Tooze calls it a problem in “Western capitalism” intentionally. It was not just an American problem. When it began, many saw it as such and dumped the blame on Washington. In September 2008, as Wall Street burned, the German finance minister Peer Steinbruck explained that the collapse was centered in the United States because of America’s “simplistic” and “dangerous” laissez-faire approach. Italy’s finance minister assured the world that its banking system was stable because “it did not speak English.”
In fact this was nonsense. One of the great strengths of Tooze’s book is to demonstrate the deeply intertwined nature of the European and American financial systems. In 2006, European banks generated a third of America’s riskiest privately issued mortgage-backed securities. By 2007, two-thirds of commercial paper issued was sponsored by a European financial entity. The enormous expansion of the global financial system had largely been a trans-Atlantic project, with European banks jumping in as eagerly and greedily to find new sources of profit as American banks. European regulators were as blind to the mounting problems as their American counterparts, which led to problems on a similar scale. “Between 2001 and 2006,” Tooze writes, “Greece, Finland, Sweden, Belgium, Denmark, the U.K., France, Ireland and Spain all experienced real estate booms more severe than those that energized the United States.”
But while the crisis may have been caused in both America and Europe, it was solved largely by Washington. Partly, this reflected the post-Cold War financial system, in which the dollar had become the hyperdominant global currency and, as a result, the Federal Reserve had truly become the world’s central bank. But Tooze also convincingly shows that the European Central Bank mismanaged things from the start. The Fed acted aggressively and also in highly ingenious ways, becoming a guarantor of last resort to the battered balance sheets of American but also European banks. About half the liquidity support the Fed provided during the crisis went to European banks, Tooze observes.
Before the rescue and even in its early stages, the global economy was falling into a bottomless abyss. In the first months after the panic on Wall Street, world trade and industrial production fell at least as fast as they did during the first months of the Great Depression. Global capital flows declined by a staggering 90 percent. The Federal Reserve, with some assistance from other central banks, arrested this decline. The Obama fiscal stimulus also helped to break the fall. Tooze points out that almost all serious analyses of the stimulus conclude that it played a significant positive role. In fact, most experts believe it ended much too soon. He also points out that large parts of the so-called Obama stimulus were the result of automatic government spending, like unemployment insurance, that would have happened no matter who was president. And finally, he notes that China, with its own gigantic stimulus, created an oasis of growth in an otherwise stagnant global economy.