Adam Tooze is a British economic historian and a professor at Columbia University in New York. He has previously taught at Yale and Cambridge. The German translation of his new book, "Crashed: How a Decade of Financial Crisis Changed the World," will be published on Sept. 11.
In the wake of a global crisis like the one we saw in 2008, certain questions are unavoidable 10 years later: What have we learned? And: Have we taken the necessary measures? That involves not just economics and history, but also politics. This, in fact, is the most basic lesson taught by the crisis: Economic policy is not just a matter of technical expertise. It is irreducibly political.
Back in 2008, the politicians and central bankers who confronted the potential collapse of the global financial system were no radicals. In America, centrist Republicans like Hank Paulson and Ben Bernanke were at the controls. Elsewhere, it was Gordon Brown and Alastair Darling in the UK, Christine Lagarde in France and Peer Steinbrück in Germany. Mainstream by nature, they nevertheless found themselves doing radical things.
In the first phase of the crisis, until early September 2008, there was hesitation. But the bankruptcy of Lehman Brothers on Sept. 15, 2008 changed the game. It made clear that the collapse of a systemically important bank was devastating. Thereafter, the crisis-fighters were driven by the fear of total catastrophe. When Ben Bernanke, who was head of the Federal Reserve at the time, urged Congress to pass the TARP bailout fund as quickly as possible, he issued the legendary warning: "If we don't do this, we may not have an economy on Monday."
American central bankers had a script for such an historic challenge: The Great Depression in the 1930s. At Milton Friedman’s 90th birthday party in 2002, Bernanke – then a member of the Fed's Board of Governors – promised that the Fed would not repeat the mistakes it had made back then. It would not allow banks to fail en masse, the money supply to collapse and deflation to set in.
But the threat in 2008 was even greater than in 1929. To enable the banks to recover, the key was rapid recapitalization. Governments around the world offered banks tax money in the form of capital to stave off bankruptcies, a measure that was popular neither with voters nor with the banks. In Europe, the acceptance of state assistance was optional, resulting in the prolonged weakness of large European financial institutions such as Deutsche Bank and Barclays Capital, which in turn proved a lasting obstacle to recovery.
In the U.S., by contrast, American authorities forced all major U.S. banks to take government capital at a dramatic meeting on October 13. That not only made the banks safer, it provided them with incentive to raise private capital to repay the hated public funds. By the end of 2009, all of America’s major banks were back on relatively solid footing.
Rescuing the banks was not enough
Recapitalization is a medium-term measure. But without a massive and rapid injection of liquidity from the Fed, they would have collapsed in fall 2008. Already in the 19th century, Walter Bagehot, the editor of The Economist, had described how the Bank of England in 1857 stopped the first modern financial crisis in the City of London. One-hundred-and-fifty years later, 2008 vindicated his lesson that in a moment of panic, the central bank, and thus the state, must act as a lender of last resort. Providing abundant cash is the one thing that will stop a systemic collapse. From 2007 onwards this is what all central banks did, on an epic scale. The U.S. Federal Reserve distributed trillions of dollars on both side of the Atlantic.
But rescuing the banks was not enough: The markets for bonds and securitized mortgages likewise needed direct support. Asset purchase schemes known as quantitative easing (QE) were the answer. In the eurozone, QE remained hugely controversial, with then-German Finance Minister Wolfgang Schäuble calling Bernanke’s policy "clueless." Others denounced it as a form of currency war. But in 2015, the European Central Bank (ECB) was forced by the euro crisis to take similar measures. To this day QE remains controversial.
What is clear, though, is that a regime of ultra-low interest rates and loose monetary policy creates winners and losers. Asset markets boom, the pressure on public budgets eases and so too does the burden on taxpayers. But as Germany’s conservative economists, the savings lobby and tabloid daily Bild Zeitung constantly remind us, savers, pension funds and insurance companies are the losers.