Intertwined Markets and the Armageddon to Come

Adam Tooze: Crashed. How a Decade of Financial Crises Changed the World. ISBN 978-1-846-14036-5 ⭐️⭐️⭐️⭐️⭐️ This book is a challenge and it is a challenge worthwhile to be taken up. A basic understanding of how bond markets work and how the yield of bonds is tied to the evolution of interest rates is helpful. An interest in economy and politics is indispensable.

Tooze retraces the three highly dramatic episodes of the financial Armageddon of 2008/2009: It starts with the crisis of the US mortgage system, becoming victim of deregulization and banks accumulating debts. Tooze walks us through the failing of American and European banks to provide sufficient liquidity to alleviate that first crisis leading to a European follow-up crisis. The final episode is the rescue attempts of the US Federal Reserve Bank and the European Union, the first being forceful and crowned with at least some success, the latter being timid, incremental and prone to create new problems without solving the old ones. The author shows the different crisis response mechanisms on both sides of the Atlantic and how intimately the two financial markets are linked. If one fails, it draws down the other. Forget all those dreams about national independence. People like Donald Trump, Michael Gove or Nigel Farage are either incompetent or liars. Or both.

Tooze points out fundamental problems of the financial markets and especially the institutional weakness of the European Union when it comes to crisis response. The system of checks and balances between the Commission, the European Central Bank and the Council may give the EU a democratic veneer, but it ties crisis management to the political doctrines of the bigger member states: Germany and France. Greece become an unvoluntary guinea pig and its economy suffered to such a point that is no longer clear what was worse: the disease or the cure. The newly created European Stability Mechanism may able to absorb future shocks, bu for how long? And having a fire-brigade ready never prevented a fire from breaking out. The inherent logics of the financial markets present a risk of their own and the question is whether we have enough safety rules and firewalls to either prevent or contain in a very early stage a would-be inferno.

I learned a great deal from the book. I had to look up a few things I had not learned at school. I still don’t feel comfortable with the concept of bond yields. But once I had worked my way through the first 150 somewhat technical pages I began to dive into a fascinating and scaring politico-economical thriller – John Le Carré for economists! And since the errors of the past tend to be the precursors of the errors in the future, I strongly recommend the book to anyone interested in current affairs. With Trump playing with fire and China holding large reserves of foreign assets – US bonds – we are heading for an uncertain future. If we can’t prevent the next crash, we may at least find some comfort in understanding it!

The potential risk of destabilisation and violent revolt after a collapse of financial markets is comparable to the French Revolution in 1789 and or the Russian Revolution of 1905. Dmitry Shostakovich has captured this spirit in his Symphony No. 11 in G Minor:

Managing Change – A Matter of Life and Death