The Sunday essay
Beyond the crash
Politics don’t matter; market forces shape our world. So ran
the dominant ethos before 2008. Adam Tooze, the author of a landmark book, says
it was always an illusion
Sun 29 Jul 2018 11.00 BST Last modified on Sun 29 Jul 2018
14.17 BST
‘I hear people say we
have to stop and debate globalisation. You might as well debate whether autumn
should follow summer.” That was Tony Blair, Britain’s prime minister, in
October 2005.
Two years later, in the autumn of 2007, Alan Greenspan, the
former chair of the US Federal Reserve, was asked by a Swiss newspaper which
candidate he was supporting in the forthcoming US presidential election. His
response was striking. How he voted did not matter, Greenspan declared, because
“[we] are fortunate that, thanks to globalisation, policy decisions in the US
have been largely replaced by global market forces. National security aside, it
hardly makes any difference who will be the next president. The world is
governed by market forces.”
Theirs is a world we have lost. To understand it, you had to
believe that global markets, like the seasons, were givens. You had to believe
that markets had a logic by which they ruled and that the outcome of their rule
was, on the whole, benign. You had also to believe, as Greenspan’s exception
indicated, that although national security remained political, it was separable
from economics. Otherwise, if economics and geopolitics were entangled, then
presumably economics would be a matter for politicians, too.
In the 10 years since the financial crisis of 2008, all of
those assumptions have been revealed as false. The idea that the economy is a
realm beyond politics or the play of international power has been exposed as a
self-serving illusion.
Donald Trump is the most spectacular manifestation of that
disillusionment and the one that matters most. He is an outright nationalist,
pushing against the trend of globalisation. He has little respect for markets
unless they deliver outcomes he likes. He is not afraid to boss the bosses or
moan about the Fed. And he proclaims that everything from imports of German
cars to Chinese “borrowing” of US chip technology is a matter of national
security.
Trump matters because the United States affects the entire
system. Brexit shocked Europe, but, as Theresa May’s government is finding to
its cost, the UK’s effort to “take back control” does not mean that everyone
else falls into line.
In trade and security, the UK lacks the heft, but it has
shaped our era of globalisation and may still do so via one hugely significant
entity: the City of London. While Wall Street has America’s huge national
economy as its hinterland, the City of London is outsized, preeminent in
currencies, interest rate derivatives and global banking Its present role and
importance was already taking shape by the late 1950s when it began to provide
an offshore market for unregulated borrowing and lending.
Again, this was very much a political choice, shaped via the
growth of someting called the Eurodollar – a dollar held in Europe and hence,
importantly, outside the jurisdiction of the Federal Reserve; a political
choice enabled by the British authorities and tolerated by the Americans. Hence
it was by way of London that the offshore dollar banking industry was born,
with profoundly destabilising long-term results.
In fact, the consequences were nothing less than world
historic. On 15 August 1971, Richard Nixon suspended the gold convertibility of
the dollar. (By the terms of the Bretton Woods Agreement of 1944, which had
governed post-war global finances, currencies were pegged to the price of
gold.) For the first time since the invention of money in the ancient world, no
major currency was anchored to a metallic base. Money was openly acknowledged
as a political creation.
The result, in the short term, was an explosion of
instability, inflation and gyrating exchange rates. It was a feast for
investment bankers, both on Wall Street and in the City of London. Opec’s oil
earnings added to the surge. To avoid taxes, the money was funnelled through
offshore havens, many of which were located in the former British empire, or
exploited quasi-feudal entrepots such as Guernsey.
The eurodollar market was a “work-around”. By the 1980s, the
push was on to achieve something more comprehensive: the wholesale
liberalisation of capital movements. Regulators in London and New York, egged
on by banking interests, were racing to the bottom.
By the 1990s, the City of London had ceased to be in any
sense a British banking centre. After Margaret Thatcher’s Big Bang, the small
merchant banks of the City were swept up by Asian, American and European
competitors. The City became, as Mervyn King quipped in 2012, the Wimbledon of
the world economy. The success of British competitors was rarely, if ever, the
point. But that sporting analogy, with its suggestion of elegance and decorum,
is flattering. The City of the boom years was more akin to the Premier League:
brash, cosmopolitan, sucking in punters from around the world and showered with
staggering amounts of money from questionable sources.
As much as it was global, local competitors were still in
the game. The old City might have gone, but the big British commercial banks
had not given up. Like their European counterparts, Deutsche Bank and Paribas,
like American high street banks, such as Bank of America or Citigroup, the
British giants – Barclays, RBS, HBOS – wanted a slice of the global action. It
was the merger of the megabank with the financial market model – Premier League
mashed with Wimbledon – that created the conditions for the comprehensive
meltdown of 2008.
With the failure of Lehman, the Blair-Greenspan vision of the
relationship between politics and the market collapsed. It became clear that
markets did not govern themselves. Their dysfunction threatened to ruin not
just them, but to bring the entire world economy to a halt. World trade
collapsed at a faster rate in 2008 than in 1929. It was no longer obvious that
autumn would follow summer in 2008. Far from being self-evident, the way ahead
needed to be discussed very urgently. And, as Greenspan’s successors would
discover, it mattered which politicians ruled, nowhere more so than in the US.
The crash changes everything
Gordon Brown might have to deal with rumblings on the
backbenches, but in parliament his majority was solid. In the US, whilst the
Republicans became increasingly a party of sectional interests and protest,
crisis fighting would fall to the Democrats. They would have to take upon
themselves the conflicts of interest and the odium that rescuing financial
capitalism entailed. At the height of the crisis, encouraged by Barack Obama’s
victory, Brown tried to offer a sweeping vision of global solutions for a
global age. But the new team in Washington was not interested in a rerun of the
Anglo-American condominium at Bretton Woods.
There was a global response to the crisis of 2008, but it
came not in the form of a new Bretton Woods. Instead, the institutions of the
American state were put behind the world’s banks and their offshore business in
London and Europe. As central bankers will hasten to tell you, the Fed’s
emergency provision of dollar liquidity was no bailout. These were fully
collateralised loans. It was normal lender of last resort activity, just on a
very abnormal scale. One European central banker referred to the European
central banks as having become in 2008 the 13th branch of the US Federal
Reserve system.
Not surprisingly, in the wake of the crisis, it was time for
a rethink. Not that the basic principles of financial globalisation were
questioned. (National controls on capital movements were adopted only by
emerging market countries and Greece in 2015. ) But private banks are the
crucial actors in global money creation and a new regulatory framework – Basel
III – and tougher national rules set out to constrain their balance sheets.
Large parts of the shadow banking system have been dried out. And if finance
has “deglobalised”, the geography of that retreat is telling. American banks
have held their own, Asia’s new banking giants have rapidly expanded. It is the
British and European banks have done the contracting.
In part, this was commercial logic, but it is also a matter
of political choice. After 2008, realisi ng the risks to which financial
globalisation had exposed them, the Americans set new rules. While Europeans
were scandalised about America’s “chlorine chickens”, in the transatlantic
financial talks the Americans held their noses. Specifically, they have
required European competitors such as Barclays and Deutsche Bank to provide
more capital to their US operations or to leave. Faced with the choice, both
preferred to downsize.
The shock to the City dealt by 2008 was severe. But the
City, and those who steer it, have not lost their global ambitions or their
sense of historical direction. If transatlantic finance had plateaued, the
future was in the east. The “UK” bank that came through the crisis best was
HSBC. Its strategy of straddling between the City of London and Hong Kong was
the future.
In 2013, the City began marketing itself as the offshore
centre for China. Again, this was driven in part by commercial logic, but also
by political choice. The UK authorities, under David Cameron’s government,
selfconsciously repeated the eurodollar strategy of their forebears. The City
of London would provide China and its banks with a platform to globalise the
yuan.
As a recent Bank of England report revealed, as the
geography of global finance has shifted eastward, London has remained pivotal.
The British banks are significantly more exposed to China than their European
and American counterparts. This promises profit. But it involves a double risk.
The eurodollar world that took shape in the 1960s mapped
neatly on to the outlines of Nato. It had Washington’s assent. It was, as we
say nowadays, a geo-economic bloc. The same cannot be said for Britain’s China
venture. London’s obsequiousness towards Beijing was not lost on Washington. As
one American official remarked off the record in 2013, constant concessions
were no way to confront a “rising power”.
With that phrase he burst open the final framing assumption
of the passing era: the comprehensive pacification of great power relations
created by the victory of the US-led alliance in the cold war. This had allowed
the story of global economic growth to be thought of as neutral with regard to
power politics. Already, under Obama, that was no longer the working assumption
of US policy. China’s growth was increasingly viewed as a source of threat.
The strategy of the Cameron government to seek partnership
with China raised the question: where in a future world order did Britain
stand? In retrospect, it throws stark light on the astonishingly high-risk
strategy of the Cameron administration. At the same moment that it was putting
Britain’s relationship with Europe on the line, it was antagonising Washington
with a strategy of co-operation with a state whose power and self-confidence is
growing by the year. Beijing talks a good game over globalisation, but,
especially under Xi Jinping, it views politics, grand strategy and economics as
an integral whole.
It is also, however, fragile. China’s credit boom is
unprecedented. The setback it suffered in 2015-2016 shook the world economy. As
both the Bank of England and the IMF have warned, along with Britain’s
financial exposure to China comes serious risk. If a China meltdown is the
great tail risk that hangs over the world economy, then the City of London, as
it was in 2008, is likely to be the first western domino in line. And that will
not be a matter of fate or market logic, pure and simple. It will be the result
of deliberate strategic choice.
• Adam Tooze is professor of history at Columbia University.
He is the author of Wages of Destruction, which won the Wolfson and Longman
History Today prize. His new book is Crashed.
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