Whose Recovery Was It?

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AP Photo/Chris O'Meara

Crashed: How a Decade of Financial Crises Changed the World

By Adam Tooze

Viking

This article appears in the Winter 2019 issue of The American Prospect magazine. Subscribe here.

In 2009, I was summoned to the Treasury Department by the men who were launching the recovery from the global financial crisis. At the time, I was a state banking commissioner and had my hands full managing the waves of mortgage foreclosures inundating Maryland communities. The purpose of this meeting was to hear the distant “provincial” concerns I was raising as a leader of state financial regulatory officials about the spreading crisis in local housing markets. I had some unfashionable and not-ready-for-the-policy-elite views about why the post-crisis economy wasn't improving and why household net worth was tumbling and destabilizing middle-class and working-class neighborhoods. My perspective focused on the gritty and corrupt dynamics of the American mortgage system, not the big-picture Washington narrative of global economic imbalances and the Chinese-American relationship.

At the Treasury that day, I argued for a so-called “look down” to the cities, towns, and neighborhoods way below the power centers of Wall Street and K Street, to see what was happening in the offices of mortgage brokers and real-estate appraisers, the households of suddenly unemployed people trying to pay bloated mortgages on houses that had lost half their value, and whole communities wiped out by predatory and discriminatory mortgages. Even in 2009, it was clear that the Treasury and Federal Reserve rescue strategies were responding first and foremost to the needs of Wall Street, where recovery of liquidity and capital would be the top order of business, and only secondarily to the deepening crises on Main Street, the side streets, and the back streets.

To understand the total inadequacy of the establishment response—not just how the immediate massive social and economic damage went unaddressed and became exacerbated, but how the handling of the global financial crisis actually reinforced the dangerously inegalitarian structure of our global economy—we have the gift of Adam Tooze's expansive, timely, and insightful treatise Crashed: How a Decade of Financial Crises Changed the World. And a treatise it is, clocking in at a dense but gripping 706 pages (including all the reach-for-that-magnifier footnotes).

The story is at once opaquely complex and dazzlingly simple. For economists, historians, and policy advocates, Crashedis a globally comprehensive, detail-rich, and riveting account of what happened and why. But for citizens who may be impatient with all the intricacies of the global financial meltdown—transatlantic financial linkages, the crises buffeting Greek society, the strategic positioning by the People's Bank of China, the roller-coaster ride of the Russian ruble and its effects on Putin's incursions into Crimea and Ukraine—I can cut to the chase: The financial system nearly collapsed, but we saved it by massive government intervention without changing its basic dynamics of inequality, instability, and license for speculative private finance.

Tooze's book leaves us with the inescapable conclusion that we need a new way. As devastating as the crisis was, the response by economic political elites around the world, while minimally satisfactory and competent from a short-term perspective, is almost more frightening because it left us massively weakened economically, with even sharper inequality and a stressed-out middle class, and politically even further adrift from viable strategies for inclusive democratic prosperity.

Tooze illuminates the central role of the so-called currency swap lines that the Fed used to prop up the teetering world economy. These currency swap lines were Federal Reserve loans extended to other countries' central banks in exchange for those banks' currencies to be repaid later with interest. By September 2010, total lending and repayment on swap facilities had logged in at a whopping and unprecedented $10 trillion. Tooze shrewdly uncovers the Federal Reserve's liquidity operations, showing how the Fed made itself the lender of last resort to the world.

Currency swap lines actually had been developed as a tool in the 1960s but were used sparingly and in decidedly lower amounts. It was not until the September 11 attacks that they were dusted off and tested more expansively. Then, in the run-up to the global financial crisis, as financial institutions in other countries confronted dollar shortages stemming from their need to repay other firms with greenbacks, the use of currency swap lines took off and the Fed became, with little fanfare and even less public comprehension, the lender of last resort to the planet.

Just as the currency swap lines acted as a powerful tool to extinguish the systemic risk that was about to sink significant portions of the world's financial sector, the Fed turned another powerful fire hose on the economy with its unprecedented and accelerating rounds of monetary policy accommodation through the use of large-scale assets purchases, using the disarming name “quantitative easing.” Over nearly a decade, QE1, QE2, and QE3 were continual confidence-enhancing injections of cash into the markets with no end dates in sight. The Federal Open Market Committee led the way, with infusions upwards of $4.4 trillion, followed by more liquidity from the European Central Bank and the Bank of Japan.

As Tooze explains for anyone who missed the point, these powerful tools—the currency swap lines, the funds that went to the so-called too-big-to-fail banks via the Troubled Asset Relief Program, the liberal use of liquidity facilities, and the successive injections of monetary accommodation via quantitative easing—had a discrete set of immediate beneficiaries. These instruments worked through the big banks, through their executives, and through the parts of the public that had invested in the stock market and could afford to keep their funds invested even during a prolonged downturn. The direct beneficiaries were obviously not the people who had lost their homes to foreclosure and their jobs to globalization and automation.

The Treasury's rhetoric of the day emphasized the need to “save the system,” which, it was assumed, would save the people along with it. The beneficiaries of the bailout, it was believed, would come to allocate credit on safe and affordable terms to households and businesses, and they would efficiently distinguish “avoidable” foreclosures from “unavoidable” ones. The theory was that mortgage servicers would be incentivized by profit to arrange prompt resells of the countless foreclosed homes that marred the American landscape with their overgrown yards, out-of-control mold, and broken pipes. A lot of communities are still waiting for the market to work its magic.

The contrast between the solicitous care shown the culpable financial sector and the negligence shown to the innocent homeowner was startling. I remember, as a Federal Reserve governor, going to New York in 2012 to speak to financiers and being thanked profusely by them for my work in “ending” the crisis. But the next day, I traveled to Cleveland and saw packs of howling dogs scavenging at a boarded-up factory and “cash for gold” vans parked in vacant KMart lots where the opioid crisis was already in full bloom. The “trickle-down” benefits of recovery seemed like a cruel joke in giant swaths of America, where a deep discontent set in in what became the breeding grounds for the Donald Trump campaign.

The question that hovers over Crashed is why the recovery strategies undertaken in the United States and abroad were so limited and selective in nature. Why was there so little in the policymaker’s toolbox to help households, especially those that had suffered the double whammy of a loss of a quality job and the loss of a home? To be sure, there were several well-intended policy incursions to assist homeowners—Remember HARP, HAMP, and other loan modification efforts?—but they were straitjacketed by draconian rules set up to ensure that “undeserving homeowners” would not benefit, a resolve wholly missing when it came to policies that benefited potentially undeserving banks and corporate executives. But right-wing ideology, never far from the surface of public debate, quickly found its bogeyman and asserted that “undeserving homeowners” should have known better than to be duped by their mortgage providers and should not be allowed to benefit from a reduction in the principal amount of their mortgages. When it came time to help the American people instead of the American financial system, the fire hose of financial aid had become an interval sprinkler timed to shut down as quickly as possible.

I saw the same effect when it came to unemployment insurance, which progressive policymakers proposed strengthening and coupling with meaningful job training and retraining. This idea was left on the drafting-room floor, like the idea that federal taxpayer injections of capital to the banks needed to be matched with concrete commitments by those banks to engage in direct lending to small businesses, communities, and consumers. Similarly, the Fed did nothing with the problem of America's $1.3 trillion (now $1.44 trillion) student loan debt, despite the fact that it had become a ball and chain for millions of young people trying to launch their careers, homes, and families. In short, under the unimaginative and obsolescent dogmas of the Washington Consensus, the benefits of the recovery went to some of the most culpable quarters and least-deserving people, and not to many of the Americans who most needed them. This was bad politics and bad economics, too; for inequality has itself become poised to be a critical drag on the economy.

The conventional verdict on the collapse, superbly challenged by Tooze, is that the Fed and the Treasury took aggressive and sweeping actions to address the crisis. And yes, the American taxpayer has been by and large repaid for the mountains of cash we put up for the bailout. But, for all their boldness, energy, and magnitude, these actions reinforced rather than reduced the dramatic disparities in wealth and income that have come to disfigure American democracy and drain our economy of strength.

Tooze invites his readers to think of economics and politics as intertwined fields of play. “The political in ‘political economy' demands to be taken seriously,” he writes, and he sees “political choice, ideology, and agency” as replete throughout this startling story. These lessons teach us to be wary of claims that there are inescapable economic imperatives outside of politics just as they teach the champions of democracy to be ready with independent economists, unbought political leaders, and comprehensive economic plans to address and, more importantly and more urgently, to prevent the next global financial crisis.