My review
of Crash: How a Decade of Financial Crisis Changed the World is
finally out at the London Review of Books (subscribers only I’m
afraid). From what I’ve read it has received glowing reviews
elsewhere, and mine is no exception. Reflecting its ambition it is no
quick read (the main text is 600 pages). There is an introduction
which does summarise some of the key ideas, but the triumph of the
book is that it combines a detailed account of the events of the last
ten years with an analytical overview which makes sense of the
detail and which makes good sense. It has the additional advantage
from my point of view that it is broadly consistent with many of the
arguments made on this blog, although I don’t think I ever managed
to match the quality of his prose.
The argument that
binds the whole book together is that the crisis was not the result
of the specific shocks of Subprime debt or the housing markets of
Ireland and Spain, but an inevitable consequence of a global banking
system that became chronically short of buffers to cushion against
any kind of significant systemic shock. To use the technical term the
system became over leveraged: lending too much in relation to the
capital it had to cover loans going bad. This is the same theme as
the book by Tam Bayoumi I discussed here,
but in fact the two compliment each other: Bayoumi focuses on the
regulatory changes that created global megabanks, while Tooze deals
with the consequences of when these banks crashed.
Key to how the crisis played out was how different governments
reacted to the crisis, and this is the central part of the book.
After the mistake of Lehman, the US government took comprehensive
action on a huge scale. To quote Tooze:
“It was a class logic, admittedly – ‘Protect Wall Street first, worry about Main Street later – but at least it had a rationale and one operating on a grand scale.”
The UK did the same, but because there were no widespread defaults in
the UK there was no failure to help borrowers.
The contrast with the Eurozone is emphasised by Tooze. First Eurozone
countries tried to suggest this was an anglo-saxon crisis, despite
their own banks being deeply embedded in this global network, and was
particularly rich as the Fed was (as Tooze shows) providing billions
of dollars to European banks to keep them afloat. Germany with the
help of the ECB refused to participate in a joint Eurozone response,
and then later attempted the ‘bait and switch’ of blaming the
Eurozone crisis on excessive government debt: bait and switch is the
title of my review, and was originally used by Mark Blyth who in his
book
Austerity: the History of a Dangerous Idea saw earlier than most that
the crisis was all about banks. Again to quote Tooze on the Eurozone
response:
“‘It is a spectacle that ought to inspire outrage. Millions have suffered for no good reason.”
I have to add for those reading in the UK that this was about how
individual Eurozone governments behaved within the Eurozone system,
and has nothing to do with the trade relationships and regulation
pooling that is the EU.
There is a lot more in my review (LRB gives you the luxury of over
3,000 words), and many important things in the book that I did not
have space to comment on. For those into international relations as
well as economists and historians this book is a goldmine.
On the subject of books, my own more modest effort is out shortly: it
can be ordered at a 20% discount here,
rising to 35% if you join the publisher’s mailing
list.)
I thought this one of the best books I have tackled in a long while. The audio book is excellent if you prefer that format.
ReplyDeleteMy next favorite book of the year also has an excellent audio version;
https://www.goodreads.com/book/show/36738613-globalists
I read the LRB piece with pleasure, and would heartily endorse both assessments of this book, which I thought was excellent. My one reservation is that I do not recall having seen any discussion of the tax preference to owner occupation. This, in my view, is the root cause of the banking crisis.
ReplyDeleteAs I see it, governments have encouraged owner occupation for more than 50 years, partly to stimulate demand, and partly to cultivate electoral support (with governments of the right using owner occupation as a bulwark against socialism). Take the UK: the imputed rent of the owner occupier was taxed as part of normal income under Schedule A of the Income Tax between 1802 and 1963. It was calculated pursuant to quinquennial valuations, but the last round of valuations was conducted in 1936-7 and, thereafter, surveyors were overwhelmed by war damage assessments. By the 1950s the pre-war valuations were obsolete and the tax lost its efficacy. However, owner occupation flourished as the Tories promoted the Skeltonite notion of a 'property owning democracy' to differentiate themselves from Labour during the period of the Butskellite consensus, and to retain office. This tactic reaped success in 1955 and 1959, but MIRAS was not enough; Schedule A had to go, and by 1960 grassroots agitation for abolition had become almost irresistible. The failure to abolish (due to Treasury, though not Inland Revenue, concerns and the admonitions of the 1955 Royal Commission on the Taxation of Profits and Income) was held to have contributed to the Liberal victory in the celebrated Orpington by-election. Abolition quickly followed in 1963. Labour, having squeaked into office in 1964, with support from a portion of the owner occupier vote (it had backed Schedule A abolition along with the Liberals), implemented CGT in 1965, which exempted the primary place of residence. I saw no reference to this exemption in Targetti's or Thirlwall's studies of Kaldor.
Owner occupiers then had the prospect of perpetual untaxed capital gains. As productivity growth faltered in the 1960s and a growing gap emerged between actual real wage growth (with mounting inflation) and the expectation of rising living standards, unions compensated their members via wage demands, whilst owner occupiers speculated on the price of their homes. The first signs of a property bubble became evident by 1968-9. However, the speculation needed to be financed. Heath/Barber were anxious to demonstrate the vitality of the UK economy to demonstrate to Pompidou that the UK could be a dynamic member of the EEC: hence Competition and Credit Control (actually a Bank of England strategy) in 1971. The liberalisation of credit allowed the speculation to be financed. A house price spiral began in earnest and, absent the checks of 1973-4, 1989-96 and 2008, has continued ever since, often in almost parabolic fashion.
The higher the valuations, the more credit must be issued to keep the whole Ponzi scheme going, and so the more fragile the system becomes. Interest rates must be held down to prevent over-exposed owner occupiers being put into distress, especially as mortgage lending constitutes about four fifths of the loan books of retail banks (starving industry of investment in the process). A doom-loop results. Moreover, as mortgage repayments crowd out saving, the growth of housing equity becomes more crucial, since it constitutes the superannuation of many owner occupiers on DC schemes. The UK thus has five decades' untaxed compounded speculative gains bearing down upon the next generation.
The tax preference to owner occupation has encouraged multiple malformations across the economy, and is once of the primary causes of banking instability. I did not see any mention of Schedule A in Tooze's book.
Allefuckingluja! At lasts, economists are coming around to the notion that, perhaps, the 'crash' of 2008 was the result of what was happening beforehand.
ReplyDeleteObviously, you don't yet get it. Instead of "pre-2008 good; post-2008 bad" your charts should read "pre-2008 bad; post-2008 true".
Maybe the next generation of economists, untainted by this embarrassing episode, will look at the historical data objectively.
"lending too much in relation to the capital it had to cover loans going bad."
ReplyDeleteYou are still clueless: the liquidity crisis was not about covering loans going bad but about the refusal to lend against any collateral.
The solution was for the Fed to print as much money as necessary to supply liquidity against all sorts of collateral that had previously been judged fine.
Your failure to understand the implications of private sector net financial asset creation leads you to the failure of imagination that results in silly fiscal rules. Private finance has no such rules and the central banks back them up with unlimited liquidity when needed. Fiscal space should enjoy the same unlimited backstops.
In practice the two are hard to separate. Why would somebody refuse to lend against collateral or choose to severely haircut it? A: because the collateral is poor quality. If banks had more capital the risk of illiquidity would be lower.
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