<nettime> Adam Tooze: Politics don’t matter; market forces shape our world (The Observer/Guardian)

[Patrice Riemens <patrice@xs4all.nl>]

Politics don’t matter; market forces shape our world. So ran the 
dominant ethos before 2008.
Adam Tooze, the author of a landmark book ('Crashed' -pr), says it was 
always an illusion

The Observer/Guardian, Sun 29 Jul 2018



‘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.”
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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 
someting 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.

With the failure of Lehman, the Blair-Greenspan vision of the 
relationship between politics and the market collapsed. It became clear 
that markets did not govern themselves. Their dysfunction threatened to 
ruin not just them, but to bring the entire world economy to a halt. 
World trade collapsed at a faster rate in 2008 than in 1929. It was no 
longer obvious that autumn would follow summer in 2008. Far from being 
self-evident, the way ahead needed to be discussed very urgently. And, 
as Greenspan’s successors would discover, it mattered which politicians 
ruled, nowhere more so than in the US.
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, realisi ng 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.

• Adam Tooze is professor of history at Columbia University. He is the 
author of Wages of Destruction, which won the Wolfson and Longman 
History Today prize. His new book is Crashed.
https://www.penguin.co.uk/books/56199/crashed/
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