A man leaves the Deutsche Bank building in central London after the company announced the first of 18,000 job cuts globally LEON NEAL
Ten years ago, few people would have predicted that in the summer of 2019 Donald Trump would be campaigning for a second term as president of America. The idea that Boris Johnson would succeed Theresa May as Britain’s prime minister would have seemed deranged.
Yet it was not so hard to foresee that there would be a political backlash in the aftermath of the global financial crisis — a backlash as momentous and enduring as the economic repercussions, which continue to make themselves felt, not least on battered banks such as Deutsche Bank, which made the first of 18,000 planned job cuts last week.
“There will be blood,” I told an interviewer in February 2009, “in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilise some countries. It will cause civil wars to break out that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable.” I also hypothesised that some governments — notably the Russian — might resort to foreign aggression, though I reasoned wrongly that President Vladimir Putin would be deterred from invading Ukraine by the economic costs of doing so.
In 2011, as the crisis was spreading across the Atlantic to Europe, I added some more political predictions. The eurozone would not break up, I argued, but add new members. However, Britain would vote to leave the EU. And conflict in the Middle East would escalate.
The financial crisis did indeed have profound political consequences. In a number of Arab countries — notably Tunisia, Libya, Egypt, Yemen, Syria and Bahrain — there were revolutions, mistakenly dubbed an “Arab Spring” when they began at the end of 2010. In nearly all western democracies — Germany was a rare exception — incumbent politicians were displaced, often by younger figures less tainted by association with the financial elite and the policies it had favoured. In February 2014, following mass protests in Kiev and the flight of the country’s corrupt president, Viktor Yanukovych, Russian forces and pro-Russian separatists seized control of the Crimean peninsula and later the Donbass region.
In 2016, the unexpected results of Britain’s referendum on EU membership and America’s presidential election led many liberal journalists and academics to write fearfully about a general crisis of liberal democracy — a “democratic recession”, in the words of the Stanford political scientist Larry Diamond. A “deep gloom . . . arrived in September 2008”, wrote the New York Times columnist Frank Rich last August. “When the collapse of Lehman Brothers kicked off the Great Recession that proved to be a more lasting existential threat to America than the terrorist attack of seven Septembers earlier. The shadow it would cast is so dark that a decade later . . . one conviction . . . still unites all Americans: Everything in the country is broken. Unlike 9/11, which prompted an orgy of recriminations and investigations, the Great Recession never yielded a reckoning that might have helped restore that faith. The Wall Street bandits escaped punishment, as did most of the banking houses where they thrived. Everyone else was stuck with the bill.”
Left-wing politicians like Jeremy Corbyn called for bankers to be jailed for their role in the crisis
Left-wing politicians like Jeremy Corbyn called for bankers to be jailed for their role in the crisis PETER SUMMERS/GETTY
Yet the relationship between financial crisis and politics was not so straightforward. If it were, surely Bernie Sanders would now be president of America and Jeremy Corbyn prime minister of the UK. After all, they and left-wing politicians like them were the ones who called explicitly for bankers to be jailed for their role in causing the crisis. “It is an outrage that not one major Wall Street executive has gone to jail for causing the near collapse of the economy,” Sanders said in a statement published in October 2015.
This was a recurrent theme of his campaign for the Democratic Party’s presidential nomination the following year. Yet it was Hillary Clinton who won that contest — a candidate whose leaked speeches for Goldman Sachs and the fees she received came as no surprise to those familiar with the Clintons’ many years of sweet-talking Wall Street.
She in turn was defeated in the presidential race by Donald J Trump, a candidate who boasted in a May 2016 interview, “I am friends with all the major banks. They are dying to do business with me,” and proceeded to appoint Goldman Sachs alumni to key positions in his administration, including Treasury secretary, director of the National Economic Council and chief strategist. The self-proclaimed “king of debt” had not seemed self-evidently likely to be the beneficiary of a backlash against the financial system — which was one of the reasons so few professional pundits foresaw his victory.
History helps explain why the financial crisis was so much more beneficial to right-wing populists than to their left-wing counterparts. “Jail the bankers!” no doubt has its appeal as a slogan, but blaming economic hardships and disappointments on immigrants and foreigners would seem to be a more politically potent strategy.
Likewise, while “Regulate Wall Street more tightly again” resonates with some voters, “Make America great again” resonates with more.
There have been many financial crises in the western world since the first era of globalisation in the late 19th century. In most cases, right-wing populists have been the political beneficiaries. The best explanation would appear to be the greater psychological power of their arguments. The main losers of a financial crisis are a heterogeneous group, after all: they are not the welfare-dependent underclass, who had relatively little to lose, but the financially exposed or precarious middle class. People who have lost homes they owned or white-collar jobs that conferred status and income are not especially receptive to a classical socialist message of increased government control and fiscal redistribution. They are more likely to respond to the right-wing populists’ arguments for immigration restriction, trade protectionism or a departure from monetary orthodoxy.
On closer inspection, the populist backlash that produced not only Brexit and Trump but also six different populist or partly populist governments in Europe and twice as many successful populist parties was the result as much of increased immigration and increased inequality (or the perception of increased inequality) as it was of the financial crisis per se. In the case of America, the rise in the share of foreign-born workers in the population, the increase in the proportion of income going to the top 1% of households, the stagnation of the average household’s inflation-adjusted income, and the decline of prime-age male participation in the labour force were all trends — like the shocking increase in mortality rates for middle-aged non-Hispanic whites — that dated back to the turn of the millennium.
The financial crisis may have acted as a catalyst for popular revulsion against the political establishment, but it was by no means the sole cause of the “great revolt”. This helps explain the apparent paradox that the principal political beneficiaries of this revolt — the Brexiteers and the Trump economics team — were proponents of financial deregulation.
History loves irony. The financial crisis was predicted by few economists. Even fewer political commentators foresaw its consequences. But financial history is a better guide than economics or political science. A decade ago, the horses to bet on were the wild ones: the right-wing populists whose slogans were “America first” and “Take back control”. Today, I’ll place another bet: that these wild horses, with their shaggy blond manes and galloping deficits, are pulling us all towards the next financial crisis.
© Niall Ferguson 2019. Extracted from The Ascent of Money: A Financial History, an updated edition published by Penguin at £10.99
Niall Ferguson is the Milbank Family senior fellow at the Hoover Institution, Stanford
Roughly 99.9% of economists regard President Donald Trump’s trade war against China as idiotic. Doesn’t he get that American consumers will pay the costs of the tariffs on Chinese imports in the form of higher prices? Doesn’t he realise that a trade deficit is not equivalent to a loss in business?
When he studied at Wharton business school, Trump evidently missed the class on David Ricardo’s theory of comparative advantage. But somewhere along the way he picked up an intuitive understanding of power.
A visit to Beijing last week revealed to me a governing elite scrambling to formulate a strategy for a trade war they thought would be over months ago, an economic elite divided about the consequences of the “Trump shock” and a middle class increasingly ambivalent about the government of President Xi Jinping.
China has few good options. It has imposed retaliatory tariffs, but it knows that Chinese imports of US goods are much less than US imports of Chinese goods. The idea of sending another delegation to Washington has been quietly abandoned. Last week the former finance minister Lou Jiwei called for export restrictions on US companies such as Apple, but everyone I spoke to dismissed him as a “loose cannon”. And no one thinks that a significant weakening of the Chinese currency would work.
Optimists in Beijing argue that the trade war has created an opportunity for the government to speed up economic reform. Pessimists admit that the US tariffs pose a significant threat. They worry that, far from accelerating reform, the trade war could lead to its postponement. China is supposed to be grappling with the mounting debts of its corporate sector, overcapacity in heavy industry and a financial system infested by shadow banks. But to offset the effects of the trade war, China’s rulers look like restarting their debt-propelled infrastructure investment machine.
The most striking feature of China today is the division at the top. As one hugely successful businessman put it to me, there are three Chinas: the “New New China” of the dynamic technology sector, the “New Old China” of the most profitable state-owned enterprises (SOEs), such as banks and telecoms, and the “Old Old China” of the heavy industrial, rust-belt SOEs.
There is growing pressure on New New China from the government, which regards the big tech companies as having grown so large as to pose a political threat. Jack Ma’s recent announcement that he intends to step down as executive chairman of Alibaba (the Chinese Amazon) has been the subject of febrile speculation. Rumour has it that Ma was told to step down with immediate effect but was able to negotiate a postponement.
Cheng Li of the Brookings Institution argued in a recent article in the US magazine Foreign Affairs that the key to China’s future was the attitude of its vast new middle class. I agree. The question is whether criticism of China’s leadership — which has focused on the escalation of the trade war but relates to other issues, including Xi’s abolition of term limits — will mutate into resentment of American bullying.
I wonder. My impression is that many educated Chinese people view the government’s foreign policy with derision. The recent media coverage of Xi in the People’s Daily has been comically old-fashioned, with innumerable boilerplate reports of his meetings with obscure heads of state, the majority from Africa. Last Sunday, for a change, the front pages pictured Xi with Nicolas Maduro, the Venezuelan dictator, and Vladimir Putin. A popular meme on social media is a WeChat message contrasting China’s history of conflict with Russia with its history of good relations with the United States.
There is much about Xi Jinping’s China that brings to mind the French Second Empire, proclaimed in Paris 166 years ago. The emperor, Napoleon III, was a modernising autocrat, a living advertisement for the benefits of strong leadership over democracy. Like Xi, Napoleon III pursued a free trade policy, exemplified by the 1860 Cobden-Chevalier trade treaty with the UK. Like Xi, he was a bold urban planner. During his reign Paris was transformed into the spacious city we know today, just as Beijing is being shorn of its migrant workers’ slums.
As in China today, the bourgeoisie in Second Empire France was, on the whole, content with its lot as long as the good times rolled. There was a railway construction boom. The department stores of Paris, such as Le Bon Marché, were a sensation. But, like their Chinese counterparts, they held dear the gains of their enterprise. Property rights were sacrosanct, and threats to them were unpopular. If the threat was posed by corrupt officials, the reaction took the form of a liberalism that asserted the benefits of limited government, the rule of law and representative institutions.
The Second Empire grew ossified. Growth slowed. Foreign policy reverses culminated in the Franco-German War of 1870, in which French forces were swiftly defeated by the superior Prussian army. After a revolutionary interlude (the Paris Commune), the Third Republic was proclaimed. The lesson of history is that an autocratic regime that brings into being a large middle class runs a certain risk, one that Karl Marx — a keen observer of the events described above — understood well.
Xi Jinping is a student of Marx. He must therefore be aware of the risks he is running. For that reason I expect him to do whatever it takes to avoid a significant slowdown in Chinese growth. I also expect him to avoid the sort of head-on confrontation with his geopolitical rival that undid Napoleon III. But that leaves him in a very uncomfortable position if Trump presses on with his trade war.
Unlike Kim Jong-un, Xi is not able to give Trump a symbolic victory by conceding to his demands at a showy summit, although the North Korean leader has demonstrated the ease of reneging when the cable TV cameras move on. Even if Xi were sure that China’s trade policy could remain unchanged after such a summit, he still would not risk the associated loss of face.
Jack Ma took a small piece of revenge on his political master last week by reflecting that the US-China trade war might last 20 years. That is the stuff of nightmares in Zhongnanhai, the compound inhabited by today’s Chinese emperor.
Sure, Trump’s tariffs violate the theory that free trade is a “win-win” process, but they make a good deal more political sense than is generally realised. With his uncanny instinct for the weak spot of the counter-party, Trump has found the Chinese leadership’s principal vulnerability.
How far this weakness may lead to real economic problems for China remains to be seen. But it is already causing real political problems to Xi, six months after the decision to extend his term in office sine die. Future historians may be as impressed by the Trump shock as today’s economists are contemptuous of it.
Niall Ferguson is the Milbank family senior fellow at the Hoover Institution and a visiting professor at Tsinghua University, Beijing
I am not sure exactly when I received The Subprime Primer, a slideshow that someone emailed me early in 2008. I do recall thinking it was unlikely ever to be surpassed as an introduction to the financial chain reaction that began as I was writing The Ascent of Money and reached its climax in the months after the failure of Lehman Brothers, the 10th anniversary of which fell yesterday.
Illustrated with foul-mouthed stick men, The Subprime Primer’s 45 slides told the story of how “crappy” mortgage loans originated by “Ace Mortgage Brokers” came to be owned by “First Bank of Bankland, Inc”, which sold them to “RSG Investment Bank of Wall Street”. The “really smart guys” (RSG) were the ones who came up with the plan to “create a new security and use these crappy mortgages as collateral” and then sell the resulting collateralised debt obligation to investors such as the “Norwegian Village Pension Fund”. We all now know how the story ended.
A decade has passed since the escalation of the credit crunch into a global financial crisis and then a great recession. There are four questions we need to address. First, why did it happen? Second, why, in most countries, did it not turn into a full-blown depression? Third, why was the recovery from the crisis so anaemic? Finally, and most importantly, could it all happen again?
Gordon Brown, prime minister when the storm struck, is among those who think it could. “We are in danger of sleepwalking into a future crisis,” he said last week. “There is going to have to be a severe awakening to the escalation of risks, but we are in a leaderless world.” Having sleepwalked into the last crisis — and then prematurely claimed to have “saved the world” — Brown speaks with a certain authority.
Ten years ago I was right to foresee that, bad though things already were in the summer of 2008, they were going to get a great deal worse. A US recession had already begun. Banks all over the world were about to reduce lending to compensate for losses from mortgage-backed securities. I was right, too, that Europe would be at least as badly affected as the United States. There was to be a “great dying” of weak banks and asset managers. Millions of people would lose their jobs, their homes, their savings.
What had gone wrong? In The Ascent of Money I argued that this deepening financial crisis could not be explained simplistically — “It was the greed of the bankers!” or “It was reckless deregulation!” — but required a consideration of six pathologies:
1) The inadequate capitalisation of the banks of the western world;
2) The contamination of the short-term debt market with toxic securities of the sort depicted in The Subprime Primer;
3) Errors of monetary policy by the US Federal Reserve, which turned a blind eye to signs of overheating in the American property market;
4) The rapid growth of the forms of financial life known as derivatives, which added an opaque layer of complexity to the system;
5) The politically motivated campaign to increase the homeownership rate in the United States (and some other countries that also experienced housing bubbles);
6) The unbalanced relationship that had developed between the United States and China, which I gave the name “Chimerica”.
Second question: whom or what should we thank for the fact that the 2010s were not the 1930s — the Federal Reserve? The spirit of John Maynard Keynes? A bit of both would be a fair answer, although monetary policy was used for much longer than fiscal policy. But I would give more credit than most western commentators to China’s massive stimulus programme.
Question three: whom or what should we blame for the fact that the 2010s were also not the 1990s? Why was the recovery that followed the crisis so underwhelming? Is it justified to speak, as the Harvard economist Larry Summers has, of “secular stagnation”? Or was his colleague Kenneth Rogoff right when he argued that such a large financial crisis was bound to result in a prolonged but finite economic hangover?
I am inclined to side with Rogoff in this debate but I would add two further points. First, the EU’s horrible mishandling of the crisis surely acted as a brake on recovery. Second, the administration of Barack Obama did its best to throw sand in the American economic machine in the form of overcomplicated regulation.
Keynesians have claimed the recovery could have been more rapid with even larger fiscal stimulus — the construction of umpteen bridges to nowhere, paid for by yet more government debt. Brown last week endorsed that story. But might it not have made more sense to try tax cuts plus deregulation — the policies belatedly adopted by Donald Trump’s administration last year?
Final question: is Brown right to fear another financial crisis? The answer is yes. The most striking feature of the global financial system is how little it has changed in a decade, despite the promulgation of thousands of pages of new financial regulations on both sides of the Atlantic. Banks are certainly better capitalised than they were 10 years ago. But that’s about it.
There are novelties, to be sure. Ten years ago bitcoin was introduced to the world in a paper published under the pseudonym Satoshi Nakamoto. By 2017 there was enough speculative interest in bitcoin and other cryptocurrencies to produce a spectacular bubble. Yet the bubble burst. Despite the cryptocurrency mania, Planet Finance is still dominated by fiat money created by banks with fractional reserves, long and short-term debt instruments issued by governments and corporations, stocks issued by corporations, insurance policies and mortgages.
The thing to worry about — as in 2008 — is the sheer size of the debt mountain. Relative to global GDP, the financial sector has reduced debt and households have held steady, but the debts of governments and non-financial firms have soared. Total debt is up from 280% of GDP in 2008 to 320%.
If the global financial system has not changed fundamentally since 2008, then it does not take great prophetic gifts to predict another crisis. Financial history has not ended any more than political history ended with the fall of the Berlin Wall.
The next crisis will not be like the last one. History teaches us not to expend too much energy trying to prevent the last crisis from happening again, but instead to ask the broad question: which borrowers around the world have overextended themselves to the point where they will begin to fail in the event of rising real interest rates? And which lenders or investors will be in trouble if the defaults exceed their expectations?
What makes it so easy to predict the next financial crisis is that in some overleveraged emerging markets — notably Turkey and Argentina — it has already begun. Who will be next — South Africa? Brazil? Or the big one: China?
Somewhere, I hope, the author of The Subprime Primer is working on a sequel. The Submerging Market Road Map, anyone?
An updated edition of Niall Ferguson’s book The Ascent of Money: A Financial History of the World will be published in 2019
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