’s coalition government, shifted the blame for austerity on to alleged Labour profligacy. German politicians shifted the blame for the Greek mess from their banks on to Greek politicians. Transforming a financial crisis into a fiscal crisis confused cause with effect. Yet this political prestidigitation proved a brilliant coup. It diverted attention from the failure of the free-market finance they believed in to the costs of welfare states they disliked.
At the same time, the financial crisis really had left most countries permanently poorer than had been expected. People were in aggregate worse off. That misery did need to be shared out. The question always was: how.
What, finally, are the biggest results? One comes from Tooze’s remark that “the optimistic dogma under which democracy and markets were seen as necessary complements — the mantra of the aftermath of the cold war — was dead. In its place the crisis had put a more realistic awareness of the potential tensions between the two.” This is surely right.
Yet another of these big results is that power and politics are back. US power dealt with the crisis. German power shaped the eurozone’s response. Rightwing politics reimagined a financial crisis as a fiscal one. A similar politics also shifted the emphasis from the dangers of economic insecurity and inequality to the threat from immigration. The crisis has, alas, awoken the sleeping ogres of fear and hatred.
How, if at all, will liberal democracy survive the age of Trump, Brexit, Putin and Xi? That is the biggest question raised by this transformative decade.