According to the British Academy’s explanation (which, it must be said, is widely shared), the Crash of 2008 happened because by then – and unbeknownst to the armies of hyper-smart men and women whose job was to have known better – the risks that had been assumed to be riskless had become anything but.
Thinking that it had successfully diffused risk, our financialized world created so much that it was consumed by it.fiRegular crises perpetuate the past by reinvigorating cycles which started long ago. In contrast, (capital-C) Crises are the past’s death knell. They function like laboratories in which the future is incubated. They have given us agriculture and the industrial revolution, technology and the labour contract, killer germs and antibiotics. Once they strike, the past ceases be a reliable predictor of the future and a brave new world is born.
The first real Crisis took its time to strike. It awaited the rise of the great corporations and the concomitant dawn of large-scale financialization. When 1929 descended on humanity, crushing its great expectations. It felt as if the sky had fallen in.
Had it not been for the carnage of the Second World War, the Crash of 1929 would have maintained its grip well into the 1940s.
The war liberated state finances from all political constraints. The government spent money as though there was no tomorrow.
Old factories were powered up again, new factories sprang up on green fields, innovation reached its apotheosis, output went through the roof, business boomed. What a pity millions had to die before politics could allow government to act properly and fully.
Once the war began to lose its momentum and peace seemed within reach, US officials began to panic. In a majestic reaction to the fear that the Crisis (during which they had cut their teeth) might rear its ugly head again once the war ended, they got down to business. They planned for the most far-reaching socio-economic engineering human history has ever seen. I call it the Global Plan.
The United States of America came out of the Second World War as the major (indeed, if one excludes Switzerland, the only) creditor nation. For the first time since the rise of capitalism, all of the world’s trade relied on a single currency (the dollar) and was financed from a single epicentre (Wall Street).
The New Dealers who had been running Washington since 1932 realized that history had presented them with a remarkable opportunity: to erect a post-war global order that would cast American hegemony in stainless steel. It was an opportunity that they seized upon with glee.
The New Dealers never forgot the unexpectedness of the Great Depression and its resistance to ‘treatment’. The more power they felt they had in their hands, the greater was their fear that a new 1929 could turn it into ash that trickled through their fingers.
In 1944, the New Dealers’ anxieties led to the famous Bretton Woods conference. The idea of designing a new global order was not so much grandiose as essential.
In a recent BBC interview, Dominique Strauss-Kahn, the IMF’s then managing director, called for a return to Keynes’ original idea as the only solution to the troubles of the post-2008 world economy.
New Dealers, however respectful they might have been of John Maynard Keynes, had another plan: a Global Plan, according to which the dollar would effectively become the world currency and the United States would export goods and capital to Europe and Japan in return for direct investment and political patronage – a hegemony based on the direct financing of foreign capitalist centres in return for an American trade surplus with them.
The Global Plan started life as an attempt to kick-start international trade, create markets for US exports, and address the dearth of international investment by private US companies. But before long it had developed into something bigger and supposedly better.
The New Dealers’ central organizing principle was that American global hegemony meant ‘looking after’, nursing and nurturing two ex-enemy countries. This they did by ensuring that there was strong demand for German and Japanese industrial output among other capitalist countries.
Stabilizing global capitalism was essential to maintain the Bretton Woods system and to enhance US prosperity and power.
Never before in history has a victor supported the societies that it had so recently defeated in order to enhance its own long-term power, turning them, in the process, into economic giants.
The US took it upon itself to relegate the periphery, and the Third World in toto, to the role of supplier of raw materials to Japan and Western Europe.
The result was a series of coups and wars, which the New Dealers and their successors in government pursued as part of consolidating the Global Plan.
Large-scale wars were fought in Korea and Vietnam.
Their audacious policies to promote capital accumulation in distant lands, over which they had no personal or political interest (in the narrow sense), can only be explained if we take onboard the weight of history under which they laboured.
The Global Plan, we must not forget for a moment, was the work of individuals who had experienced poverty, a deep sense of loss, the anxieties engendered by the near collapse of capitalism, and a consequent war of inhuman proportions.
Their experiences steeled their determination not to allow capitalism to slip and fall again on their watch.
The Global Plan lasted from around 1950 to 1971. It boiled down to a simple idea: a system of fixed exchange rates binding together the capitalist economies.
The Global Plan’s most impressive feature was its incredible adaptability – successive US administrations amended it every time bits of it came unstuck.
From 1945 onwards, at the heart of the New Dealers’ thinking lay an intense anxiety regarding the inherent instability of a single-currency, single-zone global system. Indeed, nothing concentrated their minds like the memory of 1929 and the ensuing Depression.
The simple lesson that the Global Plan can teach us today is that world capitalism’s finest hour came when the policy makers of the strongest political union on the planet decided to play a hegemonic role – a role that involved not only the exercise of military and political might, but also the kind of massive redistribution of surpluses across the globe that the market mechanism is utterly incapable of effecting.
The Global Plan unravelled because of a major design flaw in its original architecture. What was it? It was the lack of any automated global surplus recycling mechanism (GSRM) that would keep systematic trade imbalances constantly in check.
US policy makers failed to foresee that global imbalances could undergo a drastic inversion, leaving the United States in the unfamiliar position of a deficit country.
The Global Plan’s architects apparently neglected to take seriously the possibility that the lack of self-restraint would lead Washington to codes of behaviour that would undermine their brilliant grand design.
When America turned into a deficit nation, the Global Plan could not avoid going into a vicious tailspin.
President Nixon, on 15 August 1971, announced the effective end of Bretton Woods: the dollar would no longer be convertible to gold. Thus, the Global Plan unravelled.
The Global Plan was, of course, designed and implemented to be in the interests of the United States. But once the pressures on it (caused by Vietnam and internal US tensions that required an increase in domestic government spending) became such that the system reached breaking point, the greatest loser would not be the United States, but Europe and Japan – the two economic zones that had benefited most from the Global Plan.
The Global Plan was dead and buried, and a new unruly beast, the Global Minotaur, was to fill its place.
The termination of the Global Plan signalled a mighty rise in the costs of production across the world. Inflation soared, as did unemployment – a rare combination of stagnation with inflation that came to be known as stagflation.
American policy makers understood that they had a simple task: to entice the rest of the world to finance the USA’s deficits.
A new phase thus began. The United States could now run an increasing trade deficit with impunity.
The 1980s ideology of supply-side economics, the fabled trickle-down effect, the reckless tax cuts, the dominance of greed as a form of virtue, etc. – all these were just manifestations of America’s new ‘exorbitant privilege’: the opportunity to expand its twin deficits almost without limit, courtesy of the capital inflows from the rest of the world. American hegemony had taken a new turn. The reign of the Global Minotaur had dawned.
Once America lost its surplus position, US policy makers were quick to read the writing on the wall: the Global Plan’s Achilles heel had been pierced and its downfall was just a matter of time. They then moved on very rapidly, unwilling to countenance the prospect of jeopardizing global hegemony in a futile attempt to mend a broken design.
The aim? To afford it the ‘exorbitant privilege’ of running up boundless deficits, and thus to entrench further US hegemony – not in spite of but courtesy of its * deficit position - by choosing to fling the world economy into a chaotic, yet strangely controlled, flux – into the labyrinth of the Global Minotaur.
America began importing as if there were no tomorrow.
So long as foreign investors sent billions of dollars every day to Wall Street, quite voluntarily and for reasons completely related to their bottom line, the United States’ twin deficits were financed and the world kept revolving haphazardly on its axis.
The American Dream may always have been based on a shared fiction. But the reality of more than a century of rising living standards was never in dispute. Things changed in the 1970s.
The interest rate rise that was part and parcel of the Global Minotaur’s own rise to prominence proved more effective in destroying the enemies of US foreign policy around the globe than any military operation the US could ever mount.
When the United States lost its surplus position, the Global Plan’s fate was sealed. As we have seen, the United States turned its new twin deficits to its advantage. Instead of forfeiting its hegemonic role, or trying to reduce its deficits, it did quite the opposite: it enhanced its hegemony by boosting its deficits!
And since deficits must somehow be financed, the key to this second post-war phase was to have the rest of the world generate a constant tsunami of New York-bound capital.
This never-ending haj by the world’s capital to the global financial Mecca nourished America’s deficits to such an extent that they soon began to resemble a mythological creature, a Global Minotaur on whose presence the US economy became dependent and whose influence quickly extended to every region of the globe.
Walmart did something no one had ever thought of before: it packaged a new ideology of cheapness into a brand that was meant to appeal to the financially stressed American working and lower-middle classes.
The situation in the workshops and fields of the Third World, where goods are grown or produced on behalf of Walmart, is, as one might imagine, bordering on the criminal.
The Walmart extractive business model reified cheapness. It imported the Third World into American towns and regions and exported jobs to the Third World (through outsourcing), causing the depletion of both the ‘human stock’ and the natural environment everywhere it went.
The Global Minotaur and Walmart rose to prominence at about the same time. It was no coincidence.
Perhaps the most widely felt effect of the Global Minotaur’s ascendancy was its impact on house prices.
Homeowners feel good when estate agents tell them that their house is now worth a lot more, the rise in the asset’s nominal value never fails to make house owners feel more relaxed about borrowing in order to finance consumption. This is precisely what underpinned the stunning growth rate in places like Britain, Australia and Ireland.
The world economy became addicted to these financial instruments, of which the CDOs were but one example. Soon they began to function not only as ‘stores of value’ but also as ‘means of exchange’: they had turned into a very private form of money.
How did this differ, really, from handing the Fed’s printing presses over to the mafia? There is not much difference, is the honest answer. *
None of the high priests of fiscal and monetary conservatism batted an eyelid while zillions’ worth of toxic private money (over the quantity and worth of which no one had the slightest control) were inundating thr globe.
When the plug was pulled in 2008, and all the private money disappeared from the face of the earth.
The loss of the private money brought the Global Minotaur to its knees. With it came crashing down the only mechanism the world economy had for recycling its surpluses. The upshot is a Crisis from which no liquidity-pumping by the Fed and the other central banks can help us escape.
In retrospect, we see that the creature’s originators (America’s top administrators and some of Wall Street’s high priests) could discern the writing on the wall. Unlike the clueless handmaidens, they had foreseen the Crash. In painful slow motion.
The story of how the Crash of 2008 began is now the stuff of legend. Thus, there is no need to delve into the sequence of events. The trick is how to recall the dramatic events while keeping an eye on their deeper causes in the unravelling of the Global Plan and its replacement by the Global Minotaur.
If it were not for the lessons that the central banks had learned from the Crash of 1929, the repercussions would have been unimaginable – as opposed to just frightful.
The Crash of 2008 seriously wounded the Global Minotaur. Since 2008–09, the Crisis has eased. But it has not gone away. The beast is down and no one any longer fulfils its crucial function of keeping America’s twin deficits running and absorbing the world’s surpluses. Thus, the Crisis is constantly metamorphosing, taking its toll differently in different places. This is no longer a financial crisis. It is not even an economic crisis. It has become a political crisis.
Unable to coordinate policy at some central level, Europe dithers, its economies stagnate, the productive fibre degenerates and, consequently, the dream of political union, which was pushed along so brilliantly by post-war US administrators on the basis of enhanced growth prospects, fades. *
But who cares about the truth when lies are so much more fun, not to mention useful to those who are desperate to shift the spotlight from the real locus of the Crisis – the banking sector?
Socialism died during the Global Minotaur’s Golden Age, and capitalism was quietly bumped off the moment the beast ceased to rule over the world economy. In its place, we have a new social system: bankruptocracy – rule by bankrupted banks.
What matters is that 2008 marked a significant discontinuity: that life after it will not resemble life before it. In the context of this book’s narrative, the new post-2008 era is marked by a grand absence and a looming presence: absent is the Global Minotaur, which gave us the world prior to 2008 and which led us to the Crash of 2008; present are its resurgent handmaidens, which, since 2008, have returned with a vengeance.
By strengthening the hand of the bankrupt banks, they deprived themselves of any serious room for effective policy making. Once Wall Street’s powers had been restored, politics lost its capacity to rein in the ongoing Crisis.
Rather than resoundingly declaring ‘never again!’, our political leaders have effectively signalled to the banks that it is business as usual. Moreover, it is business as usual with public funds.
In political terms, our governments have well and truly capitulated to the failed banks.
If the pre-2008 period was unsustainable, the post-2008 period is replete with tensions that threaten future generations with a tumult, the likes of which the mind cannot even envisage.
It is now appropriate to turn to the Global Plan’s second pillar, Germany, and its mixed fortunes during the Age of the Minotaur and beyond.
Germany had something that Japan lacked: access to its own vital space, a space that the United States had previously laboured so hard to create on Germany’s behalf – the European Common Market, today’s European Union.
Like Japan, Germany, too, showed a magnificent capacity for efficiently producing the most desirable and innovative industrial products. Equally, it, too, failed miserably to generate endogenously the requisite demand for them. But, unlike Japan, Germany had the advantage of its European periphery.
From 1985 onwards, the Global Minotaur’s drive to expand the American trade deficit translated into a major improvement in Germany’s trade balance. This rubbed off on the rest of the EU, which saw its collective trade position go into surplus.
Germany bit the bullet and acquiesced to a common currency: a permanent currency union that would stop the speculators from speculating against the incidence and range of currency fluctuations.
The rest of the Europeans all had their own * reasons for wanting a common currency.
Just as in the United States in the 1970s and 1980s, when working people were forced to accept lower real wages in return for shiny credit cards, the underprivileged in Europe’s deficit countries were obliged to take on more debt.
In reality, the lethargic European growth rates had nothing to do with inflexible labour markets, an arthritic financial system or overgenerous social security.
The only relief Europe’s deficit countries had during the Global Minotaur’s halcyon days came from net exports to the United States. But when 2008 struck, even that silver lining vanished.
The Maastricht Treaty was sold to the European public and elites as reasonable measures to shield the euro from free riding.
Although a mechanism preventing such free riding is necessary for any currency union, it is certainly not sufficient. Something was missing.
Was that ‘something’ left out accidentally, or was there a hidden agenda? I think the latter. In fact, it was the same agenda that lay behind Harry Dexter White’s rejection of Keynes’ International Currency Union proposal at Bretton Woods, in 1944 * .
Just as the Americans insisted on preserving their right to run large surpluses under the Global Plan, so Germany demanded that the Maastricht Treaty should not include any explicit surplus recycling mechanism.
The great difference between American hegemony worldwide and German dominance within the EU was that the United States understood well the importance of recycling surpluses.
So, under the Global Plan, they made a habit of supporting Germany and Japan with generous capital injections. And when the Global Plan died an ignominious death, the Global Minotaur that took over recycled with glee, albeit by reversing the flows of capital and trade surpluses in favour of Wall Street.
When the Crash of 2008 wounded the Minotaur, the euro cracked. Greece was its weakest link, but the problem was deeply ingrained in the whole design and, in particular, in the lack of a surplus recycling mechanism.
The steady disintegration of the Soviet Union, which began unexpectedly in the late 1980s, soon led to the demolition of the Berlin Wall. *
What the oil crises, Walmart and some aggressive corporate moves had achieved in the United States in the 1970s, reunification brought to Germany in the 1990s.
From Poland to Slovakia and from Hungary to the Ukraine, dirt-cheap labour became available to German companies.
Once the euro was introduced, and German industry was shielded from the competitive currency depreciation of countries like Italy, its gains from the fall in wages became permanent.
However, even though the picture seemed quite rosy for the German elites, something rotten was taking over its banking sector.
And when the Crash of 2008 happened in New York and London, that virus was energized in earnest. It was to be the beginning of the euro’s existentialist crisis.
German banks were caught with an average leverage ratio of €52 borrowed to every €1 of their own funds – a ratio worse even than that racked up by Wall Street or London’s City.
The ECB, the European Commission (the EU’s effective ‘government’) and the member states rushed in to do for the European banks what the US administration had done for Wall Street.
The financial sector the opportunity to mint private money all over again. Once more, just as the private money created by Wall Street before 2008 was unsustainable and was bound to turn into thin ash, the onward march of the new private money was to lead, with mathematical precision, to another meltdown.
This time it was the public debt crisis (also known as the sovereign debt crisis), the first stirrings of which were felt at the beginning of 2010 in Athens, Greece.
Most puzzlingly, this is a crisis that Europe could resolve in a few weeks. How? And, if I am right, why is Europe dithering? *
Europe’s approach has failed because it has both ignored the way the debt crisis and the banking crisis reinforce one another and also turned a blind eye to the deeper cause of the crisis: the lack of a surplus recycling mechanism at the heart of the eurozone. Here are three simple steps in which effective remedies could be put in place.
The first step would be for the ECB to make the continuation of its generous assistance to the banks conditional on having the banks write off a significant portion of the deficit countries’ debts to them.
Step two would have the ECB take on its books portion of the public debt of all member states, equal in face value to the debt that the Maastricht Treaty allows them to have (i.e. up to 60 per cent of GDP). The transfer would be financed by ECB-issued bonds that are the ECB’s own liability, rather than being guaranteed by member states.
Finally, the third step brings into play another venerable EU institution, the European Investment Bank (EIB). The EIB has double the capacity to invest in profitable projects than does the World Bank. Unfortunately, it is underutilized because, under existing rules, member states must advance a proportion of the investment.
Given the awful state in which they find themselves, the eurozone’s deficit states cannot afford to do this. But by granting member states the right to finance their contribution to the EIB-financed investment projects by means of bonds issued for this purpose by the ECB (see step two above), the EIB can become the surplus recycling mechanism that the eurozone currently lacks.
Summing up, the first two steps would make the debt crisis go away, and the third would underpin the eurozone by providing its missing link – the mechanism that it never had and the lack of which caused the euro crisis in response to the Crash of 2008.
But if I am right about all this, why does Europe not take up this suggestion, or something along these lines?
If the euro crisis were to be resolved quickly and painlessly, Germany would forfeit the immense bargaining power that the simmering crisis hands the German government vis-à-vis France and the deficit countries.
So it seems that the euro crisis is wholly unnecessary from an economic viewpoint, but that it serves the interests of maintaining within Europe the role that Germany developed for itself during the reign of the Global Minotaur. And now that the Minotaur is kaput, Europe is in crisis and Germany is in denial.
Neither the nature of China’s rise nor its future impact can be understood without a good grasp of the world as shaped by the Global Minotaur. For the soaring dragon not only grew up in an environment shaped by the Global Minotaur, but must also mature in an unstable world occasioned by the latter’s demise.
America’s conundrum in the face of stupendous Chinese growth is that the Crash of 2008 stopped the Minotaur from quick-marching the Chinese to its tune. Up until then, the Chinese had depended on the Minotaur for their trade surpluses, and were thus forced to reinvest them in the United States.
With the Minotaur no longer capable of absorbing increasing quantities of Chinese goods at anything like the pre-2008 rate, China does not automatically need to send all of its capital to New York.
Unable to expand its deficits and lacking the clout to do to China what it did to Japan in 1985, the United States is finding it hard to decide how to deal with China.
China seems to be pursuing a new strategy of creating something like its own Global Plan! It is directing part of its outbound capital flows to countries other than the United States, in an effort to stimulate demand for Chinese goods there, in those other places.
The ‘emerging economies’ are growing at the expense of Europe and the United States, the two loci of long-established capitalism, which, regrettably, have spawned the new socio-economic ‘system’ of bankruptocracy.
Some think that China only needs to wait, certain that, in the fullness of time, it will prevail. The Chinese leadership is less sure. It understands intimately the scarcity of total demand in the post-Minotaur world.
On the one hand, China’s consumption-to-GDP ratio is falling – a sure sign that the domestic market cannot generate enough demand for China’s gigantic factories. On the other hand, its fiscal injections are causing real estate bubbles. If these go unchecked, they may burst and thus cause a catastrophic domestic unravelling. But how do you deflate a bubble without choking off growth? That was the multi-trillion dollar question that Alan Greenspan failed to answer. It is not clear that the Chinese authorities can.
For the first time since World War II, the United States has lost its capacity to recycle the planet’s surpluses. Without an alternative mechanism for achieving this recycling, America’s (and the world’s) capacity to recover is severely circumscribed.
Bankruptocracy is as much a European predicament as it is an American ‘invention’. The difference between the experience of the two continents is that at least Americans did not have to labour under the enormous design faults of the eurozone.
Americans were spared the need to contend with a central bank utterly shackled by inner divisions and the German central bank’s penchant for treating the worst-hit parts of the Union as alien lands that * had to be fiscally waterboarded until they ceased to obey the laws of macroeconomics!
Europe is disintegrating because its architecture was simply not sound enough to sustain the shockwaves caused by our Minotaur’s death throes.
To recap, the Minotaur’s surplus recycling was essential to the maintenance of the eurozone’s faulty edifice. Once it vanished from the scene, the European common currency area would either be redesigned or it would enter a long, painful period of disintegration.
An unwillingness by the surplus countries to accept that is the reason why Europe is looking like a case of alchemy-in-reverse.
Just as in Europe’s surplus countries, so too in China, * the Global Minotaur’s passing has impeded any meaningful recovery. Indeed, it has made the world we live in more precarious.
For until and unless a global recycling mechanism rises from the Minotaur’s ashes to replace him, the world will remain an insecure, depressing place.