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All That Was Solid

Adam Tooze

Economic historian Adam Tooze on a decade of shattered illusions and the limits of the neoliberal imagination.

Interview by
Seth Ackerman

Ten years after the 2008 crash, we now have a synoptic account of the politics and economics of the last decade.

In Crashed: How A Decade of Financial Crises Changed the World, Adam Tooze, a Columbia economic historian whose previous work explored the wartime Nazi economy and America’s emergence as an economic global power, surveys the political economy of the post-Lehman era — scrutinizing not just the bank bailouts and the eurozone crisis, but everything from the fate of South Korea’s chaebol to the Russian-NATO proxy war in Ukraine to America’s social crisis in the age of Trump.

Tooze’s account is unique in its understanding of the financial mechanics of the crisis, the first systemic breakdown of the new securitized, post–Bretton Woods financial system. Drawing on the innovative work of “macrofinancial” economists like Hyun Song Shin or Perry Mehrling, Tooze meticulously surveys the new landscape of crisis — one in which classic images of queues of panicked bank depositors are replaced by postmodern “runs on repo.”

In this interview with Jacobin’s Seth Ackerman, Tooze considers the degeneration of the European project, the ability of US hegemony to stabilize global capitalism, and the prospects for the Left in forging a new economic model.


SA

As we’re speaking today, global financial markets are in turmoil over Turkey, whose currency is plummeting against the dollar even as its private sector owes hundreds of billions in dollar-denominated debt to foreign creditors. This comes ten years after the 2008 crisis and twenty years after the Asian financial crisis, both of which stemmed in large part from just this sort of foreign-currency debt mismatch.

A naive observer might ask why this sort of practice wasn’t somehow reformed away after the previous crises. It’s not exactly a secret that private foreign-currency borrowing makes financial systems fragile.

AT

But isn’t that to take an excessively functionalist, reformist view of why things happen? It hasn’t happened because, until the day before yesterday, BBVA, the Spanish bank, could make a 4 percent interest margin lending in Turkey whereas it could only make a 1 percent margin lending in Spain. More than a third of its profits before tax came from its Turkish franchise last year.

That’s why it hasn’t stopped. And Turkey has, after all, also grown like gangbusters since 2001. It’s the only Western Eurasian state to be up there in the growth leagues with India and China.

But the other reason is bricolage. Every time it happens, you fix it and then you go forward from there. There’s this perception with regards to financial crisis that, “Oh, one’s enough, you couldn’t possibly want to do that again.”

That rather underestimates the risk appetite of capitalism. It’s perfectly willing to do dangerous things as long as it makes profit.

SA

In other words, “this time it’s different.”

AT

That to me is a little bit like somebody looking at an airplane crash and saying, well, gravity was the cause. It’s true! Undeniably true. It’s undeniably true that in bubbles you get people expecting the bubble will last forever. And then it bursts, and you can say human psychology caused it. But that’s a lot like saying that gravity caused an airplane crash.

It’s true, but it sidelines and shorts out everything that’s actually interesting from a historical point of view. It doesn’t explain why this one happened after that one, why this crisis happened when it did. It avoids history and reduces it to social psychology.


SA

In many ways, the great theme of your book is the return of politics. Before the crisis, the assumption was still that we were at the end of history. Any changes that might happen would come through automatic, technocratic, incremental adjustments, with no real political substance or vision behind them.

But when the moment of crisis comes, big decisions have to be made — there’s political agency in the world, after all. And yet, in this crisis, agency was ultimately exercised by people who were very technocratically minded, who hated the idea of grand visions. There were no de Gaulles, no Roosevelts — it was Merkel and Obama.

AT

I totally take your point about the crisis managers being deeply improbable historical actors. They’re kind of the anti-historical historical actors.

It puts me in mind of Alan Milward’s foundational work on the early history and political economy of the EU. Because if you think of the European Coal and Steel Community as the original kernel of the European integration project [in 1951], the whole project was to say, “We’ve got this tightly interconnected economic sector that has powerful geopolitical and broader historical implications, so we have to neutralize it. And the way we’re going to neutralize it is this mechanism.”

They did that with agriculture as well, in the early 1960s. They said, “Peasants are a big chunk of our population, a key part of this historical transformation, and politically potentially really lethal, and so as we stabilize, let’s have this Common Agricultural Policy.”

It’s really telling to me that before the 2008 crisis the Europeans were unable politically to draw on that and say, “Right, we’re building this tightly interconnected economic sector — finance. It has potentially explosive implications for the eurozone project. Clearly, we need to have a banking union, and we need to have it straight away and right from the beginning.”

In their eyes, the problem was all sovereign debt, which was a total irrelevance to the eurozone project, before Greece managed to impale itself. But they never squarely focused on the banking sector as historically analogous to those other big chunks of capitalism which have a powerfully explosive crisis dynamic that is transnational.

SA

What accounts for that failure?

AT

In part, it was the failure of the neoliberal imagination. They didn’t understand the scale of European integration, and they didn’t think of European banks as being as dangerous as they turned out to be. They didn’t understand that if anybody is financialized, it’s the Europeans, not the United States.

I also think there’s a fateful and crucial coincidence between the failure of the European state-building program in 2005 and the crisis. These are not entirely unrelated. They let Turkey slip — EU accession talks opened in 2005 and quickly sputtered — which leads us into our current configuration today.

Above all, the failure that year of the proposed European constitution entrenched a very limited nation-state vision of what the EU was going to be, just as financial integration was taking off and acquiring this powerful transatlantic dimension — which the euro banks got completely sucked into. It’s an extraordinary fateful tension.

SA

The failure of the European constitutional referendums in 2005 was, to my mind, due to a lack of legitimacy. Voters felt that European integration was a battering ram to lower their living standards.

By contrast, when you mention the Common Agricultural Policy, de Gaulle’s philosophy was that if he wanted his population behind him while he advanced his grand geopolitical schemes, he had to give them what they needed when it came to welfare and wages and all the rest. Once elites abandoned that, it seems they deprived themselves of legitimacy.

AT

Certainly, and all the way down to the present day. It’s extraordinary that the ECB doesn’t have any kind of employment mandate. Even the Fed, after all, the hub of the global financial system, has a clearly specified employment mandate, and Ben Bernanke was not afraid to say it: “I will not raise interest rates until unemployment falls below six percent.”

If the eurozone had had that kind of management — and it’s not a revolutionary project — it would have certainly made a substantial difference to the legitimacy of the institution. It would have clearly reflected the fact that it wasn’t just about rescuing banks or maintaining zero inflation, but actually about ensuring that generations of European young people could find their way into employment.

Of course, throughout the crisis, the vast majority of Europeans aren’t unemployed. The crisis is profound and real, but its worst impacts are limited in their geographic scope. Large parts of Europe remain remarkably prosperous, and the average welfare and living standards are higher than in the US, in most respects. But I completely agree the failure to understand the basic logic of hegemony — that you actually do have to make some concessions — is kind of amazing.

It may be that Germany’s extraordinary inversion of its political economy between the late 1970s and early 2000s is emblematic of the sense that you can get away with it. But, of course, you can’t, because the German Social Democrats (SPD) will never recover. The SPD has paid a lethal price, a terminal political price for that.

SA

So has the French Socialist Party.

AT

Exactly. The lessons here are actually very simple, at the political level.

SA

Speaking of that inversion of Germany’s political economy, in your book you argue that what appeared to American commentators like a mad obsession with austerity during the eurozone crisis was not just a mindless ideological reflex. It was the outcome of an inability to coordinate and agree on a longer-term solution. Austerity became the temporary, lowest common denominator for all parties, until they could come up with a real solution.

But the way I see it, there was an even deeper lowest common denominator, which was reengineering the European labor market in favor of capital, along the lines of what Germany had already done in the early 2000s. Some European elites may have questioned austerity, but labor market reform was the one thing that was not questioned.

Even the Americans, who sometimes criticized European austerity, never said in their conversations with the Europeans, “Hey, don’t suddenly make it very easy to fire a million people in the middle of a depression.”

AT

I agree. When you get into the Greek scenario, when they’re struggling to somehow make the debt equations look plausible, and they desperately need some kind of bump in growth to make that work, that’s where you really see that type of argument coming front and center. In other words, we need some magic source that will generate a little bit of extra growth, and that’s going to come from labor market and product-market reform. That’s where you see the argument really pushing to the fore.

But I understand the force of your question. What you’re saying is: isn’t there some sort of larger argument here about balancing the relationship between capital and labor and restructuring the European labor market? I wouldn’t for a second deny that that’s one of the basic dynamics that’s been at work in Europe since the 1970s. But my book is about a financial crisis and the things that spiral out from that. What spirals out from that is an intense conversation about fiscal balance. In the Greek case, there’s also an intense conversation about labor market reform. But there’s not a general discussion about labor market reform during the period I focused on, in the eurozone. Once you get to 2014, 2015, Merkel starts adding that in too — the whole German package.

For me, the essence of the eurozone story is that we need to get out from under what I take to be an overly mechanistic conception of the global capital market as an objective force that crashes against democracy per se, almost without mediation. The people I’m most in argument with here are people like Wolfgang Streeck. For me, the lesson of 2008 and afterwards is that if you have an activist central bank, you can do whatever the fuck you like in terms of fiscal policy. There’s really no shit you can’t pull. You can double your bet, you can run up debt like you did in World War II. If, as in World War II, you have an active central bank willing to repress the financial sector by suppressing interest rates, PIMCO [the bond investment fund] can be as big as it likes, and it is your poodle. There’s nothing those people can do.

It’s only if they get you on the run and you don’t have a central bank that’s willing to just say, “Sorry, I’m going to flood the market. What’s gonna happen? The currency’s gonna devalue? Sue me! You say that like it’s a bad thing.” This is Paul Krugman’s point: “What would be bad about a dollar devaluation? It would be good for exports!”

The bond vigilantes of the eurozone are like Guatemalan death squads. “I don’t know who’s killing you! It just happens to be a policeman off duty.” This is Draghi’s and Trichet’s position. “You know, if I just turn a blind eye, I bet your go is going to get pretty fucking rough.”

It would be a consistent position if you could get there without bringing the entire system down. But what they don’t understand — or just exploit for political purposes, to force through a structural change in fiscal posture, or new fiscal rules — is that you also need an active central bank. If you’re going to have financial markets disciplining states, you need a central bank to cushion the shock.

SA

But the ultimate political objective is to engineer these changes in countries’ fiscal postures.

AT

Yes. Which is part of a longer-run strategy, as it was in Germany, from the early 2000s. Stripping back the European welfare state, making it trim for international competition.

SA

Right: the fiscal part is just the edge of the spear, but underneath there’s —

AT

A whole bunch of other stuff, yes. It’s clearly part of a comprehensive project to shift the terms of the labor-capital balance. There’s no doubt. Germany has experienced one of the most massive rebalancings. Just imagine: you take a Bismarckian welfare state and you scrap it, basically overnight! It was an extraordinary upheaval in the relationship between work and welfare. Much more dramatic than anywhere else — much more dramatic than New Labour.

SA

And engineered originally by social democrats.

AT

Exactly. And with the cooperation of major trade unions, as well.


SA

Reading this book reminded me of the 1970s writing on “hegemonic stability” by scholars like Charles Kindleberger. They argued that a stable world capitalist economy requires a single hegemonic power: Britain in the nineteenth century or the US after World War II. The reason the world economy found itself in such turmoil after the 1960s — with the oil crises and the breakup of the Bretton Woods monetary system — was, for those writers, the decline of American hegemony.

Of course, American hegemony always appears to be declining, but it never actually seems to go away. In the book, you narrate how the post-2008 crisis-fighting efforts ended up quietly creating what is in essence a new global monetary system, based on a network of so-called liquidity swap lines set up between the world’s central banks, centered on the US Federal Reserve. The idea is that since cross-border lending is now mainly carried out in dollars, averting an international cascade of bank failures in a crisis requires that non-US banks always have potential access to US dollars.

The Fed-centered swap lines have now made that access formal and permanent. But in doing so they have also reinforced the global preeminence of the dollar. So, does the outcome of this crisis prove that the United States is still in a position to serve in that guarantor role?

AT

I’ll take you up on the hint of talking about hegemonic stability theory, because I’m a confirmed skeptic of hegemony stability schemas. But I’m convinced that the real existing capitalism of much of the twentieth century, and clearly the dollar-based financial system of the current moment — the moment of crisis — requires a hegemon.

What I’m skeptical about is the value of narrating global history back to the early modern period as a succession of hegemons, in which there is a functional obligation that has to be filled by somebody, and then you slot one state after another into that list. This is the Immanuel Wallerstein, Giovanni Arrighi, world-systems theoretic conception, which Kindleberger sometimes comes close to.

It sets up an easy critique by people like Barry Eichengreen, who show that’s not how the late nineteenth century gold standard operated. And having shown that, they argue there’s no need for a hegemon. This allows them to rewrite the history such that the problems of the interwar period were, in fact, not due to hegemonic failure, but to failures of cooperation.

Having been offered a strawman in the form of the simple version of hegemonic stability theory, critics like Eichengreen can claim to write interwar history, and indeed history after 1945, without a hegemon. And that just doesn’t follow for me.

SA

But isn’t it much easier to cooperate when there’s one party that can lay down the law?

AT

Sure. Cooperation and hegemony are not really separable from one another. Hierarchy is inherent to the system in various ways. World War I and the intergovernmental finance system that it set up — which was extended, de facto, into the 1950s and ’60s, with the Bretton Woods system — was a hub-and-spokes model around the United States. And it was held as such, carefully, by the United States throughout the period, precisely so as to prevent a debtors’ coalition from forming against it. This created a structure of hegemony that America at some points exercised effectively — most spectacularly in 1953 with the German debt deal. Then there were moments like 1915 when the structure is there, created, already developed, and the United States nevertheless fails to act.

What we’re looking at now is a global dollar-based financial system, created since the 1960s, in the form of the eurodollar banking system, which at moments of crisis cries out for some kind of stabilization. And that’s the role that America steps into after 2008. But it is a highly specific form of functional engagement. I would argue that we need to differentiate levels of power and hegemony. In 1945, these were all kind of compacted together: you have military preponderance, you have economic preponderance, and you have, at least in the non-Communist world, a plausible claim for political leadership.

In the current moment, of course, all that is shredded. You still have overwhelming military superiority. And there’s also this massive functional dependence by means of money. But the oil, the fossil fuel complex, has slipped away a little bit from the United States — it’s not the seventies system, or the sixties system. On the other hand, tech has constituted a new field of interconnection in which America plays, in comparison with Europe or Japan, an incredibly preeminent position.

We have to think of this problem of hegemony at the current moment as splintering that compact form we had in 1945. Politically, of course, America’s hegemony is largely void at this point. We have to think now about how it’s being much more disarticulated. And of course, this is compounded by all the transnational and intra-capitalist interconnection, which mean that centering this in the nation-state at some level seems increasingly anachronistic. Yet money has this peculiar property of being a part of the capitalist system that is irreducibly political.

SA

And national.

AT

And national! Right. In its current form, it’s essentially centered on the United States. And that, to my mind, is so explosive that it’s basically unspeakable.


SA

You argue that China’s response to the crisis showed an ability to maintain stability using capital controls and other centralized economic mechanisms that the West used to have in the postwar decades. Yet it doesn’t seem to have created the impression of an alternative model for other countries.

AT

Noah Smith of Bloomberg Business Week wrote an opinion piece on this, and I immediately tweeted it out, saying, maybe this is the real end of neoliberalism. Because Smith was asking the question: does China constitute a new model? Of, course it’s a new old model — capital controls, regulation of banks, liberal use of fiscal policy, financial repression. We know how this works.

SA

But it doesn’t seem to have gained much traction in the finance ministries of other countries, Turkey for example.

AT

No, and Turkey is where you might expect it to possibly have traction. Russia effectively operates a system like this, just with more globalization, because it’s a fossil fuel economy and so it can’t really step back. Effectively, the banks there are a cluster organized around the central bank and the treasury and there’s very tight control through the social networks of the oligarchy.

But I completely agree. What the Chinese economic slowdown and subsequent stimulus in 2015 and 2016 made clear is that the West is totally dependent on China’s success in continuing to operate a system like this one. Because China is the growth hub that’s responsible for 30 percent of global economic growth — the same as the US and Europe combined. But it’s stable only insofar as they can make these mechanisms work. If they become like us, and China drifts off into being the free-for-all, crazy rollercoaster that it could be, the bets are off.

SA

This strikes me as a huge contradiction in the system. There’s been some loosening of the ideology around financial globalization — the IMF, for instance, has said things about the need for capital controls sometimes. But overall there’s no appetite within the Davos or G8 establishment for that sort of thing. Yet they depend on China doing it.

AT

They haven’t given it a name, but the quantitative easing (QE)-driven — indeed QE-centered — monetary policy regime that we’ve been in is, after all, like nothing anyone’s ever seen before.

SA

It’s unconventional.

AT

Furthermore, it’s historic. So, you’ll never get back to conventional. We’ve fallen from grace. We now know central banks can do this. There’s no place of innocence anymore. Its implications go throughout the entire financial system.

You don’t have to be a screaming Wall Street hysteric to think that this is a fundamental and wrenching shift in the way in which capital markets organize. In Japan, the central bank is now essentially the owner of a large slice of the stock market by way of its purchase of the exchange-traded funds (ETF). It’s not [Swedish] Meidner-style social democracy, but it could easily be — there’s no reason why it shouldn’t be.

SA

Yet if Jeremy Corbyn and John McDonnell were to propose this sort of thing in Britain, it would elicit howls!

AT

It didn’t, though. We’re not in that space anymore. John McDonnell’s politics are an open book. The Financial Times knows all about it. Anyone who reads that newspaper knows McDonnell’s politics perfectly well. It doesn’t elicit any howls there. It elicits howls in the Daily Mail, which is a different business.

But the FT goes, “Well, I’m not sure if this will work” and “Isn’t that the equivalent of helicopter money?” and “Haven’t we discussed helicopter money before?” but no one’s saying, “We can’t do helicopter money; that’s outrageous!”

Even as recently as the 1980s, you couldn’t have conceived of someone of McDonnell’s leftism being treated with the kind of seriousness he’s being treated with now. We’re not in the cookie-cutter, pristine 1980s any longer. I don’t think there’s anyone forgetful or, frankly, cynical enough to pretend that. The Daily Mail and these other gutter newspapers, of course, will say whatever they like.

SA

When it comes down to it, though, it won’t just be the Daily Mail. If and when the rubber meets the road and we start seeing a roll-out of these kind of policies —

AT

Sure, you’re going to see all sorts of types of resistance, there’s no question. Even the bailouts have a radically different political economy depending on how power is configured. Even something that is transparently in the interest of stabilizing the financial system they’re a part of will still face resistance from, say, Barclays or Deutsche Bank. So sure, if they were confronted with anything that smacked of socialism, there would be hell to pay. I’m not saying that we should underestimate that.

But you were asking about ideas, political framing, the emergence of a new model. I would agree: no one has put a label on it yet. But look at the swap lines, or these trade agreements — which are not really trade agreements at all; the TPP and TTIP are deep structuring mechanisms meant to stabilize long-term investment and supply chain arrangements. To just pack all that under “neoliberalism” and say it’s a continuation is, I think, just really uninteresting. One could do that, but it doesn’t grasp the level of innovation that those kinds of measures entail.

If you look at area after area of governance, modes of governance are responding to the deep transformations in capitalism that we have seen in the last fifteen to twenty years. There is, I think, on the part of intelligent bits of the system, a profound awareness of what that entails.

This is one big theme of the book: the financial crisis was a cognitive shock. It was a crisis of macroeconomics. We require a new mode in thinking, and the crisis produced it. It’s kind of there for us already, in the work that so-called “macrofinancial” economists are doing. I agree there’s no single label for it, and it’s not clear what its politics are at this point, but in terms of a reimagining of the architecture, the plumbing, of global capitalism, there’s a lot going on.

This is one of my frustrations with bits of the Left, and why I hope this book will make a constructive contribution.

SA

But it’s not as if there’s been a political agency that has grasped that and put forward any political alternative, except possibly Corbyn and McDonnell.

AT

The vehicle and the driver was the inequality discourse, that massive shift in public consciousness about capitalism and its social structure, which rips through from Occupy to the Piketty moment. It’s really broad-based, and it has really shifted the way people think about income and wealth. There has been a political reaction to that, too: new left-wing movements in Europe, in democratic-socialist activism in the US, and in adjustments in fiscal policy. We’re no longer in the full austerity moment.

The full austerity moment was quite narrow — it was in 2011–13, and it was basically unsustainable. And we’re now in some sort of crazed, Republican giveaway moment in the US. Which is good for labor markets: we’re running the Kaleckian experiment — how far can you pump up labor markets until there begins to be a pushback?

The great disappointment, of course, is that it’s not a left-wing administration doing it. It’s not obvious what a left administration would get if it did attempt it.

SA

Yet the core labor-capital contradiction is still operating in the same direction as it was in the previous decades. Labor-market regulations continue to be dismantled, unions are weaker, strikes are fewer — in the US and in Europe.

AT

Yes, there has been a fracturing of neoliberal ideology. Yes, there has been a fracturing of the There Is No Alternative consensus. What hasn’t emerged is a new There Is No Alternative.