The enduring shockwaves of the Global Financial Crisis

‘Crashed: How a Decade of Financial Crises Changed the World’ by economic historian Adam Tooze describes the roots of the 2008 Global Financial Crisis (GFC) and its ramifications for global politics and economics. Tooze's central thesis asserts that the American economy's “twin deficits” at the onset of the crisis—private enterprise bankruptcy and substantial systematic budget deficits—foreshadowed the dual nature of the crisis itself. This duality manifested itself in the chronic inability of companies, particularly banks, to access dollar funding, and the emergence of sovereign debt crises within the Eurozone, epitomised by Greece. The author states that the GFC ushered in an era of crucial large-scale central interventions to sustain both corporations and nation-states. The decision by central banks such as the Federal Reserve or the European Central Bank to acquire sovereign debt on a massive scale—quantitative easing—aimed to salvage the banking system. This approach, however, was controversial, as many perceived the banking system as responsible for the crisis. Such decisions catalysed both left- and right-wing populist movements, contributing to events such as Trump's 2016 election and the escalation of tensions within the European Union, culminating in Brexit. Finally, Tooze emphasises the complex interaction between political factors and economic decisions, stressing that voter-preferred options may not always line up with the most economically sensible choices. The book delves into two key themes: the mortgage and banking crises in the United States and the European experience centred around nation-state deficits.

The 2008 global financial crisis shattered the perception of unbridled global prosperity that had persisted since the Cold War's end and the expansion of capitalism. Rooted in risky banking practises reliant on continuous funding access and market trust in asset values, the crisis spotlighted subprime mortgages—loans extended to acquire homes without due consideration of repayment capacity and the asset's value—as a symbol of recklessness. Tooze consistently describes several banking practises as presenting a systemic risk, but it is difficult to say whether this was an inherent feature of these products or whether his assessment results from the benefit of hindsight, thus diminishing the credibility of his critique. In response to the crisis, the Federal Reserve adopted an unprecedented role that would further expand the role of the dollar in the international financial system. For banks burdened by debt, the Fed would offer access to dollars at a meagre cost. In so doing, the Fed was no longer a central bank printing the dollar; it was the dollar's lender of last resort.

The crisis also resonated within the Eurozone, a realm of countries under the European Central Bank's jurisdiction and united by the euro. The interconnectedness of global investments resulted in European banks holding American mortgages and debt, and vice versa. The consequent global economic downturn translated into investment contractions across regions, affecting the ability of nations like the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) to repay their debts. The troika—consisting of the IMF, ECB, and World Bank—extended bailouts, thereby exposing the fragility of Eurozone nations' finances. Germany pushed for stricter fiscal responsibility within the Eurozone, revealing political intervention in monetary policy decisions, which the author consistently criticises. Meanwhile, the EU's handling of the crisis accentuated the United Kingdom's discomfort within the union, ultimately leading to Brexit.

The author argues that Brexit and Trump's election in 2016 can be traced back to the GFC. He claims that social movements expressing grievances over persistent cuts to social spending and the reduction of national deficits were early expressions of populist tendencies. That elections shunning establishment policies occurred both in the United States and in European nations is symptomatic of the extent to which the financial crisis affected democratic politics. The United States implemented stimulus packages, while European nations, including the United Kingdom, reduced public spending through austerity measures, but both faced a populist backlash. It is here that ‘Crashed’ is least effective as a piece of economic analysis; the author openly advocates for the American response to the crisis and seems shocked when he realises that his preferred economic option failed to prevent rising discontent within the American electorate. What he fails to note is that the transition towards higher-skill economies was unstoppable and would leave a portion of the population unequipped to adapt to the changing economy and wishing for radical change.

However, Tooze finds his strength when discussing the relationship between economics and political developments. His ability to place political events in their economic context is most notable in the chapters regarding the tension between Russia and Georgia in 2008 and then Ukraine in 2014. Tooze carefully weaves into the story of the GFC Russian fears of losing its traditional sphere of influence and its monetary strength built upon ample foreign currency reserves funded by extensive oil sales. He argues that the 2008 general commitment to welcome Georgia and Ukraine into the NATO fold weeks before the start of the financial crisis was, though many failed to realise it at the time, of great significance. As such, it is no surprise that in 2019, when the book was published, Tooze was already stressing the importance of Russian oil and gas prices and the possibility of conflict in Ukraine.

Despite his clear-eyed analysis of foreign policy regarding Russia, Tooze's viewpoints are, on occasion, simplistic and clouded by ideology. He openly describes himself as a Left-liberal historian and pro-European, and he struggles to engage with some of the Right’s core arguments, such as the importance of balanced budgets or nationalism's pull. His critiques are caricaturesque, with a tendency to dismiss the push towards austerity in the Eurozone and closely associating nationalism with populism. From the outset, the economic argument for austerity is disregarded without considering that these nations' debt burdens were unsustainable and that the Obama route, closely aligned with Keynesian economics, did not result in much more significant economic growth than austerity. A similar phenomenon occurs when discussing Brexit and the Trump presidency, though this could be a product of the book being published in 2019, just three years into these events.

What is clear, however, is that the 2008 financial crisis had severe social, economic, and political consequences. It continues to reverberate in the form of Brexit, the election of anti-establishment figures to high office, or struggling public services. However, reforms in the banking sector and international cooperation to address economic challenges demonstrate that some lessons have been learned. Steps taken to enhance stress tests and resilience mechanisms for financial institutions, the proposal to create a global corporate wealth tax, and greater debate on the international role of the dollar are direct results of 2008. While the full extent of the crisis's impact remains to be seen and it is unknown whether these changes will be permanent, it is clear that the spectre of 2008 continues to shape global economic and political policy.