Q&A: Adam Tooze on the financial crisis, Trump and the City of London after Brexit
Ten years after the start of the financial crisis, Columbia University historian Adam Tooze’s epic work of economic history, Crashed, describes a world still coming to terms with its aftermath. He spoke to City A.M. about the US, the City of London, and where the next crash could come from.
Why write this book now?
I started writing the project when I thought we had closure in 2013, when Draghi had stabilised the Eurozone and Obama had been re-elected and so it basically looked like a done deal, for better or worse. This is not a happy story in a simple sense, but bad but necessary things had been done and stabilisation had been achieved. And so with that in mind it seemed that it was ok to have a go at writing a summary that went beyond the early journalistic accounts and made use of some of the new economic analysis that appeared during the crisis.
The first two-thirds of the book still fundamentally represent that story, but subsequently repositioned as a result of the series of shocks that came afterwards – Ukraine and Georgia. Then there was the crisis in Greece, the second phase, which demonstrated how powerful the ECB intervention could have been after 2010, if only they'd been willing to do some version of QE [quantitative easing]. Then there was the near-miss crisis in China in 2015/2016 which pointed to exactly how large China had become and how the global economy really had transitioned.
And then of course there are the things that are on everyone's minds on either side of the Anglosphere: Brexit and the Trump election. I have to admit that Brexit and Trump really have been shocking events. Those have been events which have shaken the story and those are the events that I really feel still to this day and to this moment make it hardest for me to locate that narrative.
What do you make of the supranational regulatory system, the Basel system? Could it handle another crisis?
First of all, broadly speaking, lessons were learned. For instance they've tightened up liquidity regulations which were missing from Basel II – they only focused on capital. Basel III focused very sharply on liquidity. Liquidity was not the key driver of the crisis in the bad banks in '08, which was a solvency crisis. But the problem across the entire banking system was that of a mega bank run, and that's a liquidity problem, not a solvency problem, and you can't solve it by capital alone. You need to be able to have ready cash.
Columbia University historian Adam Tooze (Source: Allen Lane)
You can do that by means of central bank intervention but it's obviously better if the banks themselves are in a much less illiquid position than they were. That has had real effects. In the repo market [repurchase market – borrowing using government bonds as security] is considerably smaller than it used to be. Banks aren't willing to stockpile large quantities of illiquid assets because they have to make provision for them. So that's all real. Then the capitalisation especially of the American banks is considerably more solid than it was.
Are the banks solid enough?
Solid enough, no. To make them really safe you'd have to have 20 to 25 per cent capitalisation, much like regular businesses. That didn't happen. So they're a bit safer. We've got better seat belts, and we've got better brakes, but we haven't slowed the car down. It's still going at 200mph.
Another element is the liquidity swap line system that allows the central banks in the broader network of dollar-based banking to access dollars at a moment of illiquidity. That is there, and was made permanent in 2013. That didn't exist except as a relic of an earlier era in 2007-08, and had to be innovated into existence at that point. We're in a better place in that respect.
More capital, but is it really enough? More liquidity buffers, but is it really enough? Swap lines, yes, sure. But the effect of the swap lines is to uphold the dollar-based banking system rather than to wind it down.
Do you think the current US administration would allow that level of support?
There is going to be a bust-up between the Trump administration and the Fed, obviously, as the Fed raises interest rates. It will survive – although nothing should be ruled out at this stage! The question is whether there isn't a residual element of mainline establishment Republicans who would push back against it. Although they've shown how powerful they are and how they can be relied on!
That is one of the big stories that the book tells, of the collapse of the Republican party, rather than talking about the crisis of democracy and the end of liberalism and all these sorts of generalities. I can see why people do, and those are good shorthands, and it does feel like a crisis right now, but much more specifically what we're dealing with is a crisis of centrist conservatism in the US, which had since the 1970s since Nixon pursued this really invidious policy of on the one hand of big business globalism to satisfy the corporate elite and then a completely no-holds-barred and unscrupulous mobilisation of xenophobic nationalist and racist white votes.
That's the flip side of what the social democrats and centre leftists did, where they would take the support of the working class for granted whilst pursuing a similar policy, and in both parties compounded by a converging around a corporate liberalism, a kind of “Davos man” affirmative relationship to diversity and cultural modernisation out of sync with their base. That's true of both sides.
Where do you see the China-US relationship going in the next decade?
The question we ask all the time is where is the next big crisis coming from. It doesn't look like it's happening on the European-American axis. The one place we do really have a very large build-up of debt which looks a little bit like '08 is China.
As much as China is growing, and as powerful as it's becoming in the process , there are bound to be tensions between the United States and China. The Chinese are clearly a strategic actor, they have an industrial policy, they do want to steal our tech. There's no reason to doubt it. Once they've got it all they'll then compound it with their own expertise and they will try to dominate all of those markets. I don't think there's any reason to doubt they're serious. They say what they're planning to do.
For all of that they are getting caught up in this same logic of interdependence that has characterised globalisation under American auspices more generally. We are in an increasingly antagonistic relationship and it's being driven by both sides – the Chinese are no innocents. Nevertheless, there is this increasing interdependence. That's just a situation we've not had before.
Where does the UK fit in all of this?
It's a key part of the '08 crisis. London was the place where you could really feel the force of the argument that I'm making. If any place in the world understood that American banking was European and European banking was American it was London, because London was the place where that was done. London was at the absolute epicentre of the crisis of '08.
But then London also progressively finds, as a result of the Eurozone crisis, that that offshore position becomes more and more uncomfortable relative to Europe. The Tory party leadership decides to take this spectacular gamble on the referendum which is trying to address the problems the Republicans also failed to solve. They end up with Trump, we end up with Brexit.
In the meantime the most astonishing thing for me is that the UK – in the face of quite overt American opposition – decided to relaunch London as a global capital market, this time for China.
There is a nightmare scenario here which is that we have a hard Brexit and a crash landing in China. That would be the ultimate bankruptcy of that moment of hubris.
If things go as the government plans and the UK becomes a third country after Brexit what model does it follow?
You can have cities like London and markets like London continuing to play a pivotal role in various types of trade. In the same way that the Swiss trading houses play an absolutely pivotal role in global commodities. There's no particular reason for them to be like that other than the history that they happen to be there. You can easily imagine path-dependent continuities in London that have that kind of property. There's the infrastructure, the expertise, the tech, the legal frameworks – all extremely convenient and amenable. And you could easily devise an incredibly light-touch regulatory regime that would allow London to remain competitive. Yield-chasing investment bankers will find those places and use them.
The real question is whether or not there's any future special relationship of the type that ultimately did underpin the relationship between the City and the US. That's probably maybe only an historical episode. It was important in the long historical episode, but you can also see it coming to a close. That doesn't mean that the City won't find new business, and it will clearly have to find it in Asia, because that's where the growth is, but it won't be founded, and no one should kid themselves, on the nature of the relationship.
If you invite the Chinese in you're inviting a state actor into the game. To that extent if Britain is dealing with the Chinese state essentially, then our relationship is going to be distant, subordinate, at their bidding. There's no Nato structure; we aren't anyone's favourite aircraft carrier. There's a commercial logic, it's easy to see. There's a historic formal analogy with the US, easy to see. The substance of the two relationships, precisely because the history is so different, is radically different.
You can see people making a lot of money in the City of London forever doing this kind of thing, but it will not constitute the kind of relationship that the City of the 1970s to the 2000s was. It would basically be price competition. For the Americans what was crucial was the compatibility of the legal systems. We're never going to have that with China.
What your one takeaway from the book?
Much as we may be tempted to imagine a post-American world, our problem is in fact that we can't do without them. Our problem right now is that we can't live with them and we can't live without them. At this point one of the useful things it can do is to tell a world – horrified by the Trump administration and somehow tempted by visions of autonomy – that fundamentally that's not what 2008 shows you. The history of 2008 is that we can't do without the American state, because of the global dominance of the dollar. As long as the world doesn't have a global currency, or somebody else's currency as the anchor of its financial system, the US remains the pivot.
This interview had been edited for length and clarity.
Crashed: How a Decade of Financial Crises Changed the World | Adam Tooze | Allen Lane | £30