Adam Tooze ( Book Review by Andrew Cornford)

Review and reflections

by Andrew Cornford,
Geneva Finance Observatory.

Tooze’s remarkably up-to date book on the Global Financial Crisis (GFC) is notable for a number of reasons: the extensiveness of its coverage, its emphasis on cross-border banking operations as an autonomous cause, its detailed treatment of political context as befits an author who is a historian as well as an economist, and its attention to the different perspectives of major actors with responsibility for policy design .

The book’s principal focus is the advanced economies (AEs) of North America and Western Europe, and China and Russia. Other Emerging Market and Developing economies (EDEs) receive more summary treatment, although the countries of Eastern Europe figure importantly in the coverage of East-West relations early in the new millennium.

For comparably detailed commentary on the institutions and transactions of the financial crisis one can go only to The Financial Crisis Inquiry Report (Financial Crisis Inquiry Commission, 2011), but this is limited to the United States. Other fairly wide-ranging official reports include early responses to the GFC such the Turner Review issued by the United Kingdom Financial Services Authority (Financial Services Authority, 2009) and the Report of the High-Level Group on Financial Supervision in the EU (de Larosière Group, 2009). The crisis is also the subject of monographs by policy actors likewise mostly focussing on the United States, and works with a more technical focus in which the GFC serves as a vehicle for observations on subjects such as international capital flows and debt, financial regulation, and international financial governance more generally. But none of these rival Tooke’s book in range.

Within a review it is impossible to cover all of the subjects discussed in Tooze’s book. Those chosen here are intended to bring out major themes and messages as well as the author’s criticisms of policy measures adopted and his remarks on possible future directions for the reform agenda.

Banking practices and the GFC

The beginning of the GFC is generally located in mid-2007 when there were reports of a sharp rise in mortgage defaults in the United States, especially defaults on subprime (low-quality) mortgages, accompanied by the reversal of a long boom in house prices. Early hopes of containing major financial disruption were disappointed.

At the end of 2008 outstanding mortgages in the United States amounted to about USD 11 trillion (on 58 million mortgages). Of these subprime mortgages are estimated to have amounted to at least 13 million. These figures are large but their values were to prove an underestimate of the danger to the financial system which they constituted. This was due to the links of these mortgages to the rest of the United Sates financial system and to systems abroad. The GFC entailed standard features of a financial crisis such as lending to borrowers on terms and at interest rates which often bore little or no relation to the credit risk involved. Much subprime lending, for example, had provisions initially exempting borrowers from repayment of principal (eventual repayment to be made out of the property’s appreciation). Borrowers’ obligations became more burdensome when interest rates rose and house prices began to fall.

Beginning in 2007 the consequent defaulting fed into a vulnerable financial system. At the heart of this system were securitised mortgage loans and derivative securities constructed from them. In a traditional securitisation loans are assembled in pools, interests in which are sold to investors. During the period leading up to the GFC the forms taken by the backing of securitisations were widely extended to complex instruments. A much cited example was collateral debt obligations (CDOs), financial claims to cash flows generated by securitised portfolios of debt securities (asset-backed CDOs) or baskets of referenced obligations (synthetic CDOs). Payments to investors were made according to tranches, each of which carried a different level of risk with a correspondingly higher or lower rate of return. There were even CDOs consisting of baskets of other CDOs, picaresquely described as “CDOs squared”.  The different forms of securitisation coexisted with structured investment vehicles (SIVs), companies which purchased pools of debt instruments and were financed with cheaper, short-term debt instruments such as commercial paper, highly rated by the credit rating agencies. SIVs made possible the removal of securitised assets from a financial institution’s balance sheet, freeing it for further operations.

The traditional objectives of securitisation and related techniques were better risk management through diversification and attraction to investors enhanced through the eligibility for higher credit ratings from the rating agencies than many of the component exposures would have received in isolation. But there were also potential dangers. The resulting securitisations and investment vehicles could be opaque and illiquid owing to their dependence on short-term funding, often linked to strings of collateralised loans (repos) which contributed to banks’ interdependence and thus to the financial sector’s vulnerability. Conditions of stress mercilessly exposed the all too frequently thin foundations of equity capital underlying such structures which were intended to provide institutions with protection against losses. This protection was shown to be inadequate once the GFC got under way.

The role of the major sources of financing for mortgage securities was crucial. Before the crisis the focus of much initial commentary here was the deficit on current account of the United States balance of payments with the counterpart asset sales to surplus countries, especially China. China was thus accorded the role of a major financier of the increasing debt of the United States. Tooze points out that China was indeed a major purchaser of United States assets but none the less concentrated its purchases on low-risk investments such as US Treasuries. More important by far as purchasers of higher-risk US mortgage securities (i.e. those lacking backstops from the Government Sponsored Enterprises, Fannie Mae and Ginnie Mae) were European banks. In 2006, at the height of the securitisation boom, one-third of such securities were backed by British and West European banks. Tooze has a nice inter-regional flow chart showing how Europe’s net flows – and thus share – of cross-border bank claims on the US increased between 2002 and 2007.

Tooze also points out that these flows into United States mortgage securities were not the counterpart of current-account surpluses of European countries. Rather the flows were due to European banks’ management of their assets and liabilities, and were associated with currency and counterparty mismatches. The banks’ funding depended partly on borrowing from United States sources which could become less easily available in conditions of stress. Such conditions were eventually what European banks faced in the GFC, with consequences in the form of desperate searches for dollars to meet short-term financing obligations. Estimates of Bank for International Settlements economists cited by Tooze indicated needs for more than USD 2 trillion, a figure far beyond the resources of European central banks and thus their capacity to provide crisis financing to their banks. Inaction in this situation would have had potentially drastic implications not only for Europe but also for the United States. As Tooze puts it, “If the Fed did not act, what threatened was a transatlantic balance sheet avalanche, with the Europeans running down their lending in the United Sates and selling their dollar portfolios in a dangerous fire sale”.

However, the Fed did rise to the occasion with a huge programme of currency swaps (collateralised lending). This, as Tooze points out, was “a dramatic reassertion of the pivotal role of America’s central Bank”, which contributed crucially to avoidance of still more extreme cross-border financial contagion after the outbreak of the GFC.

Macroeconomic policy responses

The policies adopted in response to the GFC had to address both the danger of financial collapse and the downturns in economic activity and increases in unemployment triggered by it. The main response to the first threat was intervention in the form of lending to banks, recapitalisation, purchases of their assets, and state guarantees of their liabilities. The second threat, that to the macroeconomy, was met with stimulus measures which were far from uniform as between different countries.

United States measures directed at stabilisation began before the outbreak of the GFC proper and were initially focussed on Fannie Mae and Ginnie Mac, the huge government agencies backstopping the mortgage market and now found to be insolvent. Successfully uniting Democrats and Republicans in Congress behind these efforts required nail-biting efforts and foreshadowed the difficulties subsequently experienced over marshalling support for what followed. The key item of the sequel was the Troubled Assets Relief Programme (TARP). This was initially voted down in the House of Representatives but then passed only a few days later with the additional insertion of tax breaks and aids to home owners. The European Union was unable to agree on a common response, although the European Commission issued a permissive license to member states concerning the provision of debt guarantees subject to conditions as to non-discrimination between domestic and foreign banks. Moreover the European Central Bank initiated a programme under which it provided cheap liquidity to banks for the purchase of sovereign debt, an action which could be an easy and apparently safe source of profit.

Early in the new administration of President Obama a large stimulus in the form of the American Recovery and Reinvestment Act was passed. Together with the United States economy’s non-discretionary, automatic stabilisers (mandatory entitlements under social programmes, unemployment benefits and lower tax payments), which Tooze considers “the unsung heroes of modern fiscal policy”, these increases in public expenditure achieved a revival of the United States economy.

Stimulus policies elsewhere varied in size. This was reflected in the breakdown of the figure of USD 1.87 trillion for the discretionary fiscal response of G20 countries during 2008-2010. Of this total the United States was responsible for USD 719 billion, while Germany, the largest European economy, was responsible for only USD 123 billion. Notably some EME members of the G20 made significant contributions to the total, the China figure being USD 337 billion.

This variation was due partly to differences in economic conditions and in the impacts of the GFC. But it was also due to ambivalence amongst different national policy makers regarding fiscal activism. Amongst the largest economies other than the United States at one extreme was Germany. Here the coalition government of the CDU and the SDP agreed in 2009 agreed on a modest programme of emergency spending in the face of increasing unemployment, leaving a major role to automatic stabilisers. This was followed by the adoption of a constitutional amendment placing tough limits on borrowing at the levels of both the Federal government and of the Länder. Mrs Merkel declared that Germany would then try to transfer its projected debt brake to the world as a whole. At the other extreme was China, whose State Council in November 2008 authorised a supplementary expenditure programme of USD 586 billion (12.5 per cent of 2008 GDP).

Germany’s reluctance to undertake a large scale stimulus programme reflected partly scepticism concerning Keynesian fiscal economics, Peer Steinbruck, the SDP finance minister in the coalition government, for example, being a convinced supply-sider. It was also due to resistance to new large-scale initiatives after the structural programme of liberalization of labour markets and benefit cuts (Agenda 10) under the previous Schroeder government and the huge expenditure on reconstruction and subsidies following German reunification.

Likely to slow recovery was the shift in emphasis of United States fiscal policy from reflation to deficit reduction announced in Obama’s State of the Union address in January 2010.  In the United States as well as in Germany there was a current of influential opinion among both policy makers and commentators which normally favoured financial equilibrium in government budgets, large deficits being acceptable only in macroeconomic emergencies. In the United States this fiscally restrictive view dominated in a Republican Party reinvigorated by its victory in the mid-term election of 2010. But the budgetary conservatives did not have things all their own way. Another stimulus programme was passed in December 2010 but one largely limited to tax cuts including, as Tooze notes, the prolongation of giveaways for those on high incomes legislated by the previous Republican administration. Conceptually and practically this second programme fell short of the initial American policy response to the GFC.

Stabilisation and austerity in the eurozone

Tooze’s book contains a lengthy account of the Eurozone’s response to the crisis. Here the role of the United States was that of a trans-border provider of short-term funding to Europe’s banking systems, as described above, and of an often anxious spectator and source of – frequently ignored – advice to Eurozone governments. The book also extends to political as well as economic relations with countries bordering the European Union (EU), especially Russia, and, inevitably owing to its rapidly increasing size and economic importance, with China. Tooze’s account illuminatingly and coherently weaves together not only economics and politics but also the parts played by the main personalities involved.

Creation of the Eurozone raised important questions of both feasibility and power. The single currency was to create a zone of exchange-rate stability in a world in which liberalised capital movements had been a source of exchange-rate instability since the abandonment of fixed exchange rates between the major currencies in the 1970s. But introduction of the single currency was not accompanied by moves towards fiscal and political integration broached by its original European founding fathers. Instead of fiscal integration there were simply rules for member countries limiting fiscal deficits and setting debt ceilings under the Stability and Growth Pact. On the monetary front a uniform interest rate for all member countries was set by the European Central Bank (ECB) with the aim of achieving price stability. Its conservative policy guidelines followed those of Germany’s central bank. Moreover its powers of intervention in the financial markets of Eurozone countries were sharply limited.

This framework had flaws which were not to be a source of intractable problems until there was a deterioration of the relatively benign economic climate in which the single currency was introduced. Outstanding amongst these problems were that the single interest rate set by the ECB, as might have been expected, was not simultaneously appropriate for all the Eurozone’s member countries in view of divergences in their macroeconomic conditions and of structural differences in their economies and financial sectors. Moreover in practice the framework accorded great power to Germany. Exercise of this power was to have an inordinate influence on policy decisions concerning extension of the ECB’s powers to intervene in financial markets and the bailouts of the countries whose indebtedness most increased during the GFC.

Especially harsh programmes of austerity were to be imposed in Ireland, Portugal, Spain and Greece.  At the end of September 2008 Ireland announced that its three largest banks were on the brink of collapse, this in a country where the balance sheets of banks registered in Ireland amounted to 700 per cent of the country’s GDP. The response of the government was to guarantee all the liabilities of six major banks for two years –440 billion euro for a country with a population half the size of New York City. Faced with a rise in the public borrowing requirement associated with an increase in the public debt ratio from 25 per cent of GDP in 2007 to 98.6 per cent in 2010, Ireland was no longer able to raise money from the bond market, and the government submitted the country to stringent austerity covering both incomes and welfare expenditures. In November 2010, as a condition for continuing ECB support of the Irish banking system, Ireland had to accept a programme of further fiscal consolidation, structural reforms (with the pain to the population which these entailed), and reorganisation of its financial sector. But there was no provision for haircuts to the holdings of investors despite their contribution to the boom which preceded the Irish crisis.

In the aftermath of the 2008 crisis Portugal too faced an untenable budgetary situation. After adoption of austerity policies which had led to a rate of youth unemployment of almost 60 per cent and a rate of long-term unemployment of 40 per cent, an election in 2015 was followed by political deadlock with no party coming close to having a majority in parliament and with the incumbent centre-right coalition unable to form a new government on the basis of an alignment similar to that before the election. With great reluctance the country’s conservative president eventually accepted the formation of a three-party left-wing government. But the acceptance came with conditions: Portugal had to continue to accept the EU Growth and Stability Pact; it had to remain committed to NATO; it had to continue to implement the plan for the restructuring of the ailing banking system; and it had to limit the role of trade unions in deciding government policy. As in the case of Ireland, the country’s democratic autonomy was thus tightly constrained by externally imposed conditions. This accorded with a statement of Schäuble, the German finance minister, that economic policy should not change as a result of elections.

But it was Greece which was to experience the longest drawn-out Eurozone financial crisis. In 2006 Greece’s debt in relation to GDP was lower than it had been when the country joined the Eurozone in 2001. But its position was vulnerable, as Tooze puts it, to toppling “from just about managing to Insolvency” in response to the unfavourable macroeconomic changes which took place in 2008.

The new incoming PASOK government in mid-2009 provided revised figures for the country’s fiscal deficit which raised its debt burden from 99 to 115 per cent of GDP, a figure which, amidst surging interest rates, implied unsustainable levels of debt service. An estimate cited by Tooze indicated that stabilizing Greece’s debt would require raising tax revenues by 14 per cent of GDP and cutting expenditure by the same amount.

An outside observer could well conclude that Greece’s debt was a suitable case for restructuring. But this idea met resistance from key parties. To avoid what would be the tarnishing of its reputation as a party of government PASOK wished to avoid a clean break with the past, preferring a policy of “extend and pretend”. This position coincided with the preferences of France and Germany. French banks had the largest exposure to Greece amongst major European countries, and the country’s public was hostile to further bank bailouts. A French concern already present regarding proposals for debt restructuring and one which was also to dog subsequent discussion of initiatives regarding Greece was the possibility of contagion, with the country’s exposures to the European “periphery” of Greece, Ireland, Portugal, Spain and Italy amounting to about USD 500 billion.

German banks’ exposure to the periphery was of a similar amount. But initial attitudes towards financial support for Greece and Ireland from the coalition government of Christian Democrats (CDU) and Social Democrats seemed sympathetic. This changed after an election in September 2009 which brought to power a coalition of the CDU and the right-wing, pro-business Free Democrats (FDP). From now on there were two key figures in determination of the policy of Germany, the most powerful Eurozone country,  towards debt and emergency financing: Angel Merkel, Chancellor and former high-level civil servant in communist East Germany, whose attitude towards debt problems in the Eurozone was conditioned to a great extent by political pragmatism and sensitivity to the mostly conservative views of the German parliament, of the official élite and of the press; and Wolfgang Schäuble, a Christian conservative with a strategic vision of the EU as an upholder of Western civilisation but none the less prepared to support financially Greek exit from the Eurozone if this proved necessary for the achievement of a multi-speed Europe in which a core group of countries set the pace for the less disciplined and less competitive remainder.

Influential roles were also played by the heads of the ECB. At the outbreak of the GFC the head was Jean-Claude Trichet, a conservative Frenchman with a deep attachment to the restrictive rules of the ECB which included political independence and a ban on monetising newly issued government debt. Trichet was also a vocal opponent of debt restructuring. Mario Draghi, who took over as president of the ECB in November 2011, proved more flexible both regarding the establishment of new financial facilities in the EU and haircuts for creditors’ holdings of debt which he saw as necessary for the re-establishment in Northern Europe of citizens’ trust in the process of managing debtor countries’ obligations. But this flexibility was always within the parameters of what he believed the German government could accept.

“Extend and pretend” involved adoption of financing and other measures sufficient to ward off the immediate prospect of Greece’s default or exit from the euro – both of which were mooted during a series of periods of market pressures. But these programmes, according to realistic forecasts of their impact, were not going to lead to a long-term solution to the country’s debt problems. In March 2010 IMF support was sought and provided for the financing of Greece, and thus came into being the infamous “troika” of the EU, the ECB and the IMF. The vehicle for the European component of future financing would be national credits furnished on a bilateral basis coordinated by the Eurogroup, the informal but powerful meeting of Eurozone finance ministers. The loans would not be on concessionary terms, and support would be extended not pre-emptively but only when Greece, after imposing austerity measures, had lost access to financial markets.

The scale of the bailout fund for Europe (the European Financial Stability Facility/EFSF) seemed large: 60 billion euros from EU Commission funds, 440 billion euros from European governments, and 250 billion euros from the IMF. However, it was soon evident that it was not going to be large enough to handle simultaneous bailouts for several peripheral countries. The first test of the agreement came as early as May 2010.

In view of the time required to implement commitments by EU member countries to the EFSF, in the interim the ECB undertook a programme of bond buying to calm the markets. Despite contrary pressure from governments there were reports that several banks took advantage of this programme to offload depressed debt from their balance sheets.

By the early summer of 2011 it was obvious that Greece’s situation was once again deteriorating. A financing programme designed to meet Greece’s needs through 2014 was agreed at a lower rate of interest than that of its predecessor. This time Greece’s private lenders were also involved through haircuts of 21 per cent on their outstanding loans. But by October 2011 the inadequacy of this programme had become evident. This time a voluntary bond exchange at 50 per cent was announced, designed to reduce Greece’s debt below 120 per cent of GDP. To provide Greece with the short-term financing also required it received another 130 billion euros. The Greek programme was to be accompanied by an increase in the financial capacity of the EFSF to approximately 1.2 trillion euros and by a recapitalisation of EU banks in the amount of 106 billion euros, with the banks raising the funds themselves.

Only three months later attainment of the target for Greek debt in relation to GDP was being frustrated by the decline in the country’s GDP caused by austerity. At this point there was serious talk in the EU of allowing Greece to exit the Eurozone. Indeed, there was secret planning for such an eventuality. Nevertheless the planning was abandoned owing to fears concerning the unpredictable consequences for other European economies of such a move and the consequent blow to the standing of Eurozone members of the G20. Instead a new programme for Greece was designed involving a further writing down of Greek debt. What remained was replaced by two-year notes backed by the EFSF and long-dated, low-coupon bonds.

Nevertheless the apparent scale of the restructuring was deceptive. Money to induce creditors to participate in the writing-down of the debt, to provide needed support to Greek banks in the wake of the restructuring, and to pay for a buyback of the long-dated bonds as early as December 2012 was provided in the form of further borrowing from the troika. The restructuring achieved a large shift in the proportion of Greece’s debt held by private creditors to pubic creditors. Much of the financing received by Greece between May 2010 and the summer of 2014 was used to meet repayments and debt service. Only 11 per cent served to meet the needs of the Greek government and taxpayers. During the laborious process of reducing Greece’s public debt from 350 billion euros to 285 billion euros the macroeconomy and society had taken a terrible battering: in 2009 Greece’s GDP was approximately 240 billion euros but during 2012 it had fallen to 191 billion euros; in 2008 the Greek rate of unemployment had been 8 per cent but by 2012 had risen to approximately 25 per cent, that for the younger generation being approximately 50 per cent. As for the Greek parliament, in Tooze’s words,”it had been reduced to a factory for decrees demanded by the troika”.

A drastic reaction from the population was predictable: in the May election the vote of PASOK fell from 43.9 to 13.2 per cent, while the Left, consisting of a new movement, Syriza, and the communists, achieved a figure almost twice as high. But no new coalition government could be put together. So another election had to be called for June 2012 with the result considered decisive for the prospect of adoption of the measures that were considered essential by the Eurogroup for continued Greek membership of the Eurozone. This time PASOK was wiped out with left-wing voters now largely in Syriza’s corner, while the traditional conservative party, New Democracy, dominated the right.

Survival of the Eurozone continued to be threatened in 2012 by crises elsewhere, in particular in Spain (where more than 50 per cent of the increase in Eurozone unemployment since 2007 had taken place) and Italy, two of the currency area’s largest economies. Emergency support for Spanish banks was provided in the form of drawings from the ECB, and the European Stability Mechanism (the permanent replacement for the EFSF) was given extended powers to support government debt. However, an initiative for a more comprehensive banking union was blocked by Germany. The continuing danger of psychological deadlock was avoided when the new head of the ECB, Mario Draghi, announced to an audience in the City of London that within its mandate the ECB was ready to do whatever it took to preserve the single currency. In other words the ECB was prepared to intervene in financial markets whenever it believed that the stability of the euro was at stake. But such intervention would not be unconditional. The ECB would act only if the country targeted had agreed on an austerity and aid plan approved by the ESM. Its new role was formalised under the title of Outright Monetary Transactions (OMT).

By 2015 the Greek economy had been shredded: youth unemployment was above 50 per cent; half of the population was relying for survival on the pension income of a senior citizen, in a situation where half of the pensions paid to senior citizens were below the poverty line; and according to the OECD one person in six was going hungry on a daily basis. From an election in January 2015 Syriza emerged as the leading party and chose as its coalition partner the nationalist ANEL. But this result did not get the opposed parties any closer to resolution of Greece’s problems. As Tooze puts it, “What followed were months of agonizing back-and-forth over achingly familiiar ground.”

Greek default remained a continuing possibility. The new Greek finance minister, Yanis Varoufakis, explored the possibility of attracting additional investment by China. However, China desisted when the German government informed the Chinese that it did not welcome their intervention in the Greek crisis. Varoufakis was also prepared to use the threat of Greek default and its knock-on effects as a weapon in negotiations with creditors. However, the threat was now considered less menacing since the ECB was more confident that with the instruments by then at its disposal it could contain such knock-on effects. The Greek prime minister, Alexis Tsipras, apparently favoured a less confrontational approach in negotiations on Greece’s programme. In April Varoufakis was replaced as Greece’s chief debt negotiator (though he retained his position as finance minister).

At the end of June 2015 Tsipras, announced a referendum to let the Greek people decide whether to accept the terms of the troika. Despite intimidation, which included freezing emergency liquidity support by the ECB for Greek banks on the day after the announcement of the referendum and thus triggering a bank run to which the government’s response was bank closure, limits on cash withdrawals, and capital controls, more than 60 per cent of the electorate voted against acceptance.  Divisions within the ranks of Greece’s creditors were surfacing. Even at the IMF expert opinion increasingly agreed that Greek debts were unsustainable, and a July report questioned the realism of the current programme, calling now for debt relief of 50 billion euros, a doubling of maturities, and 36 billion euros in short-term financing.

But in renewed negotiations between Greece and its creditors only a surprisingly radical proposal from Schäuble contained debt restructuring. His proposal would entail a “five year time-out” for Greece from the Eurozone accompanied by debt restructuring and humanitarian relief. But this proposal was conditional on Greece’s agreement to a collateral fund of 50 billion euros consisting of Greek national assets which would be under creditor control. In the negotiations – involving only Merkel, Tsipras, Hollande, and Donald Tusk, president of the European Council which followed – Merkel abandoned the time-out proposal which did not meet with favour partly, it was feared, because it might serve as a precedent for future negotiations with other countries. But Merkel continued to push for the collateral fund which was eventually agreed but with headquarters in Athens rather than Brussels. The remainder of the programme consisted of new European loans of 86 billion euros and still further budget cuts.

Thus Greece remained in the Eurozone but at drastic economic and political cost and, in the last negotiations covered in Tooze’s book, without the debt restructuring by then widely acknowledged in  official quarters as the most important contribution which could be made to enabling Greece to return to more normal conditions. Tooze’s account of post-GFC developments in the Eurozone is almost an illuminating book in itself, although he has to omit the details of the controversies within Syriza over the extent to which the Greek side should present to its creditors the more radical demands for debt relief in the party’s electoral programme or more compromising proposals likely to prove a basis for negotiations acceptable to its creditors (Toussaint, 2019).

Throughout his account of the Eurozone crisis one can sense Tooze’s frustration concerning policies deployed as substitutes for the greater economic integration with which the single currency’s founding fathers believed it should be accompanied. These substitutes relied instead on rules, to a great extent expressed in quantitative terms, which, as anticipated by some critics, were unlikely to be uniformly suitable for all the eurozone’s member countries and whose application was to reflect the eurozone’s unequal distribution of economic and political power and fundamental disagreements as to the approach to the design of appropriate policy for handling macrofinancial crises. As Tooze is clearly aware, politically serious tensions in the eurozone can easily return over the constraints on national policy autonomy associated with the implementation of its rules.

Regulatory reforms in the United Sates

Tooze’s account of the regulatory reforms adopted to deal with the weaknesses of institutions and infrastructure highlighted by the GFC focusses heavily on the response in the United States. Changes in international standards are treated more briefly.

The principal focus of United States reforms was the perceived need for the restoration of the financial system’s stability. This largely overrode public concerns fuelled by the belief that the financial sector itself was the main source of the crisis which had left fragile institutions and infrastructure in its wake. The results were reforms which avoided radical options like nationalisation or the break-up of large banks. High levels of compensation for bankers continued in the face of pleas for restraint from President Obama and post-crisis contractions of profits for their institutions. Despite the shortfalls in the performance of the principal bank regulators prior to the crisis their responsibilities were preserved as part of their role as agents for much of the implementation of post crisis reforms. Thus the effectiveness of these reforms was vulnerable to too cosy a relationship between the regulators and the institutions they continued to regulate.

Regulators were to be responsible for conducting crisis simulations or stress tests of United States banks with special attention to the major banks with assets in excess of USD 100 billion considered the most likely to prove a threat to future financial stability. The results of these tests served as the basis for estimates of required additional capital, which for this purpose was defined to include items other than new equity, thus potentially reducing the impact of the requirements on the returns to banks’ shareholders. The stress tests were to be accompanied by a Comprehensive Capital Analysis and Review by the Fed which would evaluate banks’ capital adequacy and their plans to make capital distributions through dividend payments and stock repurchases.

The principal formalization of United States measures was set out in the Wall Street Reform and Consumer Protection Act, usually referred to as Dodd-Frank. This lengthy piece of legislation (which extended to 849 pages) did not reflect a coherent vision of the causes of the financial crisis but rather, as Tooze puts it, “embodied a compendium of crisis diagnoses” as well as some longstanding proposals for reform of the country’s banking system. Thus it contained the following: prevention of the predation of poorly informed borrowers; more transparent market-based trading of derivatives; greater responsibility for institutions carrying out securitisations through minimum mandatory financial participation (“skin in the game”); increased regulatory authority for the restriction of bailouts and rules for payment for bailouts by the banking industry; authority to cap banks’ growth into still larger institutions; and restrictions on commercial banks’ participation in proprietary trading (the Volcker rule).

Passage of the law was not smooth. There was predictable opposition from congressional Republicans. But on this and issues related to the treatment of homeowners and bailout processes and on equal treatment for all banking institution regardless of size Sheila Bair, Chair of the Federal Deposit Insurance Corporation appointed by the preceding Republican administration, was an official voice more in tune with public sentiment than the group around President Obama. Together with Senator Dodd  Bair achieved the insertion in Dodd-Frank of the macroprudential provision that oversight over the financial system as a whole should be exercised by a Financial Stability Oversight Council which would be chaired by the Treasury but would also gather together all the key financial regulators.

After the passage of Dodd-Frank there was a need for the formulation of 398 new rules for the financial sector. Three years after Dodd-Frank became law only 155 of these rules had been finalized. Enforcement of these rules was going to be a daunting task for supervisors at a time when their independence from institutions supervised by them is being questioned (Segarra, 2018).

The approach to reform embodied in Dodd-Frank has also been criticised for its piecemeal character. What is at issue here according to the critics is insufficient acknowledgement of the relation of particular banking risks to macroeconomic conditions. For example, liquidity risk is due not only to balance-sheet mismatches between assets and liabilities and to the saleability (or lack of it) of particular assets but also to conditions in financial markets which can change, altering risks as they do so (Wray, 2016: chapter 7)

This criticism points towards a more fundamental integration of “macroprudential” into regulation than that underlying current design and practice. Current conceptualisation reflects thinking dating from the 1980s incorporating the recognition that, owing to various forms of interdependence, banking risks are capable of posing threats not only to the institutions directly affected but also to the infrastructure of the financial sector. In other words this conceptualisation has reflected simply more explicit acknowledgment than in traditional microprudential regulation that many of the risks to a single bank targeted by regulation in crisis situations can spill over into risks also affecting many other banks and can thus threaten essential functions of the financial system such as payments, lending and deposit taking. Perhaps understandably the post GFC reform agenda builds on widely accepted concepts. But it is reasonable to hope that in its work the Financial Stability Oversight Council, for example, will also take account of the broader conceptualisation of banking risk outlined above.

The international reform agenda

Like Dodd-Frank the international regulatory agenda was conditioned not only by shortcomings highlighted by the GFC but also by the continuation of a longstanding reform process. Overseeing and coordinating the programme of financial-market reform agreed by the G20 in the Washington Declaration of November 2008 was assigned to the Financial Stability Board (FSB), a body established in April 2009 containing all member countries of the G20 as well as representatives of major financial and regulatory institutions. The FSB’s responsibilities were to include early warnings of macroeconomic and financial risks and the reshaping of regulatory regimes.

Central to such reshaping was the strengthening of standards for banks’ leverage, which measures institutions’ exposures to risk in relation to protective layers of capital. The development of international capital standards for this purpose dates back to the 1980s. The task was entrusted to the Basel Committee on Banking Supervision (BCBS), a body originally consisting of member countries from a restricted group of AEs but more recently with an expanded membership of regulators and central bank governors from 27 countries. The main outcome of the BCBS’s work has been successive editions of the Basel Capital Framework, which has gone by the official titles of Basel I, Basel II, and Basel III. These are paralleled by corresponding directives and regulations of the European Union.

There are four key categories of risk in the Basel capital framework : credit risk resulting from the failure of borrowers or other parties to meet payments due to the bank; market risk due to losses on the bank’s trading positions arising from changes in market prices; liquidity risk due to bank’s inability to meet financial obligations promptly; and operational risk due to losses resulting from failures of banks’ internal systems and procedures or from causes such as legal rulings, government actions, natural disasters, or criminal activity. The Basel capital framework initially addressed primarily credit risk. However, owing to developments in the financial markets and in banking operations there was an extension of its scope from 1996 onwards – firstly to market risk and then to operational and liquidity risk. The evolution of this framework – still not complete at the time of writing Tooze’s book – started with Basel I in 1988 and has since been followed by substantially revised versions in the form of Basel II and Basel III. Tooze’s observations concern primarily the framework’s rules for credit risk.

The initial versions of the capital framework for credit risk had two principal objectives. One was microprudential, namely to help to ensure the strength and soundness of individual banks and thus indirectly of the banking systems of which they are a part. The other was to help to equalise cross-border competition between banks by eliminating competitive advantages due to differences among countries in their regimes for capital adequacy which, for example, were believed by the United States to favour Japanese banks. Since the initiation of Basel III, the objectives of the framework now incorporate the macroprudential dimension mentioned earlier.

Basel I was originally designed for internationally active banks. However, by the second half of the 1990s it had become a global standard and had been incorporated into the prudential regimes of more than 100 countries. Basel I became the subject of increasingly widespread dissatisfaction owing to its crude calibration of credit risks and to the growing importance of practices such as securitization and of new financial instruments such as financial derivatives for which its rules were not well adapted. Thus a decision was taken to initiate what proved to be the much lengthier than anticipated process of drafting successor agreements.

Basel II consisted of three Pillars in a structure which has been retained in Basel III. Under Pillar 1 minimum regulatory capital requirements for credit risk are calculated according to two alternative approaches, the Standardised (SA) (based on externally determined indicators such as the ratings of credit rating agencies) and the Internal Ratings-Based (IRBA), which was based to varying degrees on banks’ own rating systems and reflected major pressures during the drafting process of the Institute of International Finance, the banks’ lobby. Pillars 2 and 3 of Basel II were concerned with supervisory review of capital adequacy and with the achievement of discipline in banks’ risk management through disclosure to investors.

Partly on the basis of Quantitative Impact Studies of Basel II regulators in different countries became concerned that levels of capital under Basel II were not going to be sufficient. This concern was accentuated by the stress on banks evident since the outbreak of the GFC. Agreement on major changes to the Basel II rules for the banking book followed in September 2010 (with a revised version in June 2011). The revised rules, now called Basel III, incorporate much of Basel II. But they have also in their turn been extended and changed.

Basel III, of which the original version was published in June 2011, contains several new features whose general form has been retained throughout several revisions until the “final” text published in December 2017. These include the following: more stringent rules for the categories of financial instruments eligible for inclusion in total required minimum capital of 10.5 per cent of which 7 per cent is to consist of equity; of the 7 per cent 2.5 per cent to constitute a conservation buffer intended to absorb losses during periods of economic and financial stress; extra capital in the form of a countercyclical buffer which could be imposed by national authorities to counter rapid credit growth and relaxed during periods of stress – a measure designed to serve macroprudential objectives; and for institutions designated by the FSB as Global Systemically Important Banks (GSIBs)an additional capital charge in the range of 1 to 3.5 per cent as well as specification of total capacity for absorbing losses in the form of instruments meeting certain conditions (Total Loss Absorption Capacity/TLAC) amounting to 16-18 per cent of a bank’s risk-weighted assets (a measure likewise designed to serve macroprudential objectives).

Basel III specified rules (the Liquidity Coverage Ratio and the Net Stable Funding Ratio) responding to the long recognised observation that banks’ fragility is frequently manifested in the illiquidity of its funding capable meeting short-term withdrawals and in the insufficiency of its longer-term funding required to match its assets, off-balance sheet exposures and other commitments. Moreover critics of the Basel capital framework’s dependence on risk weights for measurement of capital requirements had pointed out that in stressed conditions a frequently dependable indicator of a bank’s vulnerability, hitherto ignored by the Basel capital framework, was a simple measure of banks’ leverage in which the numerator is equity capital and the denominator the summation of their unweighted – rather than risk- weighted – exposures. Such a ratio was included in Basel III as a backstop to its principal estimates of exposure to risk for the purpose of setting capital requirements. The leverage ratio is subject to a supplement in the case of GSIBs.

During the period between the publication of the 2011 version of Basel III and the BCBS’s announcement that Basel III was “complete” at the end of 2017 the text was subject to several revisions primarily of a technical or definitional character. More importantly certain asset classes were no longer eligible for the lower risk weights of advanced versions of the IRBA; in the SA more sensitive risk weights were specified for exposures to real estate; and a capital charge was introduced for the risk (credit valuation adjustment/CVA) of mark-to-market losses for derivative instruments occasioned by deteriorations in the creditworthiness of a bank’s counterparties during periods of stress (which were a source of substantial losses for some banks during the GFC).

The “completed” draft of Basel III as of the end of 2017 does not include the standards for the credit risk of securitisations which were issued in July 2016, though this may be a drafting rather than a substantive matter. Securitized assets of questionable quality played an important role in the illiquidity and insolvency of major parts of the banking sectors in the United States and Europe during the GFC. The 2016 revisions of the framework are designed to eliminate shortcomings by reducing mechanistic reliance on often misleading external credit ratings and by adapting risk weights for securitisation exposures to enhance the capital framework’s risk sensitivity.

The completion of Basel III at the end of 2017 was in fact questionable. The final capital standards for market risk had not yet been issued. Moreover there are indications that the standards for banks’ exposures to sovereign risk (not subject to minimum risk weights in the IRBA) were still being rethought and may yet be the subject further revisions.

Tooze’s commentary on the international agenda of international financial regulation focusses especially on the new regime for GSIBs, the making of the case (led by some academics, Sheila Bair, and some national regulators – not mentioned by Tooze – like Neil Kashkari and Tom Hoenig of the United States) for higher capital requirements, and the new framework of institutions for financial regulation in the EU. There are also other subjects likely to be important to the future structure and conduct in the industry concerning which Tooze’s discussion could well have been more extensive.

One is international capital movements and their control – or its absence. Tooze does mention the complications for the eurozone of a regime which has permitted huge trans-border surges of money. He also mentions the role played by capital movements in the Asian crisis of the 1990s and the eventual grudging acceptance by the IMF of controls over capital inflows (“as if the Vatican had given its blessing to birth control”, as the Economist put it). As historical experience indicates, regulation cannot avoid attention to the volatility due to liberalised capital movements.

Another of the subjects meriting discussion under the heading of regulation is size and concentration in banking sectors, an issue at last becoming again increasingly topical beyond the banking sector. This subject involves not only standard issues of anti-competitive behaviour for non–financial as well as financial firms but also the relation of banks’ size to financial stability.

Tooze does cover the debate after the outbreak of the crisis in the United States over whether the policy response should include breaking up the largest banks as well as recourse to nationalisation. These options received an unsympathetic response from President Obama who supported the pursuit of the overriding objective of the restoration of bank lending advocated by his Treasury Secretary, Timothy Geithner. Such pursuit included actual government support for mergers which contributed to financial stability in the short term but left the United States with some big banks still larger than before the crisis – and not necessarily more stable over a longer horizon. Tooze notes that at the outbreak of the GFC in Europe also some major banks had grown to gargantuan size, a situation which put a premium on collective action in response to the crisis by the EU. However, agreement on such action has proved difficult to achieve.

The problem of banks’ size is closely linked to the subject of their structure and corporate governance. There have been steps in some European countries towards structural reform, in particular through separation of banks’ retail from their other activities. In the United Kingdom this has led to the ring-fencing of retail banking from investment banking and related activities. Elsewhere the resistance of the banking lobby seems to have stymied more widespread radical steps on this front.

Staff conduct in banks has figured prominently in the reform agenda. Here Tooze starts here from what he considers the quicksilver character of the concept of confidence in economics. His observations on staff conduct focus principally on the egregious way in which, even as the scale of losses to banks due to the GFC was revealed, payments to top staff at major banks remained extremely generous. However, he avoids in-depth discussion of ethics and behaviour more generally n the banking sector, which are integrally related to confidence.

The principal response of the reform agenda to the widespread ethical lapses of the GFC has consisted of somewhat tighter restrictions on the payment of bonuses, in particular their postponement. An alternative approach could have been a re-examination of access to limited liability as part of structural reform of banks. Revisions to the legal framework here might involve separation of units carrying out exclusively the functions of investment and merchant banks such as advice, transaction services, position taking and trading in financial and commodity markets. These units could become partnerships, long a common legal form among investment banks. This would achieve a better alignment of interests between the institutions involved and their top management. Moreover guidelines for employees would be less likely to accommodate or encourage risky trading since losses will involve payments by banks’ owners, i.e. the partners. (Shirreff, 2016).

Regrettably Tooze’s discussion of regulatory reform in the book reviewed here does not include some very interesting reflections on reform of international financial governance inspired by his attendance  at Davos 2019 (Tooze, 2019b). Tooze is wary of global blueprints, viewing the regulatory and institutional regimes of the period since 1945 more as responses to major historical changes and thus as bearing the imprint of the interests and thinking of the most powerful parties and their representatives. What in Tooze’s view does this imply for “progressive politics”? Instead of being mired in a battle for control of commanding heights “such politics should seek to gain influence over the lower levels and mechanisms of power where what passes for the regulation and governance of global capitalism actually takes place”. For Tooze Basel III is a prime example of this process at work – “out of sight of mainstream politics but not immune to politicisation and to publicity…It is in this zone that expertise and politics can be most productively harnessed and may actually make a difference.”

Shortcomings in economists’ performance

Economists’ performance regarding both forecasting of the crisis and policy prescriptions – with some honourable exceptions – were widely perceived as inadequate (Galbraith, 2009). Indeed, this perception was reflected notably in a much reported query by the Queen Elizabeth II. The explanations from many of the leading lights of the discipline have been frequently halting and have not stemmed initiatives, in some cases started by students, to reform research and teaching, which have none the less not yet had  a major impact on the profession’s mainstream.

Tooze’s historical commentary on the crisis covers critically subjects related to many areas of economics – inequality, lobbying, and antitrust – but without detailed attention to the reasoning marshalled by the political right to justify developments since the 1970s. Regarding macroeconomic policy his discussion has more explicit conceptual implications. His criticism of the United States government’s failure to sustain the expansionary policy adopted in response to the crisis recalls criticisms of the theory of pump priming in the 1930s that the upturns resulting from short periods of fiscal expansion failed to trigger the expected longer-term recovery. His discussion of eurozone policies, especially for Greece, indicates the failure of those responsible for their imposition to acknowledge the fallacy of composition underlying the reliance of fiscal policy on austerity as a key part of measures targeting recovery and bringing down the ratio of public debt to GDP. But probably Tooze’s most important point is that the GFC has been a crisis that should be explained as the outcome of the decisions of a financial oligarchy of international banks and other large firms regarding the management of their multi-currency assets and liabilities. For analysis and forecasting such an approach implies a downplaying of the role of nation states’ balances of trade and payments as primary determinants of the size and distribution of cross-border financial flows together with more attention to the behaviour of the financial oligarchy.

The decisions of the financial oligarchy in turn need to be considered as part of macrofinance, the branch of financial economics which integrates financial and macroeconomic processes and to which firms in the financial oligarchy are linked through their participation in national as well as international financial markets. Understanding macrofinance entails understanding the functioning and infrastructure of both sets of markets, and the links between them and macroeconomic developments. This poses difficult problems for the main current schools of macroeconomics which do not easily accommodate any but the most rudimentary conceptualisation of banking and finance.

Tooze pays tribute here to the pioneering work Hyun Song Shin and other economists at the Bank for International Settlements. But he gives only summary mention to Hyman Minsky who was arguably the true founding father of macrofinance in his work on the role of finance in the business cycle. Minsky’s work penetrated beyond merely schematic attention to finance in this context. As a long-time board member of the Mark Twain Bank in St Louis, Missouri he was deeply interested in the relation between the concepts of accounting and risk management in financial firms and in bank regulation. Lack of a convincing conceptualisation of microfoundations has long been a sore point of mainstream macroeconomics and finance. Much recent work here has consisted of attempts at grafting extracts from behavioural psychology on to mainstream macroeconomic theory without developing convincing links between the two levels of conceptualisation. Although Minsky did not himself make the explicit connection, what has been described as his conceptualisation of dynamic macroprudential regulation (already mentioned above) points the way to a more promising approach to the microfoundations of macroeconomics (Wray, 2016: chapter 7). Such alternative microfoundations can provide a useful base from which to develop the cross-border macrofinancial economics that Tooze advocates as an essential part of a theory of international finance corresponding to today’s realities.

Broader post-GFC shifts

From the title of his book it is evident that Tooze is concerned with the impact of the GFC on the international distribution of power as well as on the nuts and bolts of financial and macroeconomic management.  As Tooze points out, before the GFC the expectation among observers had been that the biggest challenges facing the financial system were the disequilibria in the external payments of China and the United States and the internal economic conditions of which these were a reflection. In February 2007 in his first appearance at the high-level Munich conference for security policy Putin posed the question of what kind of world organisation the West was aiming for. Was it one dominated by military force and the imposition of political, cultural and educational policies on other countries or one taking account of the ultimately more comprehensive authority of the United Nations and international law ? The first option in Putin’s view failed to take account of the changing economic basis of newly emerging forms of power where, for example, the combined GDP (measured in real terms) of Brazil, Russia, India and China exceeded that of the EU. He was sceptical that international governance in the newly emerging world could be based on the West’s own organisations, NATO and the EU.

In August 2008 an attempt by Georgia to subdue the two territories of Ossetia and Abkhazia was met with a crushing riposte by the Russian army resulting in hundreds of casualties and the displacement of 230,000 civilians. Earlier in 2008 NATO had agreed to a procedure leading to NATO membership for both Georgia and Ukraine. After ritual expressions of solidarity by NATO leaders in the aftermath of the Georgian defeat the question of the country’s membership was sidelined. But despite remarks from Putin that a push of Ukraine towards NATO membership would lead to severe countermeasures the membership initiative for Ukraine remained moot and was to lead to more serious political and economic destabilisation. Tooze’s account of these events is particularly useful for its avoidance of the deep rooted anti-Russian bias which characterised much of the reporting in the press of Western countries.

The ending of the Cold War was associated in many Eastern European countries with economic policies leading to rapid rises in living standards which were financed initially primarily by private sources and eventually also by EU bodies. On the political front between 1999 and 2007 there were several accessions by Eastern European countries to both the EU and NATO. The euphoria ended with the financial crisis of 2008, which hit Ukraine particularly hard with a recession that left millions without pay. As a result Ukraine applied for an IMF programme. Somewhat paradoxically at this time polls suggested that the country’s most popular politician was Victor Yanukovych, whose electoral base was a Russian-oriented party with its principal support in the Eastern region of the country.

Hovering over Ukraine’s politics as its 2010 election approached was the question of whether Ukraine should choose partnership with the EU or with Russia. The vehicle for partnership with the EU was an EU Association Agreement (EAA) which covered mainly regulations concerning trade, regulation and the movement of labour. However, as the EU never concealed, EU Association Agreements were also designed to cover security cooperation between Eastern European states and the EU and NATO. Such cooperation accorded with much political sentiment in these states: As the Polish President Bronislaw Komorowski put it:”Never again do we want to have a common border with Russia”. Articles 4 and 7 of the Ukraine EEA provided for EU-Ukrainian convergence in foreign, affairs, security and defence. Under Article 10 Ukraine and the EU were “to explore the potential of military and technological cooperation”. The problem with such provisions was their inconsistency with the 1990-1991 agreement between the Soviet and Russian leader, Mikhail Gorbatchev, and the United Sates and other Western powers (United Kingdom, France and Germany) that, following the reunification of Germany, NATO would not be expanded “one inch eastward” towards Russia (National Security Archive, 2017). The same issue would also have been pertinent in earlier accession agreements for Eastern European countries but came to a head in the case of Ukraine presumably owing to its size and its importance to Russia.

Yanukovych was to win the 2010 election. Initially he had taken a position in favour of the EEA, and the officially sponsored Ukrainian press supported the EAA as a prelude to eventual EU membership. The EU offer was to be accompanied by an IMF programme with financing of USD 5 billion, of which USD 3.7 billion was to be used in 2014 to repay an earlier loan from the IMF. The conditions attached to the IMF loan included big budget cuts, an increase in bills for natural gas, and a 25-per-cent devaluation of the country’s currency. To this would be added financing of 610 million euros from the EU, a sum considered niggardly by the Ukrainian government.

Acceptance of the EU offer would have entailed large losses on Ukrainian exports to Russia and to other states with strong links to Russia – exports which exceeded those of the country to the EU. Moreover Russia made an offer, accepted by Yanukovych, of a gas contract on concessionary terms and a loan of USD 15 billion. The offer was conditional on Ukraine’s joining the Eurasian Customs Union, whose common external tariff was incompatible with an EAA.

Data from Ukrainian opinion polls suggested only a small majority favoured the EAA over the Russian alternative. However, Yanukovych’s decision to abandon the EAA was followed by large street demonstrations and an attempt by Yanukovych to crack down on opposition to his government. Responsibility for the demonstrations and the resulting deaths and casualties among protesters remains controversial, with evidence pointing to roles not only for local security forces and Ukrainian political opponents of Yanukovych but also for the country’s extreme right as well as for  the United States and other parties with links to foreign governments (Katchanovski, 2019). Facing progressive loss of support from within his own party and the security forces Yanukovych fled. In the resulting vacuum the newly installed provisional government reversed Yanukovych’s decision in favour of the Russian option, signing the EAA and reaching a new financial agreement with the IMF and the EU:

Putin was understandably concerned over the future of the Russian naval facility at Sevastopol with Ukraine a member of NATO, and was also no doubt smarting at the overturning of a Russian diplomatic victory by street demonstrations. Shortly after the regime change in Ukraine Russian troops seized control of the Crimean peninsular, and Russia began to provide support to a separatist uprising in the Eastern Ukraine.

According to the EU’s version it “sleepwalked” into the Ukrainian crisis. Various features of the crisis argue that this ignores well known antecedents: Ukraine’s history of fraught relations with the USSR after the Russian revolution and during the Second World War; its size and its military significance during the Cold War; and its considerable economic potential. The EU’s faltering response rather seems to reflect the chronic tendency of the West since the Yeltsin government of the 1990s to underestimate Russia’s still considerable strengths and its determination to protect what it perceives to be its important interests.

Signposts for the future

In the book as well as in other recent reflections Tooze acknowledges the difficulties which confront an attempt to map the post-GFC global distribution of political and economic power. At the time, late 2012, when the project of writing the book was begun, the acute manifestations of the GFC seemed over. As Tooze puts it, “it would have been churlish to deny that American corporate liberalism, as embodied by the Obama administration, had prevailed once again…And a sign of that restored normaility was the fact that America had not been dethroned”. But the apparent success of transatlantic crisis containment – but not yet containment extending to resolution of the drawn out crisis in the Eurozone -“had produced a false sense of stability…{and}…sapped the energy necessary for fundamental reform”.

Mere chronicling the policy tools and achievements and the transatlantic diplomacy which made this containment possible was soon shown to be inadequate by the morphing of the financial and economic crisis of 2007-2012 “into a comprehensive political and geopolitical crisis of the post-cold war order”, which is still with us. The internal and external fragmentation of Western countries and their arrangements for mutual consultation and cooperation have been the stuff not only of traditional news outlets but also of cable television and social media. As Tooze points out, to be plausible, a response to the resulting distortions in people’s perceptions of events and their implications has to be accompanied by acknowledgement of the longstanding deployment for their own purposes of “fake news” by the élites of Western countries and not just by demogogues, populists and xenophobes. Moreover such a response will require something which the more dissident and alternative economists and historians have always accepted but much less so thinkers and commentators of the mainstream, namely “digging into the workings of the financial machine”. Here, Tooze asserts, “we will find both the mechanism that tore the world apart and the reason why that disintegration came as such a surprise”.

Identifying what Tooze calls “the anachronistic  and out-of-date frames of reference “ which “make it impossible to understand what is happening around us” is indispensable to repairing the existing system of global governance or –what would be better but is probably utopian – replacing it with a system both genuinely functional and fair. But repair or replacement has to take account of the existing and potential coalitions which could provide it with an initial base from which the world can move forward. Here, as was noted earlier, Tooze is sceptical of the value of focussing on comprehensive designs which are internally coherent but take insufficient account of likely obstacles in the world as it still is.

A key feature of this world for Tooze is the continuing political and military predominance of the United States. His views here are less fleshed out in his book than in other related writing such as a long article in the London Review of Books (Tooze, 2019b). Here he emphasises what he regards as a key distinction between power and American political authority. He acknowledges the loss of any residual claim on the part of American democracy to provide a political model. But he believes that the military and financial pillars of an American dominated world order are still in place. Here Tooze cites – inevitably – the huge scale of United Sates military spending and operations compared with that of other countries, and its financial power exercised through the dollar basis of international payments and other financial transactions. He notes the discomfort of its allies over America’s new unilateralism in its trade relations (and the consequent downgrading of the WTO), its repudiation of the laboriously negotiated nuclear agreement with Iran, and the adoption of an energy policy based on what it perceives to be the future abundance of natural gas. A cool assessment of power relations in the world does indeed need to take account of the feature of America’s ascendancy listed by Tooze. But the assessment raises its own questions.

The facts underlying any system of power relations are constantly changing, threatening any consensus which underpins them and thus eventually the system itself unless it is adaptable. Except in situations of conflict (and its aftermath) or imperial control, the dominant partner in such a system has tp persuade the other party or parties that their existing beliefs require that they should do what the dominant partner wants (or at least not engage in actions at variance with this) (Quigley, 1982: 14) }. This makes power relations vulnerable to change, though on a time scale that is usually unpredictable. But in the existing situation it is not difficult to specify potential sources of American vulnerability. The military establishment of the United States is enormous but conflicts since the Vietnam war raise questions as to its effectiveness in many such situations. And if the adversary were not Russia or China in isolation but an alliance between the two countries, this could change the odds. Since the 1950s the rocket technology of the USSR and now Russia has been acknowledged to be of very high quality. The country’s weakness vis–à-vis the United States has been due more to the shortcomings of its manufacturing capacity. If Russia and China were to achieve a functional alliance, shortcomings of manufacturing capacity would be likely to present less of a problem for their military strength. On the environmental front natural gas may indeed push back energy constraints for the United States. But there appear to be other vulnerabilities facing the country. For example, rising sea levels are a potential threat to the American coast line. It may be argued that the United States has the resources to build sea walls to protect its coasts. But such a threat of rising sea levels is not merely material. It is potentially a shock to the country’s collective psychology and thus to its politics. The oceans to the East and the West of the United States would no longer be the source of protection which historically they have been but a source of vulnerability. Thus one can envisage environmental threats which would push even a reluctant United States towards acknowledgement of its need to accept – perhaps new – mechanisms of mutual multilateral support and coordination.

But I don’t want to end my article on an argumentative note. Crash is a fascinating book and the best commentary which I have read on governance of the world economy since the outbreak of the GFC.


de Larosière Group (2009), Report of the High-Level Group on Financial Supervision in the EU, Brussels;

Financial Crisis Inquiry Commission (2011, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, BN Publishing, January;

Financial Services Authority (2009), The Turner Review a Regulatory Response to the Global Banking Crisis, March;

Galbraith JK (2009), “Who are these economists, anyway ?”, Thought and Action The NEA Higher Education Journal, Fall;

Katchanovski I (2019, “The buried Maidan massacre and its misrepresentation by the West” Consortium News, 24 April;

National Security Archive (2017),“NATO Expansion: What Gorbatchev heard”, Washington, D.C., The George Washington University, December;

Quigley (1982), Weapons Systems and Political Instability A History. Dauphin Publication;

Segarra C (2018), Noncompliant A Lone Whistleblower Exposes the Giants of Wall Street, New York, Nation Books;

Shirreff D (2016), Break Up the Banks A Practical Guide to Stopping the Next Global Meltdown, Melville House Publishing, NY;

Toussaint E (2019) “A critical review of the critical reviews of the book ‘Adults in the Room’ by Yanis Varoufakis”, 12 February, http//;

Tooze A (2019a), “Framing Crashed (10). A New Bretton Woods and the problem of ‘economic order’- also a reply to Adler and Varoufakis”, at Home ADAM TOOZE, 9 February 2019;

Tooze A (2019b), “Is this the end of the American century ?”, London Review of Books, 4 April;

Wray LR (2016), Why Minsky Matters, Princeton NJ and Woodstock Oxon, Princeton University Press.

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