Dollar, debt and the end of the American dream

Issue: 163

Padraic Finn

A review of Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (Penguin, 2019), £12.99

I won’t say kowtow…but at least be nice to the countries that lend you money—Gao Xiqing, Head of the Chinese Sovereign Wealth Fund, 2008.1

On the morning of Saturday 13 September 2008, Jamie Dimon of JP Morgan told his senior staff to “prepare for Armageddon”. JP Morgan might pull through the crisis of collapsing financiers, but all the major investment banks on Wall Street—Merrill Lynch, Morgan Stanley and Goldman Sachs faced imminent bankruptcy. The Federal Reserve (the US Central Bank) was also preparing for the end of the world. Even while it grappled with the problems of bankrupt banks and their insurers, a greater worry was the shortage of dollars in the overblown European banks and the threat that bankruptcies in Europe could pull down US banks.

Adam Tooze’s book Crashed is a high-octane drive through the global politics and the economics of the crash and its aftermath. Since John Maynard Keynes, orthodox macroeconomics has understood global economic problems within a framework of national states, productive (or otherwise) economies and trade imbalances. The same orthodoxy assumed (pre-2007) that the next crisis would arise between the United States and China as the latter pumped its export earnings (in dollars) back in to the US by buying Treasury and other bonds.2 It is possible to argue that the flood of Chinese dollars was a significant contributor to the 2007 crash, but the main fissures came from within the US-dominated dollar system itself. And, contrary to the European view that this was a problem of Anglo-Saxon3 capitalism, it quickly became clear that, because of the ­integration of the global economy within the dollar zone, the crisis rapidly crossed the Atlantic and almost collapsed the eurozone.

Another contender, the excessive lending of so called “sub-prime” mortgages, may have been the trigger, but was not the cause of the crash. Ever since the New Deal in the 1930s, mortgage providers like Savings and Loans (and later, state sponsored lenders like Freddie Mac and Fannie Mae) were able to use state backing to create mountains of credit secured against housing.4 US state ­restriction on Fannie and Freddie after the Enron accounting scandal, led to a huge increase in lending by private banks.5

Lending by commercial banks and building societies such as Northern Rock had been limited to a multiple of their depositor’s funds.6 Deregulation of the financial sector from the 1980s onwards allowed them to float on the stock market to access more capital but also to bundle up their mortgages and sell them on as collateralised debt obligations (CDOs) having first been rated (for a fee) by credit reference agencies such as Moody’s. The Fed’s response to the downturn in the economy after 2001, lowering interest rates, boosted the growth of lending. By 2006, when the Fed had pushed interest rates back up to 5.25 percent, the ­lending boom continued upwards, led by the shadow banking sector and fuelled by foreign cash flooding into American “safe assets”. By that year, 70 percent of the $1 trillion in new mortgages was “subprime”. As the banks applied the brakes and bought insurance in the form of credit default swaps (CDSs), Goldman Sachs bet against a collapse in the housing market—ie the likely default of the mortgages they were still selling! Many borrowers, enticed by low initial interest rates, couldn’t cope with the steep hike. Defaults and repossessions began to rise, house prices began falling and the downward spiral triggered the crash.

Deregulation from the 1980s onwards had allowed investment banks to get around the restrictions on the more highly regulated commercial banks and the lower returns in that sector. Credit creation by financial intermediaries such as investment banks and hedge funds—the “shadow banking” sector—was ­effectively outside the control of the Fed.7 Mortgage backed securities were treated as if they had a government guarantee, but the same was not true of asset-backed commercial paper (ABCP) issued by the investment banks. Huge portfolios of loans (mortgages, car loans, credit card debt and student loans) were offloaded into structured investment vehicles (SIVs) in return for cash raised by selling ACBP backed by the good name of the parent bank. Loans were “off balance sheet” and often hidden “offshore” in tax havens.8 Under competitive pressures to expand and increase profitability, investment banks went a step further. Their main source of funds was the wholesale money markets. Using so-called “repo” agreements,9 a small amount of capital could support a much bigger volume of lending, provided the repo could be continuously rolled over. All would be well as long as the money markets didn’t dry up.

Investment banking was very profitable. Even in the early 2000s 35 percent of all profits in the US economy were earned in the financial sector, sucking in cash from less profitable sectors. But when confidence fell, the partners in the repo deal demanded bigger “haircuts” (discounts) before re-lending, which meant the seller had to find larger amounts of capital to continue trading. Tooze points to the already inherent flaws in the banking model, whereby banks borrow short and lend long, betting that only a small fraction of their depositors will claim their cash back at any one time. As the bubble expanded, banks became ever more dependent on short-term (often overnight) loans from the wholesale money markets.10 Competitive pressures led to a shrinking of capital relative to lending and the danger that they wouldn’t be able to pay off their own massive loans.11 As confidence waned, inter-bank lending dried up. Holding valuable assets couldn’t save overextended borrowers attempting to juggle their long-term loans against short-term funds. Securities were meant to spread risk but because banks and finance houses had become more concentrated through mergers and takeovers, the risk was likewise concentrated. Though Lehman Brothers and insurance company AIG held billions of dollars worth of solid assets such as Treasury bonds, they still went under when confidence tanked.

The battle in the US ruling class

Noting the “outrageous cost of the bailout”,12 Tooze asserts that Obama’s “corporate liberalism” saved the global financial system, essentially by pumping in state created dollars. Martin Wolf of the Financial Times described 14 March 2008 (the attempted rescue of the investment bank Bear Stearns by the Fed) as “the day the dream of global free-market capitalism died”. Tooze estimates the overall cost of the bailout as $7 trillion (US GDP in 2010 was $14.6 trillion). No leftist, he blasts this as a class action to hand trillions of dollars in loans to “a small coterie of banks, their shareholders and their outrageously remunerated staff”.

Outright nationalisation would have been the cheapest option—even for Alan Greenspan, a former disciple of Ayn Rand. But neither Treasury Secretary Hank Paulson nor the Republicans (and some Democrats) would countenance the “un American financial socialism” of the US state taking direct control of the banks. Restructuring required “market solutions”. It still took a massive drop in the foreign exchange, stock and bond markets to jolt less than half the Republican Party into supporting the Troubled Asset Relief Program (a $770 billion bank rescue package based on purchasing of toxic assets from banks) at the second attempt. Republican objectors mobilised popular opposition to bailing out a reckless and decadent financial sector when homes were being repossessed
(2.5 million between 2007 and 2009) and the economy was already in a downward dive. Ironically, all nine major US banks were eventually forced by “sovereign authority” to accept a hybrid of state guarantees and recapitalisation through low dividend, non-voting preference shares. The cost to the US Treasury of buying shares in mostly bankrupt banks was $125 billion. But state support didn’t stop there. The Fed, like all other central banks, had been “lender of last resort” to ailing banks. Over the next few years it greatly extended intervention by Quantitative Easing (QE)—creating money in order to buy back bad debt.

Bitter divisions in the US ruling class extended beyond the bailout and the subsequent QE policy. Tooze remarks that some cheered the bankruptcy of Lehman as “letting the market do its work”. But most of those who had hitherto professed belief in the self-correcting power of markets, supported the bailout.13 Perhaps it was less that they were persuaded and more that they simply recognised the political necessity of the “too big to fail” calculation that “saved” the dollar-dominated global banking system. Politics trumped economics as outgoing president George W Bush and Republican candidate John McCain were enlisted to force the bailout through.14 Interestingly, this followed Congressional rejection of Paulson’s first Troubled Asset Relief Program (TARP) bill, which demanded he be given a legal free hand and not have his decisions “reviewed by any court of law or any administrative agency”.15

Tooze shows how the idea of unlimited executive power had deep roots not just among the “technocrats” in the Treasury and the Federal Reserve. Barack Obama’s economic policy was defined by the Hamilton Project, launched in 2006 by Robert Rubin, who became the key link between centrist Democrats and Wall Street. They feared that globalisation as defined by the Republicans risked an anti-globalisation backlash and a catastrophic financial crisis. Rubin, as Bill Clinton’s treasury secretary boasted of how he had turned Ronald Reagan’s deficits into budget surpluses, but by 2004 spending on the Iraq War and tax cuts by Bush had led to a record deficit of $568 billion. Not only did this threaten the value of the dollar, rising government debt, they feared, would lead to a loss of confidence among foreign investors—not European or Japanese (as in the 1980s and 1990s), but Chinese. But, as Tooze points out, focussing on technical financial management issues could not insulate the Democrats politically from the tsunami of resentment of the bailout coming not just from Republican populists but also from the left.16

Crisis in the eurozone

Orthodox explanations of the crisis in the eurozone stress the mismatch between trade surpluses in Germany and deficits elsewhere.17 Tooze shows that, contrary to the orthodoxy, the problem lay in finance, not trade. The EU asset price bubble was proportionately bigger than the US and this drove trade rather than the reverse. He argues that the so-called sovereign debt crisis, which nearly brought down the eurozone on several occasions between 2010 and 2014, disguises the fact that the crisis actually centred on the problem of dollar funding for EU banks. Not only was the EU “overbanked” compared to the US, it borrowed in dollars to lend in euros. In 2007 the dollar mismatch was $1.3 trillion, very sensitive to changes in the exchange rate. Tooze further points out that it had been by way of London’s euro-dollar market that the dollar was made global. In 2007, 35 percent of dollar foreign exchange went through the City. By then, London was the main nexus for US and EU banks trading in dollars. The Tony Blair government’s lightening of regulation grated so much on US financiers that they demanded corresponding deregulation from their own government.

Ireland, a “little island of Anglo-Saxon capitalism operating within the EU” operating a deregulated “offshore” financial sector, was much admired by the US.18 The massive asset price boom meant that by September 2008, when the Irish banks were rescued in toto by the state (at a projected cost of 440 billion euros), Ireland’s bank debt was 700 times its GDP. This decision in effect forced the Angela Merkel government to make a unilateral verbal commitment to guarantee all savings deposits in Germany’s banks and prevent “Armageddon”. The failure of the European banks was considered an even greater threat than bank failure in the US.

Europe’s banks had always been large: in 2007, the three biggest banks in the world, RBS, Deutsche and BNP Paribas, were European. However, as Tooze points out, “feeding off the transatlantic financial circuit”, they “had grown to gargantuan size”. Compared to GDP, every member of the eurozone was three times overbanked compared to the US. And European banks were far more dependent on volatile money-market funding than US banks. As Tooze puts it: “social Europe” versus “financial capitalism” was a delusion: Europe’s financial capitalism depended for its growth on being deeply entangled in the American boom. The European financial system was “a global hedge fund, borrowing short and lending long”. Problems were compounded by its dollar dependence and the question of whether it (and/or London) would be bailed out in a crisis by its political and economic rival, the US state.

Market logic was always integral to the European Central Bank (ECB) to a degree not the case with the Fed or the Bank of England. It didn’t buy large quantities of government debt but used repo19 (of private and public debt) much in the way US banks and finance houses did. The Maastricht Treaty had banned mutual bailouts. The ECB’s main priority was fighting inflation. Its demands for austerity, “labour market liberalisation” and privatisations became the principal conditions once bailouts became a political necessity, most notably to Greece. Tooze dispels several myths about Greece. Its debt mountain had been caused by an explosion in private credit creation in the 1980s and 1990s. Nor did the majority of lending come from Germany but from France, the Benelux countries and Ireland. The Greek debt was an insignificant element of the eurozone debt crisis that burst after 2010 and lasted until 2015 when Mario Draghi, Italian banker and neo-classical economist, declared the adoption of full-scale quantitative easing (QE)—creating euros to buy the doubtful assets of Greek and other banks in order to stave off collapse. The ECB strongly resisted debt write-offs, which had been demanded by the US-dominated IMF. The Greek bailout is notable for the size of the haircuts (write-offs)—53.5 percent, or 107 billion euros. And the way it shifted the burden of debt from private financiers (including Greek banks) to the public. Most went on buying out private sector bondholders or in loan interest, including to the ECB. Tooze notes that, of the 226.7 billion euros Greece received between 2010 and 2014, only 11 percent went to the government or the taxpayer.

The sleight of hand that rendered the eurozone crisis as a problem of reckless government borrowing, concealed an even greater political embarrassment for the EU: the Fed bailed it out. Worried about the threat of bankruptcy in EU banks, and in particular the shortage of dollars, as early as 2008 the Fed secretly instigated a series of programmes to pump cash into the repo markets, nominally to help US banks. Allowing London-based US banks to avail of dollars in effect “backstopped” the City of London. Eurozone banks took the opportunity to offload their US securities in return for dollars. As Tooze puts it: the Fed “was acting as the world’s piggybank”—Europe became the “13th Federal Reserve district”. For Tooze, the idea of “social Europe” was dead well before “Anglo-capitalism” bailed out the euro, with the ruthless enforcement of EU austerity led by variants of SPD/CDU/Green coalitions in Germany trying to cement the euro’s standing as a global currency.

The global dollar

Bailout finance was deployed globally on political grounds. Early in the crisis, the ECB, the Bank of England, the Bank of Japan and the Swiss National Bank were secretly provided with dollar “swaps” (to the value of about $10 trillion) by the US, as were the central banks of Brazil, South Korea, Mexico and Singapore. The selective, secret (and profitable) programmes reaffirmed the dollar as the global reserve currency. But there was more. The Obama administration, finding it almost impossible to get a fiscal stimulus past Republican opposition in Congress, authorised another round of QE. Overriding complaints in the G20 from Brazil, South Korea, China and Germany that printing dollars to buy securities at the rate of $75 billion per month would lead to a currency war and would further destabilise the global economy, the Fed effectively “monetised the debt”, creating dollars to cover its outgoings.

Tooze details the key political flashpoints of dollar politics, namely with Russia and China.20 Russia’s large dollar reserves meant an entanglement with the dollar that conflicted with Russian efforts to resist encroachments by the EU’s “Eastern Partnership” in Georgia and Ukraine.21 The US dominated IMF, under pressure from a bankrupt Ukrainian government, made a virtually unconditional loan to the Ukrainians in April 2014. A year or so previously, the EU had provided a more meagre offer in support of its own efforts to broker a deal between the divided factions in the country. Tensions between the US and the EU were revealed by an impatient US official telling the US ambassador…“fuck the EU”.

Extremely concerned about the ballooning crisis and demanding a total US guarantee for Fannie and Freddie to safeguard their loans, the Chinese government switched back to (safer) US Treasury bonds.22 By 2009, its holdings of bonds had increased by more than 50 percent from their 2007 level to $1,464 billion.23 Tooze argues that the Chinese boom which gave rise to these global imbalances was not export dependent. The real driver of growth was massive domestic investment, firstly in traditional heavy industry then (from 2007) a huge increase in investment in infrastructure and healthcare, financed by a corresponding expansion in state-issued credit. Not surprisingly, in response to investment soaring towards 20 percent of GDP in 2009, the Chinese economy grew at the rate of 9.1 percent, way above the recession-hit US and Europe. Economic growth was not a response to a military threat or planned expansion, but a “hyperactive” and “unbalanced growth” in response to internal political pressures. Noting the currency crises marked by huge outflows of cash, in spite of a big trade surplus and large reserves, Tooze identifies tensions between an elite trying to move wealth out and system managers who favour stability.

So, what did change?

Tooze describes the crash as the “first crisis of a global age”. He dismisses the notion that this was “basically an American crisis or an Anglo-Saxon crisis” and notes the irony that it was two supposedly self-reliant nation-states with trade surpluses and dollar reserves (Russia and South Korea) that suffered particularly badly from the dollar crisis. Neither does it represent the demise of American unipolar power for two reasons: firstly, because it demonstrated the centrality of the dollar and, secondly, because it showed the contrasting ability of US and eurozone leaders to force a political resolution to the crisis. Tooze is concerned that in the next crash, especially in the light of the faltering EU project, a Donald Trump presidency would have neither the will nor the means to fend off a global financial meltdown.

In explaining the crash, Tooze, I believe, attributes too much to failures of technical issues of regulation and lack of political will on the part of governments and too little to the structures of US-dominated global capitalism. His book is haunted by the problem of how cross-party coalitions at “elite” level are failing either to manage their respective insurgent bases and to advance the kind of technical solutions to the crisis which would secure, even temporarily, the essential “centrist” alliance. The obvious comparison with 1914 represents for him, a crisis of political leadership, specifically the inability to manage the “conflict between capitalism and democratic politics”—“the great crisis of modernity”. His sombre reckoning is a long way from the claim by Francis Fukuyama less than 30 years ago that liberal democratic capitalism was the final stage of “historical synthesis”.24

“Taking seriously, the ‘political’ in political economy” enables Tooze to account for the crash and its aftermath in ways that are both vivid and informative. Ironically attending to the “political” actually conceals his analytical dependence on the economic orthodoxy that insists on their separation.

Prior to the crash, trade or financial imbalances were assumed to pose the biggest threat to economic stability. Over 600 pages, Crashed paints a brilliant fast-moving account of the actual crisis: in the US and European banking systems. “Armageddon” may have been avoided by the exercise of peremptory US sovereign power. But, as Tooze recognises, repeating this trick may be difficult next time. The global banking system is dominated not by “national monetary flows” but by flows of intra-corporate finance with 30 percent of all global trade being internal to transnational corporations25 and the value of currencies driven much more by speculation than the needs of trade or the policies of central banks. This surely demands more than a hope for orthodox technical or political fixes aimed at postponing or mitigating the ruptures produced by these crises.

Padraic Finn is a long-standing activist with an equally long interest in political economy.


1 Fallows, 2008.

2 However, most commentators were complacent about the danger of a crash of the credit boom. The Efficient Markets Hypothesis led most orthodox economists to the view that markets (especially financial and stock markets) had priced in all risk and were therefore self-correcting—Chen, 2018.

3 London is the key nexus between banking capital in the US and the European Union, not least because, from the Second World War, the City was the main centre outside the US for trading in “offshore” dollars —see Norfield, 2017. The impact of Brexit on the highly profitable activities of London finance houses remains to be seen.

4 Fannie and Freddie were originally set up (as New Deal Government Supported Enterprises) to buy mortgages from smaller, regional or state-based mortgage lenders so the latter could use the cash to provide further loans, an early version of collateralised debt obligations. Both had grown so big by the early 2000s that they were “capped” by regulators. This opened the door to a massive expansion of mortgage lending by banks which culminated in the crash of 2007-8.

5 Segal, 2018.

6 Northern Rock has the dubious distinction of being the first UK commercial bank to crash since the 1860s—Elliott and Treanor, 2017.

7 Kenton, 2018a.

8 Lehman’s CEO Richard Fudd earned $448.8 million between 2000 and 2008.

9 Where an investment bank buys a security and immediately sells it on for a short period, from one night to three months. It pays a small amount of interest to the buyer and agrees to buy it back at a small discount (haircut) say, 2 percent. A haircut of 2 percent meant a bank would only need $2 million of its own to fund the purchase of $100 million worth of securities on which it could earn interest.

10 Kenton, 2018b.

11 Bailing out Anglo Irish Bank cost $34 billion—nearly 20 percent of Ireland’s GDP.

12 Smith and Foley, 2017.

13 Baker, 2009.

14 Not surprisingly, Bush’s failure to find “weapons of mass destruction” in Iraq led many in Congress to doubt his credibility when he claimed rejection of the TARP would lead to financial meltdown.

15 Filmmaker Michael Moore described his proposal thus: “The rich are staging a coup this morning”—Moore, 2008.

16 Bernie Sanders voted against the bailout.

17 See for example, Wolf, 2015.

18 The European Central Banks’s main concern was that Ireland should not “burn the bondholders”, ie default on its debts. Like Greece, this was for show more than effect. Martin Sandbu described the Irish banks thus: “A small racket on Europe’s financial periphery, busily and exuberantly losing…investor’s money in the time-honoured way of lending more for houses than they were worth”—Sandbu, 2015, p104.

19 Reiff, 2018.

20 With the Trans Pacific Trade Partnership, the US attempted to corral South Korea, Australia, Japan and Vietnam into an anti-Chinese alliance. As ever, there were tensions within: the City of London angled for a special position in the internationalisation of the Yuan/RMB and, in 2011 against US opposition, signed up to the Chinese dominated Asian Infrastructure Investment Bank.

21 Huge amounts of Russian dollar earnings were spirited offshore (often via Cyprus and then into London) by the plutocrats around Vladimir Putin—Rapoza, 2017. Interestingly, when in 2008 Russia attempted to enlist China’s help in attacking the dollar by selling billions of dollars worth of US housing securities, China refused. Russia unloaded $100 billion of Fannie and Freddie bonds on the plausible grounds they were too risky.

22 Head of the Chinese Sovereign Wealth Fund Gao Xiqing welcomed with sarcasm the “pragmatic” intervention by the Treasury and the Federal Reserve to save the US financial system: America was not so much a capitalist democracy but “socialism with American characteristics”.

23 And the US’s “China problem” continues to grow—Winkler, 2018.

24 Eaton, 2018. Fukuyama also suggested that society could lapse back into “barbarism”. See also Sagar, 2017.

25 World Bank, 2017, p63.


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Chen, James, 2018, “Efficient Market Hypothesis—EMH”, Investopedia (29 June),

Eaton, George, 2018, “Francis Fukuyama Interview: ‘Socialism Ought to Come Back’”, New Statesman (17 October),

Elliott, Larry and Jill Treanor, 2017, “The Day the Credit Crunch Began, 10 Years on: ‘The World Changed’”, Guardian (3 August),

Fallows, James, 2008, “‘Be Nice to the Countries That Lend You Money’”, Atlantic (December),

Kenton, Will, 2018a, “Shadow Banking System”, Investopedia (24 January),

Kenton, Will, 2018b, “Wholesale Money”, Investopedia (3 April),

Moore, Michael, 2008, “The Rich Are Staging a Coup This Morning…a Message From Michael Moore”, Common Dreams (29 September),

Norfield, Tony, 2017, The City: London and the Global Power of Finance (Verso).

Rapoza, Kenneth, 2017, “Tax Haven Cash Rising, Now Equal To At Least 10% Of World GDP”, Forbes (15 September),

Reiff, Nathan, 2018, “Repurchase Agreement—Repo”, Investopedia (30 December),

Sagar, Paul, 2017, “The Last Hollow Laugh”, Aeon (21 March),

Sandbu, Martin, 2015, Europe’s Orphan: The Future of the Euro and the Politics of Debt (Princeton University Press).

Segal, Troy, 2018, “Enron Scandal: The Fall of a Wall Street Darling”, Investopedia (20 September),

Smith, Alan and Stephen Foley, 2017, “Bailout Costs will be a Burden for Years”, Financial Times (8 August),

Winkler, Matthew A, 2018, “Markets Conclude the US is Riskier than China” (12 December),

Wolf, Martin, 2015, The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis (Penguin).

World Bank, 2017, “Arm’s-Length Trade: A Source of Post-Crisis Trade Weakness” (June),