The World in Crisis
Columbia history professor Adam Tooze,
an authority on the inter-war years, has offered up an authoritative history of
the financial crises and their aftermath that have beset the world since 2008.
He integrates economics, the plumbing of the interbank financial system and the
politics of the major players in how and why the financial crisis of 2008
developed and the course of the very uneven recovery that followed. I must note
that Tooze has some very clear biases in that he views the history through a
social democratic prism and is very critical of the congressional Republican
caucus and the go slow policies of the European Central Bank under Trichet. To
him the banks got bailed out while millions of people suffered as collateral
damage from a crisis that was largely made by the financial system. His view
may very well be correct, but many readers might differ. Simply put, to save
the economy policy makers had to stop the bleeding.
He starts off with the hot topic of
2005; the need for fiscal consolidation in the United States. Aside from a few
dissidents, most economists saw the need for the U.S. to close its fiscal
deficit and did not see the structural crisis that was developing underneath
them. Although he does mention Hyman Minsky a few times in the book, he leaves
out Minsky’s most important insight that “stability leads to instability” as
market participants are lulled into a false sense of security. It therefore was
against the backdrop of the “great moderation” that the crisis began. And it was the seemingly calm environment that
lulled all too many regulators to sleep.
The underbelly of the financial system
was and still is in many respects is the wholesale funding system where too
many banks are largely funded in repo and commercial paper markets. This
mismatch was exacerbated by the use of asset-backed commercial paper to fund
long term mortgage securities. It was problems in that market that triggered
the crisis in August 2007.
The crisis explodes when Lehman Brothers
files for bankruptcy in September 2008. In Tooze’s view the decision to let
Lehman fail was political, not economic. After that the gates of hell are
opened causing the Bush Administration and the Federal Reserve to ask for $750
billion dollar TARP bailout of the major banks. It was in the Congressional fight
over this appropriation where Tooze believes the split in the Republican Party
between the business conservative and social populist wing hardens. We are
living with that through this day. The TARP program passes with Democratic
votes. Tooze also notes that there was great continuity between the Bush and
early Obama policies with respect to the banks and auto bailout. Recall that in
late 2008 and early 2009 nationalization of the banks was on the table. Tooze
also correctly notes that the major beneficiary of the TARP program was
Citicorp, the most exposed U.S. bank to the wholesale funding system.
Concurrent with TARP the Bernanke Fed
embarks on its first quantitative easing program where it buys up not only
treasuries, but mortgage backed securities as well. It was with the latter Europe’s
banks were bailed out. Half of the first QE went to bail out Europe’s troubled banks.
When combined the dollar swap lines with QE, Europe’s central banks essentially
became branches of the Fed. Now here is a problem. Where in the Federal Reserve
Act does it say that the Fed is the central bank to the world? To some it maybe
a stretch.
Tooze applauds Obama’s stimulus policy
but rightly says it was too small. There should have been more infrastructure
in it. To my view there could have been more infrastructure if only Obama was
willing to deal with the Republicans by offering to waive environmental reviews
and prevailing wage rules. He never tried for fear of offending his labor and
environmental constituencies. Tooze also gives great credit to China with it
all out monetary and fiscal policies. That triggered a revival in the energy
and natural resource economies of Australia and Brazil thereby helping global
recovery.
He then turns to the slow responses in
Europe and the political wrangling over the tragedy that was to befall Greece.
It came down to the power of Angela Merkel and her unwillingness to have the
frugal German taxpayer subsidize the profligate Greeks. As they say “all politics
is local”. The logjam in Europe doesn’t really break until Mario Draghi makes an
off-the-cuff remark at a London speech in July 2012 by saying the ECB will do “whatever
it takes” to engender European recovery.
As a byproduct of bailing out the banks and failing to directly
help the average citizen a rash of populism, mostly of the rightwing variety,
breaks out all over leading to Brexit,
Orban in Hungary, a stronger rightwing in Germany and, of course, Donald Trump.
But to me it wasn’t only banking policy that created this. The huge surge in
immigration into Europe has a lot more to do with it. Tooze under-rates this
factor. He also under-rates the risk of having a monetary policy that is too
easy and too long. The same type of Minsky risk discussed earlier is now
present in the global economy: witness Turkey, for example. Thus it is too
early to tell whether or not the all-out monetary policy of the past decade
will be judged a success from the vantage point of 2030.
Adam Tooze has written an important book
and I view it as must read for a serious lay reader to get a better
understanding of the economic and political policies of the past decade.
The full Amazon URL appears at: https://www.amazon.com/review/R3N14CMQU8F3OF/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv
No comments:
Post a Comment