The Economist

The EconomistAugust 4th 2018 67

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1

W

HEN asked how he went bankrupt

one of Ernest Hemingway’s charac-

ters replies: “Two ways. Gradually and

then suddenly.” That’s rather how the

crash was for the world. There was an ex-

tended build-up with cracks in the system

emerging during the course of 2007. Then

there was the sudden shock when Leh-

man Brothers collapsed in September

2008 and the global banking system tee-

tered on the edge. The tenth anniversary of

that frightening moment approaches.

There were some impressive takes from

authors in the immediate aftermath of the

turmoil such as Andrew Ross Sorkin’s

“Too Big to Fail” and Michael Lewis’s “The

Big Short” which was made into an Oscar-

winning film. “Inside Job” a documentary

was a scathing attack on the culpability of

the finance industry for the crisis. And a

new adaptation of a three-part play about

the history of Lehman has just opened at

the National Theatre in London.

Adam Tooze a historian noted for his

works on the interwar period is aiming to

be less entertaining than authoritative: he

takes on the financial and economic his-

tory of the last decade in a monumental

tome of nearly 700 pages. Yet with the

events it covers so recent and so dramatic

the book is as much reportage as historical

analysis.

Four big themes emerge from Mr

Tooze’s account of the post-2008 era. The

rope’s banks also had balance sheets

stuffed with dodgy loans. Meanwhile in

America the Bush administration got its

crisis measures through Congress only

with support from Democrats but biparti-

sanship stopped the moment Barack

Obama took office.

Perhaps the most dangerous failure

though lies in the unwillingness to deal

with problems which lie at the heart of the

system and persist today. The finance sec-

tor which caused the crisis looks remark-

ably unaltered. Banks may now hold more

capital and their bonuses are now tied to

longer-term performance. But bonuses are

still very high; the average payout on Wall

Street last year was $184220 just shy of the

2006 record. Scandals over banks’ bad be-

haviour in areas such as price-fixing mon-

ey laundering and mis-selling continue to

come to light.

Anyone who fell asleep in 2006 and

woke up to look at the financial markets to-

day would have no idea there had ever

been a crisis. Share prices in America have

repeatedly hit new highs and valuations

have been surpassed only in the bubble

eras of 1929 and 2000. The interest rates

paid by governments and corporations to

borrow money are very low by historical

standards. In global terms the amount of

debt relative to GDPis about as high as it

was before the crisis. As the author points

out it is far from clear that governments

will be willing to take decisive action

when the next crisis hits.

The debate about macroeconomic poli-

cy goes on in much the same way as it al-

ways has. Those who believe that govern-

ments can afford to borrow and spend

more are still arguing with those who

think that debt is already too high. Those

who want central-bank policies to return

to normal (higher rates no more purchases

first was the immediate post-crisis re-

sponse in which the banks were rescued

and both the monetary and fiscal taps

were loosened. The second was the euro-

zone crisis which hit Greece and Ireland

hardest but also affected Portugal Italy

and Spain. The third was the shift in the de-

veloped world after 2010 to a more austere

fiscal policy. The fourth was the rise of pop-

ulist politics in Europe and America.

Mr Tooze sides with most economists in

taking the view thatthe immediate post-

crisis response was necessary but unfortu-

nate in that executives in the banking in-

dustry paid too low a price for their folly;

that Europe was slow and narrow-minded

in dealing with the peripheral countries;

and that the switch to austerity was a mis-

take. Taken together the backlash against

bankers frustration with EUgovernments

and the impact ofausterity led to the rise

of populism the election of Donald Trump

and the Brexit vote.

Abig part of the problem as the author

points out was a failure of political leader-

ship. European politicians initially dis-

missed the crisis as an American problem

generated on Wall Street even though Eu-

Ten years on

The last crash and the next

A monumental account of the crisis and its aftermath

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Crashed: How a Decade of Financial

Crises Changed the World.By Adam

Tooze. Viking; 720 pages; $35. Allen Lane;

£30