Beyond The Crash

Adam Tooze writes:

‘I hear people say we have to stop and debate globalisation. You might as well debate whether autumn should follow summer.” That was Tony Blair, Britain’s prime minister, in October 2005. 

Two years later, in the autumn of 2007, Alan Greenspan, the former chair of the US Federal Reserve, was asked by a Swiss newspaper which candidate he was supporting in the forthcoming US presidential election. His response was striking. 

How he voted did not matter, Greenspan declared, because “[we] are fortunate that, thanks to globalisation, policy decisions in the US have been largely replaced by global market forces. National security aside, it hardly makes any difference who will be the next president. The world is governed by market forces.” 

Theirs is a world we have lost. To understand it, you had to believe that global markets, like the seasons, were givens. You had to believe that markets had a logic by which they ruled and that the outcome of their rule was, on the whole, benign. 

You had also to believe, as Greenspan’s exception indicated, that although national security remained political, it was separable from economics. Otherwise, if economics and geopolitics were entangled, then presumably economics would be a matter for politicians, too.

In the 10 years since the financial crisis of 2008, all of those assumptions have been revealed as false. The idea that the economy is a realm beyond politics or the play of international power has been exposed as a self-serving illusion. 

Donald Trump is the most spectacular manifestation of that disillusionment and the one that matters most. He is an outright nationalist, pushing against the trend of globalisation. 

He has little respect for markets unless they deliver outcomes he likes. He is not afraid to boss the bosses or moan about the Fed. And he proclaims that everything from imports of German cars to Chinese “borrowing” of US chip technology is a matter of national security.

Trump matters because the United States affects the entire system. Brexit shocked Europe, but, as Theresa May’s government is finding to its cost, the UK’s effort to “take back control” does not mean that everyone else falls into line. 

In trade and security, the UK lacks the heft, but it has shaped our era of globalisation and may still do so via one hugely significant entity: the City of London.

While Wall Street has America’s huge national economy as its hinterland, the City of London is outsized, preeminent in currencies, interest rate derivatives and global banking.

Its present role and importance was already taking shape by the late 1950s when it began to provide an offshore market for unregulated borrowing and lending. 

Again, this was very much a political choice, shaped via the growth of something called the Eurodollar – a dollar held in Europe and hence, importantly, outside the jurisdiction of the Federal Reserve; a political choice enabled by the British authorities and tolerated by the Americans.

Hence it was by way of London that the offshore dollar banking industry was born, with profoundly destabilising long-term results. In fact, the consequences were nothing less than world historic. 

On 15 August 1971, Richard Nixon suspended the gold convertibility of the dollar. (By the terms of the Bretton Woods Agreement of 1944, which had governed post-war global finances, currencies were pegged to the price of gold.) 

For the first time since the invention of money in the ancient world, no major currency was anchored to a metallic base. Money was openly acknowledged as a political creation. The result, in the short term, was an explosion of instability, inflation and gyrating exchange rates.

It was a feast for investment bankers, both on Wall Street and in the City of London. Opec’s oil earnings added to the surge. 

To avoid taxes, the money was funnelled through offshore havens, many of which were located in the former British empire, or exploited quasi-feudal entrepots such as Guernsey. 

The eurodollar market was a “work-around”. By the 1980s, the push was on to achieve something more comprehensive: the wholesale liberalisation of capital movements. Regulators in London and New York, egged on by banking interests, were racing to the bottom. 

By the 1990s, the City of London had ceased to be in any sense a British banking centre. After Margaret Thatcher’s Big Bang, the small merchant banks of the City were swept up by Asian, American and European competitors.

The City became, as Mervyn King quipped in 2012, the Wimbledon of the world economy. The success of British competitors was rarely, if ever, the point.

But that sporting analogy, with its suggestion of elegance and decorum, is flattering. The City of the boom years was more akin to the Premier League: brash, cosmopolitan, sucking in punters from around the world and showered with staggering amounts of money from questionable sources. 

As much as it was global, local competitors were still in the game. The old City might have gone, but the big British commercial banks had not given up.

Like their European counterparts, Deutsche Bank and Paribas, like American high street banks, such as Bank of America or Citigroup, the British giants – Barclays, RBS, HBOS – wanted a slice of the global action.

It was the merger of the megabank with the financial market model – Premier League mashed with Wimbledon – that created the conditions for the comprehensive meltdown of 2008. 

The crash changes everything 

Gordon Brown might have to deal with rumblings on the backbenches, but in parliament his majority was solid. 

In the US, whilst the Republicans became increasingly a party of sectional interests and protest, crisis fighting would fall to the Democrats. 

They would have to take upon themselves the conflicts of interest and the odium that rescuing financial capitalism entailed. 

At the height of the crisis, encouraged by Barack Obama’s victory, Brown tried to offer a sweeping vision of global solutions for a global age. 

But the new team in Washington was not interested in a rerun of the Anglo-American condominium at Bretton Woods. 

There was a global response to the crisis of 2008, but it came not in the form of a new Bretton Woods. Instead, the institutions of the American state were put behind the world’s banks and their offshore business in London and Europe. 

As central bankers will hasten to tell you, the Fed’s emergency provision of dollar liquidity was no bailout. These were fully collateralised loans. It was normal lender of last resort activity, just on a very abnormal scale. 

One European central banker referred to the European central banks as having become in 2008 the 13th branch of the US Federal Reserve system.

Not surprisingly, in the wake of the crisis, it was time for a rethink. Not that the basic principles of financial globalisation were questioned. (National controls on capital movements were adopted only by emerging market countries and Greece in 2015. ) 

But private banks are the crucial actors in global money creation and a new regulatory framework – Basel III – and tougher national rules set out to constrain their balance sheets. Large parts of the shadow banking system have been dried out. 

And if finance has “deglobalised”, the geography of that retreat is telling. American banks have held their own, Asia’s new banking giants have rapidly expanded. It is the British and European banks have done the contracting. 

In part, this was commercial logic, but it is also a matter of political choice. After 2008, realising the risks to which financial globalisation had exposed them, the Americans set new rules. 

While Europeans were scandalised about America’s “chlorine chickens”, in the transatlantic financial talks the Americans held their noses. 

Specifically, they have required European competitors such as Barclays and Deutsche Bank to provide more capital to their US operations or to leave.

Faced with the choice, both preferred to downsize. 

Choosing China 

The shock to the City dealt by 2008 was severe. But the City, and those who steer it, have not lost their global ambitions or their sense of historical direction. If transatlantic finance had plateaued, the future was in the east. 

The “UK” bank that came through the crisis best was HSBC. Its strategy of straddling between the City of London and Hong Kong was the future. 

In 2013, the City began marketing itself as the offshore centre for China. Again, this was driven in part by commercial logic, but also by political choice.

The UK authorities, under David Cameron’s government, selfconsciously repeated the eurodollar strategy of their forebears. The City of London would provide China and its banks with a platform to globalise the yuan.

As a recent Bank of England report revealed, as the geography of global finance has shifted eastward, London has remained pivotal.

The British banks are significantly more exposed to China than their European and American counterparts. This promises profit. But it involves a double risk. 

The eurodollar world that took shape in the 1960s mapped neatly on to the outlines of Nato. It had Washington’s assent. It was, as we say nowadays, a geo-economic bloc. The same cannot be said for Britain’s China venture.

London’s obsequiousness towards Beijing was not lost on Washington. As one American official remarked off the record in 2013, constant concessions were no way to confront a “rising power”. 

With that phrase he burst open the final framing assumption of the passing era: the comprehensive pacification of great power relations created by the victory of the US-led alliance in the cold war. 

This had allowed the story of global economic growth to be thought of as neutral with regard to power politics. 

Already, under Obama, that was no longer the working assumption of US policy. China’s growth was increasingly viewed as a source of threat.

The strategy of the Cameron government to seek partnership with China raised the question: where in a future world order did Britain stand?

In retrospect, it throws stark light on the astonishingly high-risk strategy of the Cameron administration.

At the same moment that it was putting Britain’s relationship with Europe on the line, it was antagonising Washington with a strategy of co-operation with a state whose power and self-confidence is growing by the year.

Beijing talks a good game over globalisation, but, especially under Xi Jinping, it views politics, grand strategy and economics as an integral whole.

It is also, however, fragile. China’s credit boom is unprecedented. The setback it suffered in 2015-2016 shook the world economy.

As both the Bank of England and the IMF have warned, along with Britain’s financial exposure to China comes serious risk.

If a China meltdown is the great tail risk that hangs over the world economy, then the City of London, as it was in 2008, is likely to be the first western domino in line.

And that will not be a matter of fate or market logic, pure and simple. It will be the result of deliberate strategic choice.