ADAM TOOZE Historian - Author - Critic - Blogger Mon, 23 Oct 2017 20:20:00 +0000 en-US hourly 1 ADAM TOOZE 32 32 German Question(s) (3): Applying the Debt Brake – The Genealogy of German austerity regime Sun, 22 Oct 2017 11:01:49 +0000 How did Germany make itself into a leader of austerity politics? The answer is less obvious than one might think.

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The “reform narrative” that is crucial to understanding the self-conception of Germany’s political class today has several strands. It addressed the labour market by way of welfare rights  (Hartz IV, coming to a blog near you soon). It addressed the labour market by way of a new politics of childcare (see the blogpost last week). It also addressed the key issue of public finance. A wide ranging debate within Germany going back to the late 1990s swirled around the issue of public debt. Reunification had led to heavy borrowing. But as Germans acknowledged, the tendency to run deficits clearly went far beyond that.

The short version of the story is that in response to a growing sense of alarm, German politicians rallied. Faced with the miserable track record of the last decades and the shock of the 2008 crisis, in 2009 they “did the right thing”. They applied the debt brake – a constitutional amendment requiring them to balance the books both at the national and local level. As a result Germany’s fiscal fortunes have since diverged radically from those of the rest of the industrialized world and the rest of the EU. The essential starting point of the Federal Republic’s agenda in the Eurozone crisis was to extend this new model of fiscal policy to the rest of Europe.

That is the short version. A more extended genealogy of the debt brake is laid out in the paper attached to this blogpost: Tooze Applying the Debt Brake June 2015

The introduction sets out some of the key arguments of the paper.

Since 2010, austerity has been the central response to the financial crisis in the UK, the US and in the Eurozone. The ratio of debt to GDP has become the overriding preoccupation of policy. The promise of austerity in the form touted since 2010 has been not only that it will reduce the new accumulation of debt, but that it will actually raise growth thus improving both sides of the ratio at once. The idea of the “expansionary fiscal contraction”, pushed by the economist Alesina and others, has attracted remarkably widespread support. Mark Blyth has traced the networks through which “austerity politics” enjoyed a new popularity.[1] A key role in this was played by international institutions such as the OECD, the IMF and the EU and a cluster of Italian neoliberal economists associated with Bocconi University in Milan.[2] In political terms, however, there is little doubt that the main driver of the austerity agenda in Europe has been the German government of Angela Merkel with her dour Finance Minister Wolfgang Schaeuble as the battering-ram.

This association of austerity with Germany, of course, conforms to stereotypes. And true to type, Merkel’s government has doggedly insisted on a rule-bound policy in the style of a revamped ordoliberalism. In thinking about the strong hold of neoliberalism on Germany we tend, for obvious reasons, to stress its “deep history” and its role in the foundation of the Federal Republic, in the era of Konrad Adenauer and Ludwig Erhard.[3] The recent surge of interest in the history of neoliberalism has encouraged this backward movement to the 1930s and 1940s. This has only been reinforced by the rediscovery of Foucault’s lectures on neoliberalism from the 1970s. But as important as it no doubt is to appreciate the founding significance of the Freiburg school for the Federal Republic, the resulting histories tend to reify and fix a certain view of what Germany was and what Germany is. Such a simple and static vision of a German Sonderweg in economic policy cannot do justice to the pullulating complexity of Germany’s capitalist democracy.

Historians of the postwar period have labored long and hard to add complexity and nuance to the endlessly repeated story of ordoliberalism’s triumph in the Adenauer period. To attribute Germany’s economic miracle after 1947 to the influence of the Freiburg school increasingly seems like a crass simplification. Likewise, since the 1970s, the autonomy of the Bundesbank has proven robust, but it has had to be repeatedly asserted and defended, at times imposed with real aggression. Meanwhile, the stout defense of conservative rigor by the Bundesbank has compensated for the far more chequered performance of German fiscal policy. With regard to debt, Germany is a fairly “average” high income country. Under the reforming Social-Liberal coalition of the 1970s and 1980s, the growth in Germany’s public debt was exceptionally rapid. By 1989, before the impact of reunification made itself felt, Germany’s gross public debt at 42 % of GDP was higher than that of either France or Britain. In 2007 before the crisis struck, Germany’s debt at 66 percent of GDP was well-nigh identical to that of the Eurozone average. The question that needs to be posed is what the relationship is between this fairly average track record on public debt and Germany’s self-proclaimed role as the chief prophet of austerity. Clearly, if we are going to argue for a distinctive German history of fiscal austerity this cannot start from a simple “matter of fact”. It must be a dynamic history of struggle within Germany, in which aspirations as much as realities are at stake and in which there is no settled “German view”, but a series of conflicting points of view in tension with one another. One is reminded of the truism in the history of sexuality that a repressive culture, filled with talk of abstinence and moral sanctions should not be confused with an absence of desire or sex.

The austere line of the Merkel government can be traced back to a program of reform driven by a mounting sense of fiscal panic within Germany itself, which then collided with the financial crisis of 2008-9. The centerpiece of this reform program, in its latest iteration, is the so-called debt brake amendment (Schuldenbremse) to the German constitution passed in June 2009, in the last months of Angela Merkel’s first Grand Coalition government. Since 2010, the debt brake has been adopted as the model for fiscal reform in the EU and has been aggressively pushed by Schaeuble. It has been subject to withering criticism by economists both from within Germany and without.[4] And in its resolute refusal of commonplace economic logic, it is tempting to read it as a quintessential expression of an anti-state, anti-debt affect of the right-wing. But as the brief genealogical sketch offered by this paper will reveal, the debt brake in fact originated in a Federal Finance Ministry that for ten years between 1999 and 2009 was under the control not of the CDU, but of the right-wing of the SPD.[5] The prominent involvement of social democrats is not unusual in the recent history of neo-neoliberalism.[6] But the German case does add three additional components. The language of justification for German austerity, is redolent not of old-school conservatism, but of the environmental concern for “sustainability” injected into German politics by the Green Party. Furthermore, because of the dynamic competition on the left of the German political spectrum between the SPD, the Greens and Die Linke, the debt brake idea was subject from its inception to a powerful left-wing critique. The result is what one might term, a “reflexive” neoliberalism, a neoliberalism that sees its enemies coming, anticipates their arguments and seeks to disarm them at source. Against their opponents on the left, who argued that the debt brake was a depoliticizing, constraining corset for democracy, the right-wing Social Democrats around Peer Steinbrueck argued that the debt brake was both a means of restoring the agency of the state and enforcing the necessity of responsible democratic choice. Furthermore, as a response to the problems of Germany’ complex, multi-party federalism, the debt brake is an essential tool for governing the kind of multi-level, dispersed, “quasi-medieval”, “post-sovereigntist” political structures that are characteristic of the contemporary world and of which the EU is the quintessential example.

[1]                 Blyth, M. (2013) Austerity: The History of a Dangerous Idea (Oxford: Oxford University Press)

[2]                 The Political Power of Economic Ideas: The Case of ‘Expansionary Fiscal Contractions’ Sebastian Dellepiane-Avellaneda, BJPIR: 2014

[3]                 Dullien, Sebastian; Guérot, Ulrike (2012). The Long Shadow of Ordoliberalism: Germany’s Approach to the Euro Crisis [1]. London: European Council on Foreign Relations

[4]                 For critiques from within Germany, see P. Bofinger and G. Horn, Appeal: Die Schuldenbremse gefaehrdet die gesamtwirtschaftliche Stabilitaet und die Zukunft unserer Kinder 15.5.2009 Heiner Flassbeck, Friederike Spiecker Der Staat als Schuldner – Quadratur des Bösen? Wirtschaftsdienst 2011/7. A. Tooze, Germany’s unsustainable growth, Foreign Affairs Sep/October 2012.

[5]                 A point well made by Hans Kundani, Can Germany’s Social Democrats Offer an Alternative? Dissent Fall 2013.

[6]                 R. Abdelai, Capital Rules (Cambridge Mass HUP, 2007).

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America’s Political Economy: On not growing the pie Thu, 19 Oct 2017 16:20:14 +0000 Fascinating discussion in pages of FT of basic questions of distribution and growth and their implications for economic policy.

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A short but important piece appeared in FT alphaville this morning from the always-illuminating Matt Klein. He is riffing on papers given at the conference hosted by Peterson recently on the future of macroeconomic policy that featured all of the great and some of the good. One of the most interesting panels, according to Matt, featured an exchange between Jason Furman, Obama’s last Chair of Economic Advisors, and Dani Rodrik over the the relationship between policies that aim to grow overall output and those that affect distribution. See the Furman slides here and the reply by Rodrik here.

Right the way back to the birth of modern macroeconomics in the late 19th century, the promise of productivist national economic policy was that one could suspend debate about distribution in favor of “growing the pie”. Indeed, ideologists easily deduced that one should suspend distributional arguments so as to maximize growth of the pie. Etc etc This was the essential claim of bodies like the NBER in the US in the early 1900s or the new “welfare economics” in Britain around figures like Pigou.

What Furman acknowledges is that in fact very few policies currently under consideration have much impact on the size of the pie at all. What they do threaten to have is a very large impact on distribution. If this is true it scrambles one of the most basic assumptions framing economic policy.

Rodrik adds a neat geometrical rationalization that will appeal to those who know some welfare economics: rectangles v. triangles.

But he then sharpens Furman’s point by pointing out that as the impact of policies on growth becomes more and more incremental, the ratio of distributional to growth impacts soars. NAFTA, for instance, was preeminently a vehicle for redistribution not growth in the US. This goes along with the observation by Martin Sandbu that the positive efficiency effects are highly skewed to certain sectors e.g. the auto-industry.

Klein then draws out some political implications by arguing that this new trade off between growth and distribution changes the basis for politics in capitalist democracies. If the problem of economic policy is not win-win, positive sum, then things get ugly fast. Here is Klein:

Of course, none of this will come as any news to those committed to one or other version of radical political economy. But it shakes conventional policy thinking to its core. The names involved in this debate and its location are remarkable. The fact that such arguments can be articulated by these people in these places at this moment is itself significant. It is further evidence of the decomposition of a paradigm of economic policy that defined the “long twentieth century”.

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German Question(s) (2): Demographic Anxiety and Childcare after Communism Sat, 14 Oct 2017 18:13:36 +0000 Along with Hartz IV & the debt brake the reform of childcare was a key part of the transformation of Germany's political economy in early 2000s.

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In the late 1990s clouds were gathering over the reunited Germany. Germany was the “sick man” of the Europe. German sociologists spoke of a “blocked society”. The contrast with the current perception of Germany as the most successful economy in Europe is stark. That change in fortunes and the way it is interpreted by the German political class, is vital to understanding Berlin’s position during the crisis of 2008 and the crisis in the Eurozone. It is vital also to understanding the doggedness with which the German position has been upheld.

The labour market measures of Hartz IV are the most widely discussed aspect of this transformation. I will review some key literature on Hartz IV in a future blog post. But the transformation was wide-ranging and multi-faceted. Beyond labour market changes, another key aspect was constitutional reorganization (Föderalismusreform) that addressed the balance of power and money between federal government, the Länder and local government. It was out of the second phase of this two-stage reform effort that the debt brake constitutional amendment emerged in 2009 that would have such drastic implications for European fiscal policy. This too will be the subject of a future post.

The changes went deep. In 2000 the Red-Green government put into force a new citizenship law, finally opening the door for Germany’s long-term migrant population to acquire full political rights. And another area of dramatic and rather unexpected change concerned family policy, preschool education and childcare. It too had major implications for the labour market through the participation rate of mothers and long-term demographic effects, or at least so Berlin hoped.

In 2001 Chancellor Schroeder described Germany’s childcare arrangements as befitting a “developing country”. In this respect too Germany, or at least West Germany, was in need of comprehensive reform. The system or non-system Schroeder was criticizing was a legacy of Christian Democratic domination in Cold War West Germany. It had been challenged since the 1970s by radical campaigners mainly from the Green milieu. But their influence outside cities like Frankfurt, Hamburg or West Berlin was limited. The reliance on stay at home mothers in West Germany contrasted radically with the publicly provided system that dominated in East Germany. In a determined effort to maximize labour force potential the GDR offered one of the most comprehensive system of socialized childcare in the world, if not the most.

In 1989 the East German system suffered a spectacular shock. And as I show in the attached paper (see below) this had immediate demographic effects. Nine months on from the fall of the wall, the birthrate in the territories of the GDR collapsed. On the night that the end of the GDR was announced, East Germans stopped making babies.

In the 1990s the East German system underwent retrenchment. But still today child-rearing practices vary drastically across Germany. Conservatives in the West anathematized the GDR’s system as totalitarian. Motherless children, they alleged, grew up to be Communists, or, after 1989, to be skinheads. But in the context of global debates about gender mainstreaming, female workforce participations and the economic benefits of early childhood education the tables were turned. This was one sphere, it turned out, where the Communist East was closer to the demands of the new (neoliberal) global standard than the conservative Christian-Democratic West. Conservatives did not give in without a fight. But they had their own anxieties. Above all they were deeply concerned with Germany’s declining birth rate. Catholics for their part demanded an more comprehensive and more expensive commitment to maternalism.

Source: Sandra Krapf, Public Childcare Provision and Fertility Behavior (Cologne, 2014)

As a result of these contradictory impulses the Red-Green government initiated a major change to publicly supported childcare that was continued by the Grand Coalition that followed after 2005. It was a remarkably far-reaching debate, which intertwined issues of gender relations, family policy and labour market policy with other abiding questions of the German political class such as demography and “sustainability”. The effect on childrearing practices in the West has been striking. The discursive hegemony of the Christian Democratic male-dominated, single breadwinner model has been decisively broken. The number of kids under the age of 3 in daycare facilities has surged.

Source: Statistisches Bundesamt

Germany now has a higher prime age female labour force participation rate than the US or the UK.

The essay posted below which explores the childcare debate in Germany in some depth was a contribution to a Festschrift for Paul Ginsborg. In the 1980s Ginsborg was an inspiring teacher of comparative European politics in the Cambridge SPS department. His lectures on fascism had a deep impact on me. They kept my interest in history alive at a time when I was mainly preoccupied with economic theory. After leaving Cambridge to teach in Italy, Ginsborg produced a series of important works on family history and the history of modern Italy. To me his volumes on Italy are models of contemporary history writing.

When I started on my contribution for Ginsborg’s Festschrift, family policy wasn’t a topic I knew much about. But in the intellectual whirl that followed Wages of Destruction it captured my imagination. Furthermore, being the father of a young child at the time raised my awareness of the significance of this key social issue. One further ingredient in the mix was a new burst of reading in social theory and philosophy. One of the things that had inspired me about Ginsborg’s lectures was the dialogue he maintained between history, political and social theory. In dealing with Italy Ginsborg framed his history within a classical conception of the relationship between state and civil society. Borrowing from Foucault and Arendt by way of one of Malcolm Bull’s brilliant essays in the NLR, I tried to argue that German history required us to deploy, instead, the concept of the biopolitical.

Ten years on, the “Kita”-debate in Germany goes on. Especially West German Länder struggle to provide enough places. At a panel I recently chaired at Columbia, Deutsche Well’s New York correspondent bluntly declared that Germans cared far more about childcare places than they did about Russia. West Germany including the most prosperous regions of Bavaria and Baden-Württemberg are in childcare deficit. Long queues of desperate young parents form outside the offices that allocate Kita places.

Source: Focus 2017

In the mean time, the piece I originally put together in 2007 has taken on new significance for my thinking about Germany. When it was written, the narrative of Germany’s comeback was only just beginning to take shape. The crisis was still on the horizon. Ahead of the crisis, writing this piece changed the way I thought about policy-making in the FRG. The mixture of domestic and international factors, short-term and long-term time horizons, and the range of actors shaping the formulation of family policy in 21st century Germany – from party politicians and activists, to think tanks, lobby groups and constitutional lawyers – was fascinating. It suggests the complexity of the matrix that we need to consider in struggling to make sense of Berlin’s response to the shocks of 2008 and 2010-2012.

The essay is linked here: Tooze contribution to Skinner Families and the State

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German Question(s) (1): Sketch of a book project Sun, 08 Oct 2017 11:39:20 +0000 Wenn ich an Deutschland denke - musing about a new project on 21st-century Germany.

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The return of the “German question” has been one of the most dramatic features of the last decade of crisis. It is a question about German power. It is, inevitably, a question about a German special path.

On the one hand this question takes a positive form. How do we explain Germany’s apparently positive trajectory of economic success and its high-functioning democratic governance? What does it mean for a country repeatedly to choose a figure such as Angela Merkel as its political leader? With its labour markets humming, exports booming and budget in surplus, Germany is, once more, a model and its is unafraid to say so.

On the other hand there are persistent worries about German domination and nagging questions about the logic of German economic strategy. Why is Germany strangling the Eurozone?

Inside Germany the election of 2017 has revealed some of the resistance to Merkel’s regiment. Support for the two leading parties of the old Federal Republic – the CDU/CSU and the SPD – the bearers of her Grand Coalitions, has fallen to all time lows. German analysts talk about a society divided around the question of modernization.



And these questions are all the more pressing given the far from reassuring dynamic of the three powers that flanked Germany and the European state system throughout the twentieth century – Russia, the United States and Britain.

In writing the forthcoming book about the 2008 crisis and its aftermath I was constantly forced up against the German question and have sketched there a basic set of answers. There wasn’t the space in that book – now retitled as Crashed: How a decade of financial crisis changed the world – to develop the argument at length. Furthermore, Crashed, ends by pointing to the need to completely reORIENT our understanding of twenty-first century economic history. Overcoming cultural and linguistic limitations as best we can, we are going to have to make the intellectual effort to understand a global capitalist dynamic driven fundamentally by Asian growth.

Of course, there is no Western economy for which that is more true than Germany. And, in any case, the German question will not let go of me. I realized looking back that it has been gnawing away at me in various forms for a while. It is, after all, my intellectual home, in more ways than one. So, I am going to use this blog to bring together scattered pieces in which I’ve begun to outline an answer to the German question. This may or may not add up to a book.

As has happened before, as I finish one project, the outline of a new book comes into view. What I worry about is that it is a Fata Morgana, produced by my overheated and exhausted condition. So another function of the blog posts will be to test how robust this is.

Right now the chapter outline would go like this.


Part I Troubled Unity

Chapter 1       Kohl’s reunification and its price

Chapter 2       Blockierte Gesellschaft (Blocked society)

Chapter 3       Red-Green

Chapter 4       Germany the sick man of the Euro

Chapter 5       The West divided: Germany and the travails of the unipolar order from Mexico to Iraq


Part II Agenda 2010

Chapter 6       Hartz IV

Chapter 7       2005: Merkel’s botched turn to the right

Chapter 8       Demographic anxiety and childcare after Communism

Chapter 9       Consolidation state: The birth of austerity out of the spirit of sustainability

Chapter 10    Saving but limiting Europe: The fiasco of the European constitution and the Lisbon Treaty


Part III Germany’s crisis

Chapter 11    Exportweltmeister: Germany’s uneven economic globalization

Chapter 12    2008: a crisis denied

Chapter 13    The debt brake and global austerity politics

Chapter 14    The right returns: 2009 election

Chapter 15    Greece and the nightmares of German history

Chapter 16    The Euro crisis: Does Europe’s hegemon not understand economics?


Part IV Hegemon?

Chapter 17    The sources of Germany’s economic strength and weakness

Chapter 18    AfD: the Euro crisis and the rise of German Euroscepticism

Chapter 19    Putinversteher: Germany in a dangerous world

Chapter 20    2015 annus horribilis

Chapter 21    Wir schaffen das! The refugee crisis.

Chapter 22    2017 the end of the “postwar” Germany?

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Blitzkrieg manqué or a new kind of war? Interpreting the Allied Victory in the Normandy campaign Sun, 27 Aug 2017 10:25:44 +0000 Should D-Day be located in a narrative that tracks back to 1940 or one that points forward to the nuclear age?

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Once more on the liberal-democratic mode of war-fighting and the problems of writing its history, a review essay on the historiography of D-Day.

The successful Allied landings on the beaches of Normandy on 6 June 1944 stand as one of the defining events of mid twentieth-century history. D-Day ranks alongside the Marshall Plan, or the Manhattan project as one of the signal demonstrations of the potency of the Western democracies. The landings were as Churchill remarked to Eisenhower in awe-struck tones, “much the greatest thing we have ever attempted.”[1] For those who honor the sacrifice and courage of the “greatest generation”, the beaches are a site of pilgrimage, the holy ground from which the “Great Crusade” for a new Europe was launched.[2] Not for nothing, the annual commemorations, now including the Germans, have become a fixture in trans-Atlantic diplomacy. But why and how did D-Day succeed? The question has given postwar society no peace. For all the solemnity and the weight of historical meaning loaded on the event, for historians D-Day serves as a Rorschach blot, an open-ended, projective test of underlying assumptions and models of historical explanation. This review essay seeks not to reconcile or synthesize the contending views, but to explore the logic of this perpetuum mobile of interpretation and reinterpretation. Tooze D-Day A New Kind of War

[1]                 The New York Times’s commentary on the 50th anniversary The Terrible and Sacred Shore” is a remarkable period piece:


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Notes on the Global Condition: Crisis in the Heartland – Homage to Peter Gowan Sun, 30 Jul 2017 13:09:13 +0000 Recommending a brilliant non-reductive political economy of the Wall Street-City of London nexus and its role in the 2008 crisis.

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Interested in global political economy? US power? The crisis of 2008 and after? If you have a few minutes today read a short but brilliant essay by the late Peter Gowan that appeared in New Left Review in February 2009, “Crisis in the Heartland”.

Sometimes when reading one stumbles on a piece that is like a kindred spirit. In this case it seemed to me, reading Gowan a few weeks ago, that I had found a Doppelgänger, or rather the better double that I wish I was. Finishing a manuscript on the genesis of the 2008 crisis and its aftermath, I found that I was not just in agreement with Gowan, not just in agreement on ideas and sources, but in agreement at the level of which particular passages from which particular sources to quote. It was like reading a condensed, edited and improved version of my own draft chapters, written by somebody else, 9 years ago who did not have the benefit of hindsight that we enjoy but saw the world with what, at least to me, seems like brilliant clarity.

To see the basic source of my enthusiasm read this extended quote from the opening pages: “An understanding of the credit crunch requires us to transcend the commonsense idea that changes in the so-called real economy drive outcomes in a supposed financial superstructure. Making this ‘epistemological break’ is not easy. One reason why so few economists saw a crisis coming, or failed to grasp its scale even after it had hit, was that their models had assumed both that financial systems ‘work’, in the sense of efficiently aiding the operations of the real economy, and that financial trends themselves are of secondary significance. [4] Thus the assumption that the massive bubble in oil prices between the autumn of 2007 and the summer of 2008 was caused by supply-and-demand factors, rather than by financial operators who, reeling from the onset of the crisis, blew the price from $70 a barrel to over $140 in less than a year, before letting the bubble burst last June; a cycle with hugely negative ‘real economy’ effects. Similar explanations were tendered for soaring commodity prices over the same period; yet these were largely caused by institutional investors, money-market and pension funds, fleeing from lending to the Wall Street banks, who poured hundreds of billions of dollars into commodities indices, while hedge funds with their backs against the wall pumped up bubbles in coffee and cocoa. [5]

Breaking with the orthodoxy that it was ‘real economy’ actors that caused the crisis carries a political price: it means that blame can no longer be pinned on mortgage borrowers for the credit crunch, on the Chinese for the commodities bubble, or on restrictive Arab producers for the sudden soaring of oil. Yet it may allow us to understand otherwise inexplicable features of the crisis; not least, as we shall see, the extraordinary growth of sub-prime itself. We will thus take as our starting point the need to explore the structural transformation of the American financial system over the past twenty-five years. I will argue that a New Wall Street System has emerged in the US during this period, producing new actors, new practices and new dynamics. The resulting financial structure-cum-agents has been the driving force behind the present crisis. En route, it proved spectacularly successful for the richest groups in the US: the financial sector constituted by far the most profitable component of the American and British economies and their most important ‘export’ earner. In 2006, no less than 40 per cent of American corporate profits accrued to the financial sector. [6] But the new structure necessarily produced the dynamics that led towards blow-out.

This analysis is not offered as a mono-causal explanation of the crisis. A fundamental condition, creating the soil in which the New Wall Street System could grow and flourish, was the project of the ‘fiat’ dollar system, the privatization of exchange-rate risk and the sweeping away of exchange controls—all euphemized as ‘financial globalization’. Furthermore, the system could not have risen and flourished if it had not offered answers—however ultimately pathological—to a range of deep-seated problems within American capitalism overall. There is thus a rational, dialectical kernel in the superficial distinction between financial superstructure and the ‘real’ US economy. In what follows, I will first sketch the main elements of the New Wall Street System, and briefly show how its crisis took such spectacular forms. I will then argue that, to understand the deeper roots of the malaise, we do indeed need to probe into the overall socio-economic and socio-political characteristics of American capitalism as it has evolved over the past twenty-five years. I will raise the possibility of systemic alternatives, including that of a public-utility credit and banking model. Finally, I will consider the international dynamics unleashed by the present crisis and their implications for what I have elsewhere described as the Dollar–Wall Street Regime.”

Gowan then goes on to elaborate a brilliant sketch of the extended Wall Street-City of London financial complex. But he does not just offer an international political economy, he mobilizes Adrian and Shin’s essential paper, Tobias Adrian and Hyun Song Shin, ‘Liquidity and Leverage’, Staff Report no. 328, Federal Reserve Bank of New York, May 2008. Gowan must have read this brilliant dissection of the inner instability of the market-based financial system within months of its appearance. He appreciates not just its technical claims but their import for his wonderfully elaborated account of the political economy of the extended Wall Street system.

The poignancy of reading the essay is increased by the knowledge that Gowan finished it under the shadow of terminal illness. He died in June 2009. In memoriam, the New Left Review published this illuminating interview and an obituary essay by Tariq Ali.

With Gowan they lost what to my mind was the most acute analyst of the crisis on the left. He had all the pieces in his hands already in 2009.


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Notes on the global condition: the dollar funding crisis of 2008 and the Fed’s unheralded rescue operation Sun, 16 Jul 2017 17:41:56 +0000 How Europe's banks almost ran out of dollars and the Fed saved them. What are the implications for the politics of global financial governance?

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Prospect is publishing an essay next week on the anniversary of the failure of the Northern Rock bank in Britain in the late summer and early autumn of 2007. In the piece I try to place both the Northern Rock crisis and subsequent events in US in a broader frame.

The financial meltdown of 2007-8 was centered on the US. But it was emphatically not an exclusively American affair. Somewhere between 25 and 30 percent of US mortgage backed securities, depending on how you count and which mortgages you focus on were owned by foreign investors. The Chinese held the securities guaranteed by Freddie Mac and Fannie Mae. The Europeans held a huge slice of the more adventurous and risky private-label MBS. They were the leading force in sponsoring Asset Backed Commercial Paper vehicles.

The problem in 2008 was not just that the underlying mortgages were going bad. The more urgent issue was how the Europeans had funded their balance sheets. The sobering conclusion of the BIS was that at least $ 2 trillion were funded on an extremely precarious basis. Roughly $ 1 trillion were funded by money borrowed from America’s money market mutual funds. Another $ trillion were scrambled together from inter bank borrowing, swapping Euros, sterling and other foreign currencies into dollars and borrowing central bank reserves.

From August 2007 those interbank and short-term money market funding sources began to shut down. This affected banks on both sides of the Atlantic but it created a specific issue for the European banks whose overseeing central banks did not have limitless capacity to issue dollar liquidity, at least until the crisis. The reserves held by the Bank of England, the ECB and the Swiss National Bank were astonishingly small relative to the size of their financial sectors and the multinational balance sheets of their banks.


The risk that arose from this funding gap was that the European banks would be forced into a massive fire sale of dollar assets. In the process they would have suffered major losses and would have undone any effort by the US authorities to stabilize their markets.

How was this funding gap to be closed? The largest European banks with branches in New York could be supplied with liquidity directly by the Fed. And the Fed did so on a huge scale. European banks were treated on the same basis as American firms.

But even this was not enough. To supplement these measures the Fed activated the so-called swap lines, exchanges of currency through which the Fed supplies other central banks with easy access to dollar funding so that they in turn might supply the dollar funding needs of their overgrown banks. Though they have a history in trans-Atlantic finance, they had never been used on this scale before. They are the great institutional innovation of the financial crisis of 2008 and its aftermath.

The scale of Fed swap activity was enormous.

The total sums borrowed and repaid by the leading central banks were gigantic.


This crisis of dollar-funding and the actions taken by the central banks to contain the problem is the great “untold” story of the crisis. It will form a major strand in my forthcoming book, Sudden Stop, out in 2018.

Of course the dollar-funding drama and the swap lines are no secret to those involved. Amongst specialists, avid readers of BIS publications etc they are widely discussed. The swap lines are a subject of great fascination for specialists in international political economy, international monetary economics etc. One of the first on the case was Perry Mehrling with a blog post already in November 2008 and a stream of publications since. Zero hedge was all over the story. But in the larger narratives of the financial crisis and the Fed’s response they have been assigned a minor place. Why this imbalance?

  1. The swap lines are technical instruments, which viewed on their face might regarded as nothing more than an administrative nicety. They were all properly accounted for. The Fed held collateral at all times. It made a nice profit on the business. “There is nothing to see here!”
  2. More importantly I am convinced that they are displaced to the margins of our narratives of the crisis, by the prevailing interpretation of the crisis as a series of national events. Once the crisis was revealed to be not about the Sino-American imbalance, it was no longer seen as an event associated with globalization. If it was basically a crisis internal to American society and politics, an interpretation which the Europeans were only too happy to agree with, the problem that the swap lines targeted shifts out of focus – the acute dollar funding problem of the European banks.
  3. Furthermore, the central bankers involved were happy for their transnational liquidity support measures stay outside the public eye. Political support for domestic banks is hard enough to legitimize. Huge liquidity actions designed to support foreign central banks and foreign banking systems were not something that the Fed wanted to pitch to Congress in 2008 or at any point after that.

And yet since October 2013 the swap lines have been made permanent. The key central banks now have standing arrangements to issue currency to each other in unlimited amounts. As Mehrling likes to say: “Forget the G7, Watch the C6.”

Anyway, this is more context for the Prospect story. Check it out.

The post Notes on the global condition: the dollar funding crisis of 2008 and the Fed’s unheralded rescue operation appeared first on ADAM TOOZE.

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Modern History: World War II, strategic bombing and the liberal-democratic mode of war. Wed, 12 Jul 2017 14:33:21 +0000 On Richard Overy's important book about thinking about strategic bombing in World War II.

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Strategic bombing has a claim to be the quintessential field of modern military history.

It has been the subject of a vast range of technical, political, historical, moral and philosophical commentary.

It’s a subject no historian of modern Germany can avoid.

In writing Wages of Destruction I had to grapple with it:

as one of the defining questions hanging over German rearmament in the 1930s,

because of its impact on the German home front from 1942,

as a key strand in the mythology of Albert Speer (he claimed to have overcome the effects of Allied bombing),

and because so many of the most influential sources that we rely on to write the history of the  Third Reich were generated by the highly self-critical after-the-battle analyses conducted by the Americans and Brits (including such future luminaries as J.K. Galbraith and “Nicky” Kaldor).

There is a common view of the bombing campaign that is highly skeptical as to its military impact. On that basis it poses a series of agonizing moral and ethical questions about the campaigns waged against Germany and Japan in World War II.

I don’t share this skeptical view of the military efficacy of bombing and Wages offered a sustained counter narrative: The crucial thing to realize is quite how immense the undertaking of strategic bombing is. It is arguably the basis of the modern military-industrial complex. It was a far bigger technological and material challenge than any of the antagonists originally realized. As a a result of resource limitations and decisions taken in the 1930s, the Germans never came close to building a war-winning air weapon. For me this is one of the fundamental reasons for thinking of Germany as incapable of mounting a truly comprehensive challenge to the global order in the mid-century – along with their insuperable naval inferiority. In a multidimensional global power system, Germany remained a one-dimensional military power. By 1943, first the British and then the Americans were on the point of developing a true air weapon. It cost a huge amount. It required major technological breakthroughs and it could not be done without extended and costly trial and error. Furthermore,  as always in military affairs, the results depend on how the weapon was applied. It is not just materiel and doctrine, but specific sequences of actions that matter. In 1943, when the RAF began sustained bombing of the heavy industrial region of the Ruhr, it had an immediate effect and panicked the Speer administration. The internal German records from this period leave no doubt about this. But after the devastating raids on Hamburg in the last week of July 1943,  the RAF switched to attacking Berlin. This was a disastrous error of military judgement. Then, in early 1944 the air weapon was concentrated on tactical and operational preparation for D-Day. From the summer of 1944, when the RAF and USAAF finally switched their full force back to Germany the effects were devastating and more or less immediate.

This reinterpretation has a variety of far-reaching implications. The prevalent critical view strikes me as a fascinating case of early, mid-century techno-skepticism. It should be seen in context of nuclear Angst, critiques of the military-industrial complex and what Mary Kaldor would call the “baroque arsenal”. It is also inflected by persistent and recurring worries about Anglo-American “military culture”. For Liddell Hart by 1944 the Allies were no longer soldiers but “iron mongers”.

Taking a different view of bombing’s efficacy also changes the terms of the moral and political debate about bombing. I didn’t fully explore those questions in Wages. I’m not going to attempt to do so here. Suffice to say that having made what I feel to be a persuasive case for the efficacy of the air weapon and its even greater potential, I feel differently about its use in winning the war against Nazi Germany. Indeed, being convinced that it worked and could have been even more devastating, I find myself powerfully drawn towards the rhetoric and passion of the “terrible swift sword” and “avenging angel” narratives. Since I am not able to properly account for this emotional-intellectual impulse and especially because I am in so many other respects so closely and personally identified with Germany, its target, I have found myself perplexed and tongue tied. I couldn’t bring myself to engage in the debate around Jörg Friedrichs, Der Brand (2002) (translated as The Fire, 2006).

One of the ways in which I have tried to escape this emotional and intellectual impasse is to think about air war in terms of a distinctive mode of war-fighting adopted by liberal democracies (that peculiar twentieth-century political formation). This helps me to rationalize my historical analysis and the strange spell of personal and emotional entanglement that the subject matter exercises over me. Obviously, there are plenty of sources of intellectual inspiration for this, from David Edgerton‘s brilliant writing on British military modernism to Carl Schmitt.

I’m still thinking about and developing this notion of a liberal-democratic mode of war. One of the places where I first reached for the category was in a review of Richard Overy’s book on the bombing war. Tooze Book Review Richard Overy ‘The Bombers and the Bombed’ WSJ Feb 2014


In the small world of Anglo-German history Richard Overy and I go back a long way. He has always been a courteous and helpful colleague, which is something for which I am truly appreciative. He was especially supportive when I was starting out. I am all the more grateful to him, because there is no disguising the fact that we disagree fundamentally about the history of Nazi Germany and about many features of the history of World War II as well.

Richard’s book on the air war is important and anyone interested in the subject or in World War II in Europe should read it. It really is an essential contribution. But this review attempts to articulate some of the ways in which I would tell the story differently.

Tooze Book Review Richard Overy ‘The Bombers and the Bombed’ WSJ Feb 2014

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America’s Political Economy: Class, the Republicans and the Fed Mon, 10 Jul 2017 12:22:13 +0000 Brilliant piece by Sam Bell on the nightmare prospect of Kevin Warsh as Fed chair and the class politics of macroeconomic analysis.

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Who will be the new Fed chair?

No doubt one should not exaggerate the significance of individuals. The Friedman and Schwartz approach to the history of American capitalism has its limits (Their monetarism combined with social theoretic naivety led them to attribute the Great Depression to personnel changes within the Fed system: wrong guys at the wrong time who didn’t see disaster coming and permitted deflation). The autonomy of those making Fed policy is constrained. We shouldn’t fall into the hero worship of Volcker, Greenspan, Bernanke. But, with all these caveats, the question of who runs the Fed matters.

Trump has to make a decision quite soon about the future of Janet Yellen as Fed chair and there are some scary alternative possibilities.

One of the most scary options is discussed in a brilliant piece by Sam Bell, which was highlighted this morning by the indispensable Alphaville. Bell offers a devastating dissection of the credentials of Kevin Warsh, the monetary policy equivalent of Jared Kushner.

Kevin Warsh is the son-in-law of billionaire and Estée Lauder heir Ronald Lauder. He is only in the frame as a potential Fed chair, because he was previously the beneficiary of a scandalous piece of favoritism by the Bush presidency.

Warsh center in White House with Bush 2004

In 2006, Warsh who had inadequate experience and credentials was promoted from the lower ranks of the National Economic Council to become the youngest person ever to join the Fed Board. It was, as Bell puts it, akin “to a president nominating a mid-level staffer (without a law degree) in the White House Counsel’s office to become Associate Justice on the Supreme Court”.

As Bell traces in meticulous detail, Warsh’s track record at the Fed over the years that followed was disastrous:

He had a watching brief for Wall Street regulation prior to 2008 which he turned into a platform for boosterism for the financial engineers.

Warsh was preoccupied with inflation even as late as September 2008, whilst Lehman was imploding.

He then promptly converted to the Wall Street bail out, assisting in the deal for Morgan Stanley that helped to save his former employers.

And then, by the summer of 2009, whilst unemployment was heading above 10 %, he was amongst the first to campaign for an end to unorthodox measures, giving priority to Wall Street over the assistance that the broader American public needed.

He made Bernanke’s life difficult in arguing the case for a more expansionary policy.

Bernanke, Warsh and Kohn

Unlike others on the Board who argued against dramatic expansion, he refused to allow his mind to be changed by evidence.

Warsh is unqualified, incompetent and would clearly be a doctrinaire disaster as Fed chair.

This is a great demolition job, but what makes Bell’s analysis truly eye-catching and thought-provoking is that he has a keen eye for the inflections of class language and rhetoric that permeate Fed debates.

The Fed is normally discussed as a technocratic organ. Of course, we discuss the outputs of the system both in terms of their overall effect and their distributional consequences. Notoriously, the New York Fed is deeply entangled with Wall Street. The regional Fed branches recruit members of their boards from their local business elites. But Bell’s analysis of Warsh’s approach to economic policy-making reveals the stark way in which the preoccupations and outlook of the top 0.0001 % inflect the macroeconomic analysis itself. In particular Bell brings class analysis to bear on the question of how one evaluates macroeconomic prospects and the famous Keynesian variable of “animal spirits”.

Bell highlights two unforgettable passages from Warsh:

“In one of his last meetings Warsh responded dismissively to a report from New York Federal Reserve President Bill Dudley about Dudley’s visit to upstate New York and how “a modest amount of additional stimulus could have outsized effects over the longer run by changing the dynamic from the current stasis to one in which additional demand growth led to employment gains that improve confidence.” Warsh joked:

“The report on economic activity in my neighborhood in Georgetown is strong. [Laughter] Also, President Dudley mentioned that he visited upstate New York, where I’m from, and he noted that the economy there appeared to be ‘hunkered down.’ That’s not a near term phenomenon — it’s been going on for about 40 years. [Laughter] He also noted that the economy there was at a tipping point, and that is true, but the only way it ever tips is over.”

Contrast this mocking fatalism about a working community — which, by the way, has seen its unemployment rate come down by more than three percentage points since Warsh’s nothing-can-help-them message — with the optimism of coming face-to-face with excited corporate directors. He told his colleagues at one of his first Fed meetings:

“CEO confidence — that look in their eyes, their view of the animal spirits — appears to be back in stronger measure than I at least have heard in some time. What then happens when CEOs go into the boardroom, as I think most of my colleagues around the table know, is that they tend to generate some excitement by directors themselves. Directors are really starting, in some regard, to go back to basics. One CEO said to me about a week ago, ‘Being a board member is starting to be fun again,’ and that is not something this particular CEO, who is on a lot of large-cap boards, would have said a year ago.”

As Bell says: “This is a blue-collar nightmare: policymakers measuring the economy by how much fun corporate boards of directors are having.”

What Bell has captured, as if in mid-flight, is Kalecki’s Maxisant reinterpretation of Keynes’s “animal spirits”.

In Keynes’s theory of investment activity, “animal spirits”, the “friskiness” of investors, their optimism and willingness to take risks is incorporated as something almost at the level of a “native concept”. Keynes was after all a theorist-investor. Kalecki politicized the argument by pointing out the crucial role that the concept of “confidence” plays in anchoring conservative economic policy. Bell shows us at the level of biography how class experience helps to shape Warsh’s disastrous macroeconomic analysis. No doubt this is easier in someone with as little formal economic training as Warsh. There is less mediating intellectual baggage to get in the way of habitus, the sense that you know how to read the look in a CEO’s eyes. (One can’t help wondering where Bernanke’s eyes were at that moment). But Bell’s piece, is a really useful pointer to the ways in which class experience and language inflects macroeconomics analysis and policy-making.

I’ll never be able to use the phrase “animal spirits” again, without thinking of Warsh and his locker room talk.

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America’s Political Economy: climate change, inequality and the value of (poor) lives Tue, 04 Jul 2017 12:00:12 +0000 How will global warming will hit the poorest counties of the United States?

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As climate changes and temperatures rise, who will hurt? At least since the 1980s and Ulrich Beck’s pathbreaking work on Risk Society, the question of the social stratification of risks has been posed.

At a global level it has long been obvious that some of the poorest nations will suffer most from climate change and that the US is amongst the least impacted countries. But does this finding hold across the US? Remarkably, a new study by the Climate Impact Lab (UC Berkeley, Rutgers, University of Chicago, and Rhodium Group, along with their research partners at Princeton University and RMS.) is the first to attempt to assess the effects across the US at the county level.

The results were published in Science and were reported in both the FT and the NYT.

The results are pretty eye-opening. Assuming a business as usual emissions scenario and no major breakthroughs in mitigation, every 1°C increase in global temperatures, costs the US economy about 1.2 per cent of gross domestic product. But these costs are very unevenly distributed. The impact on the Southern parts of the US by 2100 is predicted to be very severe indeed.


With the impact concentrated in the South, this also means that the costs will fall disproportionately on the poorest counties of the US.

Solomon Hsiang, Chancellor’s Associate Professor of Public Policy at UC Berkeley comments: “If we continue on the current path, our analysis indicates it may result in the largest transfer of wealth from the poor to the rich in the country’s history.”

Agriculture will be subject to wrenching changes. The classic midwestern areas of American agriculture will likely be devastated by diminished rainfall.

So far, so intuitive. On the face of it this seems like fairly conventional economic and agronomical analysis.

But if you follow the links to the Science paper you come face to face with the sheer weirdness of the interface between climate change and social science. I don’t say this to cast doubt on the seriousness of the problem. I am not a climate change skeptic. But an important paper like this prompts one to think about the dramatic challenge that the anthropocene poses for social, economic and political analysis.

The model they use to derive their shocking conclusions has the rather lovely name, SEAGLAS, which stands for Spatial Empirical Adaptive Global-to-Local Assessment System. As the authors write: “We developed the  (SEAGLAS) to dynamically integrate and synthesize research outputs across multiple fields in near-real time. We use SEAGLAS to construct probabilistic, county-level impact estimates that are benchmarked to GMST changes.” Specifically, the aim of the game is to provide a “probabilistic and empirically derived “damage function,” linking global mean surface temperature (GMST) to market and nonmarket costs in the United States, built up from empirical analyses using micro-level data.”

The drivers in the model are a set of relationships between temperature crop yields, labour supply, mortality, energy consumption and crime … yup, crime!

Apparently, people don’t commit violent crimes when it is freezing!

Those relationships are then used to estimate a range of scenarios for future temperature increases and rises in mortality and crime (differentiated by property and violent crime), declines in labour input etc.


This produces a rather ominous looking map of the increase in violent crime supposedly triggered by the temperature increase.

But the big issue is mortality. As the paper comments: “Rising mortality in hot locations more than offsets reductions in cool regions, so annual national mortality rates rise ∼5.4 (±0.5) deaths per 100,000 per °C (Fig. 3C). For lower Global Mean Surface Temperature (GMST) changes, this is driven by mortality between ages 1 and 44 and by infant mortality and ages ≥45 for larger GMST increases (fig. S13 and table S12).” To put an increase of 5.4 deaths per 100,000 in perspective, in 2016 mortality in the US was 823.7 deaths per 100,000 population. So a 1 degree temperature increase produces a 0.6 % increase in mortality. That may not seem like a lot, so what happens next is significant. To arrive at the overall estimate of economic costs “the value of nonmarket impacts (deaths and crime)” was “monetized” “using willingness-to-pay or accounting estimates”. In other words they are using actuarial estimates of various kinds derived from life insurance contracts etc. In particular they use the government mandated parameter of $ 7.9 m per life.

Once all the various impacts are translated into a common denominator it turns out that the “economic impact” of climate change above 2 degrees Celsius is, in fact, largely demographic.

Labour supply, crop production are all negatively affected by higher temperatures. Criminality, though it is positively correlated with temperature, washes out. The real hit to the poorer, Southern area will come from poor Southern people dying prematurely!

As the researchers comment: “The greatest direct cost for GMST changes larger than 2.5°C is the burden of excess mortality, with sizable but smaller contributions from changes in labor supply, energy demand, and agricultural production … “. They then continue in a truly remarkable qualification: “It is possible to use alternative approaches to valuing mortality in which the loss of lives for older and/or low-income individuals are assigned lower value than those of younger and/or high-income individuals (44), an adjustment that would alter damages differently for different levels of warming based on the age and income profile of affected individuals (e.g., fig. S13). Here, we focus on the approach legally adopted by the U.S. government for environmental cost-benefit analysis, in which the lives of all individuals are valued equally (37). Because the VSL (Value of a Statistical Life) parameter is influential, challenging to measure empirically, and may evolve in the future, its influence on damages is an important area for future investigation.”

Given that the headline of the research is that poorer parts of the US will be worst affected, this is a highly significant remark. Presumably, if one were to abandon the legally mandated requirement that all individuals should be valued equally, if, instead, one adjusted the value of life parameters fed into the model to take account of the fact that those most likely to die will be poor, the headline conclusion might be rather different.

In passing, in this technical aside the modelers acknowledge the brutally discriminatory realities of the century that lies ahead.

And there is more to come. “We have focused on the U.S. economy, although the bulk of the economic damage from climate change will be borne outside of the United States (42), and impacts outside the United States will have indirect effects on the United States through trade, migration, and possibly other channels. In ongoing work, we are expanding SEAGLAS to cover the global economy and to account for additional sectors, such as social conflict (30), in order to construct a global damage function that is essential to estimating the global social cost of carbon and designing rational global climate policies (7, 9).”

The “social conflict sector” will be fascinating.

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