113 | Crashed

Helen and David talk to historian Adam Tooze about his epic new book Crashed: How A Decade of Financial Crises Changed the World. Why did the crash of 2008 take so many people by surprise? How did it spread from the US around the world? Why was Europe so vulnerable? And how do the answers to these questions help explain Brexit, Trump and what's now going on in places from Hungary to China? Plus, as we approach the 10-year anniversary of the event the triggered the crisis, we explore what might have happened if Lehman Brothers had been saved.

DAVID: Hello, my name is David Runciman and this is Talking Politics. Today we're talking to the historian Adam Tooze about his epic new history of the world since 2008, since the financial crisis. It's called Crashed. This is a big conversation about some of the biggest ideas.

DAVID: Helen Thompson and I went to talk to Adam Tooze a few days ago. We recorded this conversation in London. The occasional siren you can hear in the background is the mean streets at Old Street, not Cambridge. It's a slightly longer conversation than usual because we had an awful lot to talk about, as you'll hear.

This is about some of the things that we have been thinking about and talking about on this podcast for the last two years, particularly how politics and economics only make sense together. The book starts with, to me, a kind of revelatory section about the wrong crisis, how people were thinking about the world pre-2008. So you tell me if I've understood it wrong, but what I took from it was that the fear was of those kinds of economic relationships where there was a lot of political discretion, so the relationship between America and China, the relationships around the exchange rate, around commerce, around trade. And what economists do is they see the possibility of politicians making decisions and it scares them. But actually, we knew in a way how to deal with those things because there was political discretion, and the real risk was in those areas of the economy that the economists thought they had protected from political discretion, and that's what they should have been worrying about.

ADAM: [2:25] Yeah, that's precisely the right thing. Another way of putting it is it's the China crisis versus the Atlantic crisis. And the China crisis was one measured in the conventional terms of mid-century modern macroeconomics, which was all about trade balances, and implicitly—and I think it carries that all the way back from the interwar period—it is about inter-state relations. It's implicitly about logic of economic power that originates in the imperialist period. And this really becomes very very manifest after World War One. And that's how the relationship between China and United States was thought, as China emerges from the 1990s onwards as a major global trading partner. And it is thought that way also by a particular group of the American elite. In other words, these are the Democrats in exile, out of power, who honed this analysis as a weapon with which to punish the Bush administration at least rhetorically. And they do—they project the prospect of a so-called China sell-off, so China would dump its huge holdings of U.S. treasuries, accumulated, of course because of Bush's war on terror and then the Republicans irresponsible tax cuts. So you have this sort of trifecta of threats, domestic and foreign, which are analyzed within familiar macroeconomic framework as pointing to the possibility of a sort of sudden-stop crisis in which China withdraws its funding or possibly even sells all its bonds, driving interest rates up and the dollar down, and it would be the unwinding of an emerging market crisis in the United States. And that is not what happens.

DAVID: Or in their terms, politicians do something that they can see as irrational, but they're politicians, so…

ADAM: The whole thing is driven by politics in a sense. It's bad wars, tax cuts, a Chinese regime which is pursuing a currency stabilization policy and accumulating in the manner of a 1930s-20s mercantilist. And instead, as you nicely put it, it’s the bit which was depoliticized—it's the part of the global economy where basically market-based insurance is supposed to do all the work—in various different forms, but that's basically the derivative model. That's the bit that suddenly melts out. I mean it turns out not to be a geopolitical crisis or a geoeconomic crisis but just a classic crisis of financial capitalism.

DAVID: And you have… I guess it's famous but it wasn't known to me… you have this exchange between Larry Summers and Rajan, the man who was going to become the central banker in India, where Rajan says, ‘No there are these other risks, particularly in the derivatives market.’ And Summers—it’s extraordinary, he kind of says, ‘Well no, the risks are the macroeconomic risks, the ones that we've always said… stupid people doing stupid things… You're not allowed to talk about the other things. That's about technological progress and sort of microeconomic… that's not subject to…

ADAM: He literally says, ‘It's as though you would not get into airplanes anymore for fear of airline crashes. He's very taken with the whole airplane analogy in this period. So there are technological risks because that's what they are. And then he even adds a little bit on top, which is, ‘It's not just that you shouldn't—by speaking this way you irresponsibly encourage other people, you know, a kind of technophobic, anti-modernist streak… He calls Rajan a Luddite. I mean, this is a fully paid up member… you know, former IMF chief economist, member of the Booth Business School in Chicago…

DAVID: This is happening in Jackson Hole, where they gather as Greenspan…

ADAM: As Greenspan is retiring… It’s the Greenspan retirement party, which Rajan is, you know, messing up.

HELEN: Yeah I think the geopolitics of it are quite complicated because I think you can argue that China is a trigger cause of the crisis. So I think that it's a banking crisis, and it's a particular crisis of bank funding. It's a particular crisis of European banks and their exposure to the dollar. But if you say, like, okay, why does this crisis emerge in the way she does in the summer of 2007 and play out through to the Lehman bankruptcy, or that period in the middle of September because I think that the Lehman bankruptcy can be a little bit overrated in this part of the story. I'd say there's two things, or three things actually, where China is playing its part. First of all is that from 2004, some point in the latter half of 2004, the Fed starts raising interest rates, and it does so in relation to oil prices. And it's China that is producing a significant rise in oil prices. You can't really tell the story without Fed monetary tightening, and you can tell the story of Fed monetary tightening without China and oil prices. So I think that's one thing where China plays its part. The second is, if you look at what happens then in the summer of 2007 through to the Bear Stearns crisis, which is March 2008, you actually kind of get a sovereign wealth bailout of quite a number of these Western banks that are in trouble. And why the Bear Stearns crisis is different is because China looks like it's going to inject some more capital into Bear Stearns and then it says no. So there's a deterioration that comes from this about turn in China. And then I think that that plays out through the selling off of the Fannie and Freddie bonds and securities by the Chinese and the Japanese central banks.

ADAM: Russia too.

HELEN: Yeah and Russia too. But I think the volume is with China and Japan through that selling from March 2008 through to September 2008. And that's where the China… people have been saying, ‘Look, U.S. borrowing from China is a real problem,’ They’re kind of both right and wrong. They're wrong because China cannot have a massive dollar crisis because of its own dollar exposure, hence at the same time as it's selling Fannie and Freddie stuff it's buying Treasury bonds. But it can inflict serious damage on the U.S. financial sector—and it does. And I think that the context in which then Lehman is rescued… is in part because of the fact that they’d just done this huge thing the week before, they were taking these huge mortgage corporations with massive amounts of liabilities. I mean the whole of the first QE1 is about Fannie and Freddie, it's not about U.S. Treasury bonds. And that reduces their options for dealing with Lehman. So although China's rise isn't a structural cause of the financial crisis itself, it is a pretty important, I think, trigger cause of different episodes of it. [8:20]

ADAM: That's absolutely fascinating. I don’t think there’s much there… there’s nothing I would disagree with. Another element to add is that, one of the reasons why China… there's really no point in exercising this threat of selling off treasuries in particular, not Fannie Mae or Freddie Mac, is there’s overwhelming global demand for them because they're the only safe asset left. This is a sort of—to come back to David’s more general point—we expected the risk to be in the public sector, in the sovereign debt segment. It turned out to be in the private sector segment. And so perversely, if you like, given the prior expectation, money runs into the bit that was thought to be the risky bit—in other words the sovereign debt—so treasuries are in fact in huge demand. If China decided to offload a trillion dollars of treasuries it would have had ample buyers. It probably wouldn't have moved the market very much because everyone wanted them at that moment because you've got to get out of these securitized mortgages and you've got to put your money somewhere. So that element I think is very important. I would also completely agree with you… and I don’t argue in the book, and I don’t think anyone would argue that, as it were, there isn’t a real risk here. This is Paulson's central preoccupation. It’s just that it’s managed because its recognized very early as a geopolitical, geoeconomic problem. And Paulson sets up this strategic partnership dialogue with the Chinese, which he runs personally. And I completely agree that Fannie Mae and Freddie Mac are critical, and they are, as Brad Setser pointed out, bailed out because they’re too Chinese to fail. That’s the crucial thing about Fannie Mae and Freddie Mac. And the signal that the U.S. Treasury sends, and the political price that Paulson's willing to pay for doing that Fannie Mae and Freddie Mac, which does indeed, I think, foreclose the option of a quick and easy move on Lehman, is explicitly to do with his needing to signal to Beijing, ‘Look, we’re absolutely serious about this. We’ll give you a good out into Treasuries. We’ll protect you on the way out of Fannie Mae and Freddie Mac. This is going to be okay. Play along with us because we’re actually managing this.’ The argument is not that that wasn’t a risk but that it was a risk that was recognized and was quite effectively managed. And there is a nightmare scenario in which everything converges in the summer of ‘08—they don’t get the Fannie Mae, Freddie Mac bailout done, and then we have a combination of the banking crisis and the China sell-off at the same moment.

HELEN: Absolutely. And I think the other thing that the Fannie Mae and Freddie Mac crisis shows is they basically protect the bondholders 100 percent and they work the shareholders out, near 100 percent.

ADAM: Well there aren't many of them in Fannie Mae…

HELEN: You know that is a signal of…

ADAM: What we’re going to do with AIG…

HELEN: When it really matters, the thing that is preoccupying, as you say, the Bush administration and the Fed is, ‘We cannot have a China crisis.’ [10:44]

DAVID: So to go back to where I started, what's so striking about that in a way is that they did manage it. So you've got people like Summers, who basically don't believe these politicians in particular are capable of managing it and that’s where the risk is, but actually that isn’t where the risk is because there’s political discretion. It’s in those parts of the political economy where the politicians do not know what to do because they literally have no experience of it.

ADAM: And Summers gives us the analog, which is to the nuclear arms race, right? He calls it this balance of financial terror. So it’s a little bit like the nuclear standoff in that all eyes are on this problem. There’s real, very intensive management. I think to come back to one of Helen’s points, the cross over to banking is absolutely fascinating and the mobilization of non-Western sovereign sources of recapitalisation for the Western banks from the fall of ’07 is, I completely agree, a really crucial element. One of the things I regret is not building oil more centrally into the story.

DAVID: Well Helen will do that.

ADAM: As fat as this book is, it's a highly selective slice through the narrative and there are clearly a whole variety of different other intersections that you could have traced out, and one of them clearly does run via the oil price boom up to 2007, the accumulation of enormous funds in the Gulf states, the new eurodollar, as you were, the new petrodollar, and the availability on unavailability of those for recapitalization in ‘07, ‘08, ‘09. You could run the tech line through this as well—this is also the moment that the smartphone and social media break big. But the book, as it were, manages the line through that it does by… effectively by exclusion of all of these other elements, which are tacitly there around the edges of the narrative but don’t feature in the way that Helen might make them central just then.

HELEN: I would say that I think there’s another thing to your point about the fact of, like, the politicians just don’t understand this and just blind to them risk…

DAVID: They don't understand some of it.

HELEN: Yeah they don’t understand the banking part of it, but there is a weird thing here… because the Asians, the East Asians, that is the crisis that they are prepared for after the Asian financial crisis. So their view is, look, after ’97-98 you have to have the central bank have loads of reserves because any time you could face a dollar crisis—because as what happened to them and their banks in particular in ’97, ‘98. So then you switched to what’s going on in Europe during this time and they're letting their banks accumulate all these dollar liabilities without thinking that you need the central bank to do anything about that.

ADAM: It's a civilizational hierarchy, almost—if you’re an anxious, resentful, self-insuring Asian emerging market, you have trillions of dollars in reserves. That’s for the likes of you. The likes of us operate in a market-based central banking model where we can access swap lines any time… we can get currency. There is no reason for the Bank of England to hold substantial…

HELEN: There is no reason in retrospect for them to think that at all. I mean it's an incredibly crazy belief that they…

ADAM: This is why I think the civilisational hierarchy arguments are quite important, because they really thought that was an earlier developmental stage. And the left version of that was the Martin Wolf dependista-type view, which is that the Asians learnt their vulnerability and therefore accumulated this self-insurance, which was deeply dysfunctional for the balance of the global economy in his view because it required recycling of those funds through Treasury ownership. But, as it were, the progress of modernity and a property market based solution would require a running down of central bank reserves. In fact, I mean I used to do this as a party trick, you'd ask very well informed economists about what the dollar reserve holdings of the ECB were in 2007… and everyone can give you a ballpark guess of what the Chinese holdings were, the Japanese were, and no one had ever thought to even think to ask the question how many billion the ECB had. It's trivial, a couple of hundred billion, but, you know the Bank of England was down double digits, low teens in September 2008. This is one of the major blind spots, I think. We focus a lot on microeconomics and zombie economics in the sense of like finance economics, but we don't, to my mind, speak enough about this very very peculiar construction of global macro economy. [14:50].

DAVID: And in that, Europe's in a particularly vulnerable position because they're thinking like Americans but it's a dollar world. That's why Europe is screwed, right?

ADAM: That's why it's bank balance sheets are in real trouble and why… and to the extent that they really are Americanized banks, in other words, they just operate on Wall Street, there's no problem. They are entitled to liquidity provision. It's not a bailout because it doesn't involve taking a capital stake. From the point of view of the politics of central banking, this is the crucial… capital stakes are political and difficult because they expose you to risk; liquidity provision is against good collateral, notionally and so it doesn't expose you to risk, so it's okay, it's technical. And the European banks so far as they are in Wall Street and fully present have all the support they need by way of liquidity lines there. The real problem was to the extent to which they were in fact assuming that they could swap large quantities of Euro fundings so Euro pounds, Swiss francs flexibly and at very low costs into dollars. It's important to recognize this is a market and price driven thing. So it's not true to say they couldn't get funding, it just became very expensive. And given the fine margins that high volume investment banking style business is done on, if the price shifts against you, you move from a marginally profit making, and if you churn it at huge volume, considerably profit making business to a very considerably loss making business quite quickly. And that's the killer.

DAVID: So I knew this would happen. We've lost the chronological focus. So we're going to come back… I think we need to come back to the Europe question, but I just want to ask a Lehman question because we are coming up to the anniversary. I got a hint from Helen that she thinks it's maybe not the… so I want to ask you both this. It maybe isn't the central event… I’m not sure. Is it worth just running the counterfactuals of the Lehman weekend? And you touch on this in the book. Whatever Helen says, it was a very important event. Could it… should it have been done differently?

ADAM: It could and it should. But I completely agree with Helen that there's in fact an entire ideology tied up in centering the narrative on Lehman—it's called… Die Linke, a German Swiss German journalist associated with Die Linke who takes up the slogan, coins the phrase, ‘the Lehman Lüga,’ the Lehman lie, because it serves as the alibi for European banking. If it's all down to a crazy decision by a bunch of Americans who don’t know what they're doing and otherwise the European banking system was fine. This is this exogenous shock which you have no responsibility for and all else follows from it. And it's essential to unpick that narrative. It’s clear that the problem started and really became extremely acute, as Helen was saying, already in 2007. There are de facto bailouts, full bailouts in the sense of actual capital stake participation type bailouts going on from that moment by means of various types of sovereign wealth fund. And if it hadn't been Lehman it would have been somebody else. So they're managing an entire portfolio of failing banks at this moment and on both sides of the Atlantic. The big British casualties of the crisis are going down probably whatever happens, and Northern Rock already has gone down. Hooper is I think basically dead by way of its Dublin branch regardless of Lehman. What Lehman does is, as it were, to tighten the screw and it does indeed induce shock because it reverses a previous policy position. But the markets had already begun, and that was part of the idea of Bernanke and Paulson, to signal clearly to the markets the future direction and they were going to let people go now. So the markets have begun to as it were adjust to this reality, the facts on the ground then on the morning after are far more severe and dramatic and more ramified than anyone had anticipated but it's very important, I think, to back away from a Lehman centered story for all of those reasons.

DAVID: But if Lehman had been saved in one of the ways it could have been saved, how different would your 10 year history look? I mean that's a ridiculous question, but are we going to get a very different path or are we kind of circling around back to where…

ADAM: This is one of these kind of counterfactual turning point type things where the possible trajectories... you could imagine that they would be massively different and so speculation becomes quite difficult because it changes too many things simultaneously. The simple counterfactual narrative would be to say if they'd done that, the crisis would never have burned to the extremity that it did, would never have spread as far as it did, would have been far more contained. There is another version which is that they would then also have hovered for many more months and potentially with fatal consequences in this limbo of not really knowing what their policy was, and it was, as it were, really looking over the brink on the 15th and 16th of September and getting to that moment where Bernanke will go to Congress and say, ‘If we don't do something now we won't have an economy on Monday.’ You needed to have screwed up once to have gotten you to that moment. Keynes has this great line about, you know, ‘Thank God for the candle on which the children of modern democracy continuously burn their fingers because without the pain of doing that they will never actually arrive at the adequate level of intensity of political awareness to do anything.’ So down that ‘Bail Lehman out immediately’ route also lies a route which could be one of, as it were, an endless series of relatively inadequate makeshifts, a more European, if you like, outcome to the crisis in America because you might never have gotten to the top moment, this extraordinary meeting on October 13th, where in this bizarre moment of collective action the kind of leaders, the barons of American finance capitalism, presided over by another one of their own type, now as treasury secretary actually organized this collective recapitalization. [20:07]

DAVID: So before I ask Helen, because I’m aware we need to hear hers, or a more Japanese outcome?

ADAM: Japan-Europe stands as the zombie outcome, or indeed Britain where you go case by case, worst case by worst case, and you never actually summon up the political energy, the political resources, the financial resources to impose some kind of collective solution.

HELEN: Yeah, I think there are two different issues really with the counterfactual with Lehman. The first is, let's look at… the immediate spillover was into AIG.

That is what causes the events of that week, clearly Lehem going on is doing quite a lot of damage, but Fannie and Freddie are already hurting AIG. And then the question is really if Lehman’s saved, can Fannie and Freddie do the same damage to AIG. I think probably yes. Not quite as quickly maybe, but as the consequences of understanding what's goning on there play out, I think the contagion would have spread. I think the other counterfactual though is the political one… like this is rescue, this would have been rescuing an investment bank. This isn't like rescuing the Royal Bank of Scotland. It's not that rescuing Fannie or Freddie even with these massive mortgages.

HELEN: Or rescuing AIG, which is an insurance company.

ADAM: So it would have been like Bear Stearns but kind of bigger and more politically sensitive. That's the analogy, right?

HELEN: If you think about how difficult getting Tarp through Congress was and then you add in trying to get bailout for Lehman, I just think the politics of it fall apart.

ADAM: That in a sense is a better question... If they had bailed out Lehman, the political negative feedback from that would I think have been prohibitive on Tarp. They would probably have never gotten to Tarp. So you do that, you cauterise at that level, I agree AIG is going down because AIG is really being killed by the margin calls, you know these demands for extra collateral on insurance contracts which Goldman very aggressively had been pushing since the summer. Lehman doesn't substantially change that dynamic. They know they're going to hit that problem. You don't maybe get the massive pressure on the other investment banks at that moment, which was very severe. Even the surviving ones, Goldman and Morgan Stanley, are in terrible trouble that week I think Helen and I are really in agreement on this that the naive bailout counterfactual has hidden political risks involved that we never got to explore. And we know how close we came to them really lacking political support for a collective bailout solution anyway. So you know if Lehman tilts that balance further it gets very difficult.

DAVID: And this is happening I think seven weeks before the American presidential election, so that's one of the extraordinary things about this. We talk about this and the options and the counterfactuals and yet that event is almost… it's not a sideshow but it wouldn't have changed the outcome one way or the other presumably. Obama was still going to win.

HELEN: Well he was in trouble, he was in trouble.

DAVID: But you think bailing out of an investment bank would have allowed McCain to win the presidency?

ADAM: Oh no no no no.

DAVID: That’s what I’m saying. Whichever way you go, I think Obama still wins, doesn't he?

HELEN: He does yeah. All I would say is that the Lehman bankruptcy and the immediate fall out of it plays a significant part in that election and turning that election in his direction.

DAVID: McCain does not have a good…

ADAM: McCain's incompetence and the evident tensions within the Republican Party, which I think is a crucial political part of this 2008 story, and obviously with huge resonance is down to the present, the fact the Republican Party is coming apart before your eyes…

DAVID: Once Lehman is in that kind of trouble there’s nothing that happens that doesn't bring that to the surface because you say…

ADAM: No it compounds it. Fannie Mae and Freddie Mac is the key moment. That already breaks the Republican Party apart and sets up a dynamic which the leadership, the White House, the administration finds incredibly difficult to manage.

DAVID: So we'll come back to the Republican Party. Something I was really struck by this reading the book… I'm going to give you an analogy. It might be wrong but this is how I think about sport. So as you said, the Americans actually found that they could do the necessary collective action things in the crisis and the Europeans couldn’t. And there's this kind of view about American sports, American sport is meant to be this kind of wild west, pure free market thing, and it's not. It's actually socialized and collectivised. And it's European sport, it's the world of Real Madrid and Barcelona, which looks more social on the surface, but deep down that's the wild west. Something similar is going on here. Actually the American banking system, its relationship to the American state, the power of the federal government to act, the fact the dollar is the reserve currency, they could do it here and the Europeans who tell this story that we’re not wicked Americans. We actually understand the social consequences…

ADAM: It’s also I think to do with kind of like the geometry of this. American banks, as big as they are, are small in relation to American GDP, small in relation to the resources of the federal government even if the federal government is far smaller than you might expect it to be. The proportions are different.

If Deutsche Bank is negotiating with Berlin it's not really entirely clear who really has the upper hand in that. And if you see in those negotiations in late 08, Deutsche goes in and out. Likewise Barclays and HSBC pull in and out of Gordon Brown's efforts to stitch together a collective solution. Ironically, and this compounds the another irony on top of this, the only European country which really looks anything like America is France because France appears to have a similarly high degree of elite closure as the United States sort of franchise model implies. In other words everyone knows each other, they all come from the same schools, they've all cycled through the Treasury, and Paribas is a co-operative lead elephant in chaperoning everyone in France into a weird public-private partnership essentially. It also helps of course that the French are not actually—once the Fed takes care of liquidity—the French banks are not affected in quite the same way. But that again ruptures our presumptions about difference. The elite closure in the United States and France appears to be crucial for their ability to produce these collective responses, which are very singular moments in the political economy of capital. [26:01]

DAVID: So what do you mean by elite closure?.You mean the actual connections at the top?

ADAM: The connections at the top and the fact that roles are in fact systematically confused. Like when Paulson sits opposite you, the bankers, you know one read, the sort of sovereigntist read, the Schmittest read is the American state is banging its fist on the table like it did with the war on terror, it's suspending ordinary illegality, it's doing the emergency thing, and like ‘Bravo to the sovereign state.’ And when you look who is in fact on the other side of the table and it's a former CEO as well. And if you look at the tales of the deal, you know somebody said this is not Cosa Nostra. This was an offer you would have been an idiot to refuse. It wasn't an offer you had to take it was an offer you will have to be out of your mind not to take. It had to be that way because you had to bring in the basket cases like Citi and J.P. Morgan and Wells Fargo, JP Morgan in particular could have attempted to be the Deutsche Bank, Barclays predatory deal breaker, and is instead you know offered a deal which is bad for them frankly, at least in the short term calculus, but not so bad that they have to turn it down. So what kind of a deal is that? Who has sovereignty? Sure some kind of sovereignty has been exercised, they've taken 700 billion dollars of American taxpayers money and you're doing something with it. But who is doing something with it?

HELEN: I agree with you. I think the only point when it becomes different and Britain takes the role of United States is when you get the central bank question because then the bank of England can act like the Federal Reserve Board and the European Central Bank can't.

DAVID: Because of the euro.

HELEN: Well it’s got no lender of last resort capacity at the beginning of the crisis at all. So once you get to the position where the Fed is responding with QE and the Bank of England reasonably quickly follow, that is just not an option.

ADAM: But defenders of the ECB will say you've got to distinguish between QE, asset buying, and lender of last resort function/liquidity provision, which the ECB does do on quite a large scale from August 2007. I get into terrible trouble with ECB defenders here because I am hard on the ECB consistently in this book. I think Trichet is a disaster. He’s not a disaster he's just a very determined conservative who's willing to take extraordinary risk with the European project to get his way. It has disastrous economic consequences that he thinks is a price worth paying I think. But the ECB does liquidity in the form of repos. They're not asset purchases they're these swaps, you give me your asset and I'll give you cash or they do LTROs, long term refinancing, where again they'll basically just provide you with with loans But what they will not do… they can do it. It's not outside their mandate. They could have done QE. They chose not to on a large scale but in August ‘07 it's their huge injection of liquidity which actually alerts the Fed to the seriousness of the situation.

DAVID: One of the things that your book does that makes it so remarkable in its range is it takes Eastern Europe very seriously in the story, which is not usually the case. So I had this question in the back of my mind as I was reading, a classic geopolitical question, ‘Who lost Hungary?’ Because there seemed to… I didn't know this at all till I read your book, but there seem to have been moments where discretionary policy choices were made, some of them based on this kind of geopolitical prejudice about who's in and who's out, to do with some of the possibility of these kinds of swaps. Where does responsibility lie? Because Hungary was essentially left to hang.

ADAM: One of the aims of the book is to try and just point out that the modes of power are fungible. The ideology, the hard power of violence and financial power, productive power, technology, It's better not to treat them as though they belong in separate boxes, or rather if there are periods in which they are in separate boxes, we need to explain how on earth we got into that happy state because that's an unusual and rather desirable state of affairs if you can keep these things segmented, right? It's a kind of liberal vision of everything in its right place, civil society here freedom of science there, politics here, the economy there… that's kind of Panglossian, really. And clearly something's happened in our world since… well it turns out I think really since 07-08 quite dramatically in which fears which already existed about how things might blur that we were talking about earlier on with China, the big bogey figure out there that might be the political turd in the punchbowl. That problem has just expanded massively so that everything now seems contaminated and you have the United States declaring in its national security strategy that economics is basically a playing field of national competition like any other field. China is the thing which was expected to produce that effect. And as a result of its epic growth in the end kind of is bound to produce that effect, whatever it does. It would have to as it were crash land its defence spending to avoid its economic growth from producing this effect even if it didn't have aggressive geopolitical intent itself. But the place where, again, unexpectedly if you like, this did explode into the open was Eastern Europe. And so one of the aims of the book is to integrate that systematically into the story rather than having that kind of moment of ghastly liberal indignation and surprise where geopolitics crashes back onto the agenda in 2013-2014 in Ukraine, because, you know, ‘Oh my god…

DAVID: Putin’s done something again.

ADAM: This beastly Russian bear has lumbered back into our liberal iddle and now we're going to have to adjust to this. Without becoming a kind of apologist for Putin and that's just a naive way of describing the history and geopolitics and geoeconomics of the last 20 years. And so Eastern Europe is the neuralgic place where there is in fact a shooting war in August 2008, not imaginary trade war even the frozen conflict that we have in Ukraine but a flat out invasion of Georgia by Russian forces that takes them to within hours of the capital. And of course Georgia is not the front line of any kind of economic contest. But it is the front line in the question of NATO's expansion and it's only a liberal who will say well NATO expansion’s got nothing to do with finance because from that point of view of Moscow that never made any sense. They fully understood—and indeed for the point of view of most of the East European states, EU membership, financial integration, economic integration, and NATO membership were all part of the package, exactly as they had been for Western Europe in 1945. The EU is part of the post-war package which is designed to keep the Russians out the Americans in and the Germans down. That's its original function. So ‘08 to me is… you know we have to find a way of putting this back in. And when you add it all up, it's a decent sized chunk of the story. I mean there's a trillion dollars plus at stake in Eastern Europe and it is going down hard on the question of what policy options are worth. You know, people read those chapters and go, ‘Oh my God, you know we could have saved Hungary by means of the swap lines.’ If that's the way it's read that’s unfortunate because I think… people have and you’re not the first and I may encounter problems here. But the point was simply, in a sense, just consciousness raising. This crisis happened. Wwap lines were denied. The Americans expected them to be provided. They end up with the IMF, which is probably entirely predictable that may not even be the worst possible option under those circumstances. But then neither should we be surprised about the opportunities for nationalist mobilization this opens up in a place like Hungary which has an incredible repertoire of nationalist, economic nationalist rhetoric to draw on which is exactly what Fidesz do.

DAVID: In a way the point I was making was simply to go back to a point you made earlier. So there are these kind of almost unspoken prejudices about hierarchy in global politics and it just felt like at the moment of truth Hungary was on the wrong side. So not what could have been done… [32:21]

ADAM: It’s a spoken hierarchy. If you look at the Fed minutes, they are lining up the countries as to which…

DAVID: As you say… You’re either in or you’re out.

ADAM: If your banks actually had branches in New York that will help you. If your banks run out of good collateral in dollars and you’re part of the inner circle you get a swap like. Then people in New York get worried and say, ‘How many people are we going to give swap lines to.’ And part of the thing they're worried about is Eastern Europe because many of these folks are Bush administration warriors of the 1990s. This is America's baby. They made the new Europe and they love the new Europe and they they actually have a considerable stake in it. Bob Selleck at the World Bank is one of the most aggressive exponents of intervention in Eastern Europe because he's a veteran of the Bush I. And they say to each other, ‘Okay well we won't do it. Don't worry.’ And Geithner says, ‘What I'm going to do is ramp up the IMF’s financial facilities.’ And that's the agenda of G-20 in London the following spring. And then they say, ‘Well who’s going to give these people swap lines?’  And the Fed official chiefly responsible says, ‘Well the ECB will step in.’ So they have that hierarchy explicitly spelled out. The unspoken element is that they don't want to reject too many people. So they want a hierarchy but one that's accepted by everyone involved so that you don’t have people challenging its runs. And the embarrassment would be that somebody applies for a swap line and is denied and the markets realise and then that will have a catastrophic effect on credibility. So you don’t want that to happen. So it needs to be a hierarchy that is quite explicit and clearly understood such that no one tries to jump out of their place.

HELEN: I think the really interesting thing that came out of your account about Hungary—and it plays with then your account about Greece in March 2010—is you’re in Hungary in 2008 and basically the European Union, the ECB washed their hands. That is an astonishing thing in itself to do because Hungary has a legal requirement to join the euro and the ECB is saying, ‘We’re not interested. Nothing to do with us. You go to the IMF.’ Even if you just taught that episode by itself it’s really not surprising you get a nationalist rebellion in Hungary. And then you skip on and you've got this nice bit in March 2010 where the Greek Prime Minister… his name for that moment escapes me… he’s gone to Paris to see Sarkozy. And Sarkozy says, ‘Whatever you do you are not going to the IMF.’ He says, ‘The IMF is for Africans. We’re not having the IMF in Europe.’ He is absolutely adamant about this. And that is the French position the whole time. Now it doesn't hold because Merkel can’t sell the ECB and German involvement without bringing the IMF into it. They have the French president basically saying that the IMF cannot be involved in European affairs after the European Union and the ECB has said, ‘Well only the IMF can deal with Hungary. It’s nothing to do with us.’ I mean you can’t put these two stories together without seeing that the French position was Hungary is not a European country. There isn't any other way of interpreting that. And so then really, why are we surprised when we get the kind of mobilisation against the EU that we get from Orbán? [36:18].

ADAM: And Trichet adds the element… so Sarkozy thinks the IMF is for Africans. Trichet thinks the IMF is America. So. Where you don’t want to be is in the position of America’s Africa. You know want to be made into Burkina Faso, I think is the case they cite, by America. I mean that is the kind of Weimar-era fear of Ottomanization and subordination in a global hierarchy where you don’t occupy the top slot but some kind of intermediate position.

DAVID: So we've got to Greece and we’ve got to Merkel, so let’s talk about that. So another thing that's happening as we speak is that Greece is coming out of the… we’re allowed to use bailout here?

HELEN: Bailout, yeah.

DAVID: When you look back on the Greek story now, whats the central lesson that you take from it? It is not coming to an end it is just moving into its next phase.

ADAM: I would argue that it’s… fundamentally the extraordinary difficulty of concerting and coordinating different elements solutions, all of which were in various ways advocated by one or another actor you might actually think was quite powerful and quite influential. And the overwhelming priority put instead on a kind of formal compliance with some norm of rationality. So makeshift, after makeshift, after makeshift is tidied up and groomed into a package which everyone can sign off on because the latest one for Greece is… you know achieve debt sustainability by 2050 or something. I mean it’s an insane kind of exercise in deep irrationality emerging out of elements each one of which does have a logic which are then subsequently, as it were, repackaged as something which appears coherent but only in a world of make believe fundamentally. And throughout that, the extraordinary difficulty of simply recognising the obvious, which is where they arrive partially by early 2012. In other words there has to be a debt cut. There has to be some kind of sovereign default. Has to be very substantial. All of the cost cannot be transferred to the taxpayers. A large part of the cost has got to be borne by the creditors, in the ways creditors are quite used to bearing these kind of costs really in the long run of type of history. That for me is the fundamentally to that extent, political or power political problem.

DAVID: Because one thing I got from your book, like all great history books, it simultaneously makes you think how contingent everything is and how structural everything is. How much it depends on individuals and their choices and how much individuals their choices don’t matter. So in this story it is both a massive collective action problem and one where, structurally, though people can see bits of it, they can't see the whole. And on the other hand, Germany and not just Germany but one or two politicians, not just one or two politicians, but in the end the one politician who runs will or through this story, Angela Merkel, seems to play such an important role. Am I right to think it is simultaneously contingent on one or two individuals and deeply deeply structural?

ADAM: I mean I take your point and that is part of the joy of history writing but also its deep frustration because you end up oscillating continuously back and forth between those two positions.

DAVID: Because they’re both true.

ADAM: Recognizing agency and recognising constraint. And certainly one of my intentions in writing the book was to avoid writing an anti German diatribe, which implied obvious and simple agency on their part, the total failure of insight on their part, which I think is in some ways quite a reasonable read but I think that underestimates various features of the German stand notably on debt restructuring and in the possibility of imposing losses on private sector lenders, which point to a more complex reality. Whether or not we center this on the figure of Merkel, in a sense Merkel in this narrative anyway stands for a continuity of a kind of conventional mid-Atlantic economics of fiscal responsibility and sustainability that is not specifically German at all. In fact it was adopted by the Germans because they felt they had strayed so far from the path of this normative ideal themselves in the wake of reunification and basically the crisis of the German model in the late 90s. And then in a kind of missionary spirit moved towards Hartz IV this deep reform of social welfare and labour market regulation and then in the second phase this serious commitment to budget balancing and debt stabilization, which they commit to by means of constitutional amendment, one they've actually taken seriously in 2009. And that for me is really kind of the Rubinite program of 1990s, mid-Atlantic… social democratic would be to call it the wrong thing, but this sort of third way progressivism translated into a German national program which they then push fairly consistently and Merkel sticks as closely to… what she's got to do is square that with her desire not to appear as the person who broke Helmut Kohl and Chancellor Adenauer’s  European project. And so again and again, to the vast frustration of German conservatives who do not regard Germany as a winner in the eurozone crisis but as the great loser of the eurozone crisis... again and again she compromises to keep the show on the road. And what she's really looking for is the least politically costly compromise if you like. Which everyone is screaming at her ECB ECB ECB—it's the obvious fix. Let them off the hook, push them off the hook. And in the end they get there. After 2015 they really get there. So Merkel… as you can see I’m pulling as far away as I can from the kind of peculiarities of German history or peculiarity of a kind of Merkel centric story. I think she's really quite an unremarkable figure in her economics.

DAVID: In a way what makes her the outlier is that she's the continuity. It’s that weird thing where continuity is the exception. [41:37]

HELEN: I sort of largely agree with that. The one thing I would add in on the structural side is... I think it comes out in your account very well Adam. I think it's generally been underplayed, the constraints created by the German constitutional court because if this were better understood, I think there's lots of things about the EU that would become a lot more politically complicated in terms of making it palatable to others. But effectively the German constitutional court has asserted a veto for Germany over where the limits of European integration lie. Unless the court is willing in each instance to uphold—because it will be challenged that the next act of integration is compatible with German basic law, it's going to fall. And Merkel internalized that. And so she's constantly thinking what is the limit of what the court is going to be willing to accept.

ADAM: And this has a very important chronology. I completely agree, if, you know this sort of collective action interpretation of the eurozone problem is that it is the right one, then the question of political constitution is bank. The question at political organization is bank. Because that’s, in a sense, one of the problems here. Not the only one because there are economic interests shot through this. Regardless what kind of organization you had it would still be a difficult thing to do. But the lack of organisation is a key thing. And so the failure of the EU constitution in 2005, the Lisbon substitute that was put in place, which is Merkel's baptism of fire as a European politician. This is not somebody, as everyone's always said… she doesn't have any kind of instinctive, personal, biographical commitment to Europe. That means her world has always been wider. She's more interested in California than she is in Spain. You know, she's deeply interested in global history. She reads global history as a pastime. Jared Diamond and stuff like this. But the crucial point is at that moment, she steps into the European political scene and is rescuing the failed constitutional project, and the German diplomats work like dogs to get the Lisbon deal done, and then just as the crisis hits, the Irish turn it down. And you come to the fall of 2008 where everyone is screaming at the Europeans, ‘Do a collective solution, hand it up to Brussels, build a collective bailout fund.’ There's no way in hell that anyone in Berlin is going to authorize a transfer of authority to the European commission in the fall of ‘08. And then, exactly as Helen is saying, the German Supreme Court, the Lisbon… that summer is fundamental. And it's one that many right thinking people will happily agree with. It sets a very high Democratic bar. We will not hand this stuff off unless we actually are persuaded that the European parliament is a real parliament and there's real democratic control here because otherwise this is a violation. And if you add into that then the shift in the complexion of the German political scene with the reshuffling of the coalition from a grand coalition with the SPD to a much more narrowly based, much more right wing, conservative, free market, nationally oriented, limited coalition with the liberals, they are also going to hold Merkel to account, or she will become embarrassingly dependent on the party that's supposed to be the opposition but remains de facto her grand coalition partner, the SPD. And the SPDR really has some traction in terms of this indirect leverage they can exercise. So the constraints on her… the SPD in the earlier phase by way of the great green coalition did Hartz IV and then together with her passes the constitutional amendment for fiscal consolidation. So they are fully on board, at least most of the party is fully on board although the left wing is kicking against it and trying to get back off the Hartz IV wagon… is fully on board with this sort of consensual, continuity logic that they inherit from the 1990s. [45:01]

DAVID: Your book describes quite a lot of leftwing kicking against it. Most famously in Greece, but in Spain and other places. And as you also say, in a sense the structural features of the European project do win out.

ADAM: It’s nothing if not a brilliant defensive structure. I mean it may be bad for solving collective action problems but if you had to design a hegemonic structure for containing insurgent movements, I mean it's like the Holy Roman Empire.

DAVID: So far, so far.

HELEN: I think it all depends on the ECB though. That’s the thing. It doesn’t actually have that at the beginning.

ADAM: No it doesn’t. And the ECB stepping in with QE…

HELEN: I mean that's that there's no taking down Greece in 2015 without QE, so.

ADAM: Of course not. And there's no handling Italy right now without the QE. So…

DAVID: So again, it’s a classic structure plus whatever it takes.

ADAM: Well not whatever it takes. The amazing thing about whatever it takes is nothing happens and the ECB allows its balance sheet to contract after 2012. The people pumping money into the global economy are the Fed again. They are the  loan anchor, which is where the dollar falls. We get the real divergence between the EU and the U.S. macro economically after 2012. But its ‘15. We’ve really underrated the QE in ‘15 because it looks like the EU is sliding towards Japan style…

HELEN: And also they announce it literally a few days before the Greek… and actually I think it’s done pretty knowingly. The reason this needs to be in place… because actually it isn’t going to be started until March. So that’s January, the elections are in January. It’s basically to say, ‘We will have a defense against contagion when Syriza is in power.’

ADAM: I'm not sure I buy that instrumental…  but de facto. So if you hear Draghi in interviews later that spring, ‘God, it turns out we've got some pretty good instruments now.’ Like we’re not worried… He literally has an interview where he’s like, ‘ Once upon a time I might have worried but now it turns out I've got some great instruments.’ And ECB QE is spectacular. I mean they have drained the bond market. There are so few available bonds now for private purchase, it's extraordinary. I mean it really does beg fundamental functional questions about how pension funds are supposed to operate. You don’t have to be a German propagandist for the German Savers Association to believe that it has wrenchingly dislocated European capital markets.

DAVID: So it took Europe till 2015 to do what the Americans woke up to much quicker.

ADAM: 2009., yeah.

DAVID: We haven't talked much about Britain. There’s much we could talk about, and we are…  I think we've really gone over our length as a podcast. I want to ask one British question, which is, in a sense, an extension of this, which is the Corbyn question. So Britain is not under any circumstances part of the euro, and probably were there to be a Syriza, or whatever it would be, style government in Britain, probably not part of the EU at that point too. Do you think Britain… the possibility of a left government of that kind of Britain stands outside of the story or do you think the constraints will swallow up Britain as well? How much room for manoeuvre do you think Corbyn, or I should probably say a McDonnell government would have?

ADAM: I mean I’m a remainer to the core in the sense that I sound English and I have a UK passport and  I grew up in Germany. So I'm in a rather unfortunate position right now.

DAVID: And now you live in New York.

ADAM: And now I now live in New York. So I speak with a certain kind of… yeah. But the book says, and I would stand by this, right, that the blank… the simplistic, crude remainer prediction that Brexit would result in an immediate catastrophe has clearly not been indicated. And folks like Ashoka Modi, and I mean he's a he's a great guy. You should get him on the podcast. His book about the euro is very controversial, but he was there in Ireland in 2010-2011, part of the interesting side of the kind of insurgent IMF analysts who were pointing out the insanity. He has hammered this point home, and it depends on essentially what Helen was saying earlier on. If the bank of England is cooperative, there need not be an imminent and dramatic collapse.That's a big if, but if the bank of England is cooperative… and to my mind, what we have begun to see is the formulation by people like Draghi and of Carney of a quite acute awareness of their critical role they play in mediating their relationships with financial markets and that modern democratic conditions. For me a really interesting moment was the Italian referendum of ‘16, at the end of ‘16, which Renzi lost. And Draghi announced before the referendum that he was going to buy Italian bonds regardless of the outcome. And that seems to me the kind of posture that responsible pro-democratic central banking ought to adopt. In other words, we will offset market pressure so as to enable relatively free democratic choice.

DAVID: So just how would that work before a British general election? The governor of the Bank of England says, ‘It's okay, you can elect Corbyn because we’ll…’ Obviously...

ADAM: To my mind it would be like polling in the sense that you would basically say, ‘We will try and neutralize the effects of financial market fluctuations ahead of democratic decisions, and more than that, we will treat speculative behaviour as on its face anti constitutional behavior and we will try and punish it.’

HELEN: I think there is a difference though in that Britain isn't really in a QE program at the moment and the ECB were. So you would have to then basically reintroduce…


HELEN: A significant QE program to support Corbyn government, and I think that's a different position than the one that Draghi was in.

ADAM: Because he was already in a QE. And he clearly said that he wasn't going to suspend QE as a result, whereas with Greece of course, Trichet continuously said, ‘I will suspend my version of QE if you do not do what I say.’ That was Trichet’s threat. [50:23]

HELEN: Even under the securities market program, Greece didn’t actually get that much… I mean it stops in 2011 at a really intense point in the Greek crisis, it just stops.

ADAM: The answer to the question is, I think, the crisis demonstrates that if you do have an active Central Bank, which is willing to do rather unconventional things, there is a very high degree of autonomy, in fact. This is one of the shocking things about the crisis. And it goes all the way back to the Bretton Woods moment. The monetary system is fundamentally at the apex of this pyramid as are the organizations of the state and political organizations. Everything from the banking license all the way down has this. This is not like the fossil fuel economy, which is materially rooted, deeply complex in infrastructural terms, and it’s really quite difficult to see how we get around without this stuff.

This is kind of light, and it has proven to be massively politically fungible, frankly. And a left wing government with enough aggression and with the cooperation of a central bank, de facto… Say the left wing government in Portugal has played a game with the ECB, which is, you know, ‘we will go this far so that we don’t lose our investment grade rating and then you'll go on buying our bonds and we'll go this far.’ And that's the game they've played. And of course it's a highly constrained, highly unequal game, but in a sense, what we would be looking for is in the UK cases as a more expanded and open ended version of that.

DAVID: So Helen often tells us on this podcast that one of the big questions for the future of European politics is who will replace Draghi. But presumably, also, given what you were just saying, who will replace Carney is perhaps the central question of British politics. Or at least one of them.

ADAM: I mean we haven't articulated the broader politics that would be necessary to enable this kind of shift in central banking. But it seems to me that for the left to articulate, spell out and establish at least some basic credibility… in other words we need this not to induce an immediate panic. But there needs to be a program of saying, ‘Look this is going to be a part of our program and when we say central bank independence, by that we mean, also one that respects the independence of the democratic process,’ rather than this one way street in which their independence is basically just a mediator for market pressure. Because we've seen historically what that kind of independent central bank could look like and we'd like one of those that's pro-progressive presumably.

HELEN: I think the other thing though… is this is where things are different even in the last few months, currency issues are back to the fore. And in some sense that they never went away. I'd say they've been going on really quite deeply since early 2016. And so a Corbyn government could be really vulnerable to a sterling crisis. I mean it's not like the pound’s in a particularly strong position at the moment and QE doesn't save you in a currency crisis. It makes it worse.

ADAM: It's unclear, isn't it, how that dynamic would play out because you could simply say, ‘We’ll ride it out,’ as long as we don't end up in some sort of vicious circle, downward spiral, 1970s style, endogenous kind of inflations droop. This might not be the worst thing ever for the British exports. I mean Britain has a gigantic current account surplus. Here’s a prima facie reason to have a deep devaluation. Part of the argument would presumably be that if you collapse bits of the City's business then the kind of crowding out effect that happens by way of the City of London will be diminished. This is certainly Ashoka Modi's kind of argument, that the intelligent Remain position was that, ‘Yes indeed we are going to crunch bits of this deeply, deeply unbalanced political economy, which are driven by the City-London house price spiral. And that will indeed induce this structural shift which will then hopefully create the space.’ Whether it does or not depends of course on a whole variety of other conditions.

DAVID: I going to ask you a last question, which is going to connect three things that we haven't talked about: Trump, Turkey, and where the next crisis is coming from. And I’m going to do it, but I want to read you a couple of sentences from George Packer, an article he wrote in The New Yorker about the 10 year anniversary of the crash. And he ends his article with this. So this is about the U.S.: “Economic indicators are strong right now, but before long there will be another financial crisis. They come every 7 or 10 years, each bearing the features of its time. If the previous one was the result of overconfidence in free markets, the next might be triggered, as in Turkey today, by the behavior of an authoritarian leader. When it comes we'll be less prepared to address it than we were in 2008.” He’s talking about the United States. “This president has made an enemy of facts. Congress no longer passes rational laws. And American democracy is 10 years unhealthier.” So it goes back to where we started, it's about the politics. There are a few kind of possible questions in there. There’s a question about Turkey, but also, when the next crisis comes, are we less well-placed politically because of the political consequence of the last crisis to get through it?

ADAM: I mean I think this is a fundamental misunderstanding. I quite like Packer but he's just, like, barking up the wrong tree. We will not have another crisis. The sort of crisis we had in 2008 does not come along every seven years.

DAVID: As I was reading the 7-10 years, I mean that…

ADAM: What we will have is another recession, which I think is more or less inescapable. The growth trajectory we're currently on cannot extend. There’s evident signs for recession. The 2008 crisis, but for massive intervention… well I think it’s clear would have been the worst financial heart attack that global capitalism has ever suffered. Full stop. Bar none. So no, it's a total misunderstanding to think it's the sort of event which comes along every 10 years. [55:40]

DAVID: But not all crises are that crisis. That is the ur-crisis.

ADAM: That is in some sense I think qualitatively separate crisis.

The question is whether we're in a world which is flat with occasional massive spikes, which would have ‘29 and ‘08 as distinct but massive disruptions, or whether we're in a world which is more kind of Anthropoceney in its logic. In other words we just saw a bad one. Everything after this is going to be even bigger and even worse. It certainly won't be like 1929, it won't be like ‘73, it's not going to be like dot com… because dot com wasn't a financial crisis. Dot com was an asset bubble bursting. That's not the same thing. But it is possible that one could see a dollar-based, short-term funded, highly leveraged type crisis now playing out on the even bigger stage of essentially China and the emerging market economy complex associated, with which America is to a degree connected, but part of the problem would be that it wouldn't be as deeply connected as it was with Europe and therefore the imperative to do liquidity support, transatlantic kind of support actions would just not be there. That’s an unexplored politics.

DAVID: But on that point the, you do end your book with the 1914 parallels. When whatever the thing is next comes next, is what's happened to our politics in the last 10 years something that leaves us fundamentally much more vulnerable, and that's the key?

ADAM: You could tell that as a story of decline which Packer is very you know, he's very into this kind of end of the American dream nightmare, an American Gothic I have a chapter about that syndrome, which is a syndrome really of 2013 2014. Not quite as manifest now in the US. That isn't the mood. The mood is much more antagonistic and confrontational. And so a different read would not…

DAVID: From the Unwinding to the Resistance.

ADAM: Yeah it would be much less the kind of decline of the Republic more to polarization. And the real central question there is partisan. And it's difficult to avoid this, and it seems like it seems like a trivial point to make, but you could argue that the stability of global capitalism since the Wilsonian period has to a large extent revolved around the politics of the Democratic Party of the United States. I mean they've been the party at three moments in the Wilson era, under Truman and FDR, and then in the transition from the late Bush administration to Obama, who have been willing to mobilize a political base, very fraught, very contested, and quite fragile to mobilize the resources of the one nation state large enough to actually act as a stabilizer for global capital to do that job. And it's on essentially the stability of that coalition that everything hinges, and on the nature of the opposition they face. And the truly alarming thing is the nature of the opposition they have begun to face. It’s not since now and Trump or even 2008, but since Clinton. I mean since that first unfettering of ultra-partisanship and really the unwillingness of Republicans to grant that after Reagan there should be any other president but Reagan forever, and baby boomers with their odious cultural politics could now be… and their commitment to civil rights and so on... that I think is a deep question and it's not obvious… this question is… it was really eye opening for me to read the post Clintonian Democrats in the 2000s already asking themselves this question. Brad DeLong has this great blog post where he goes, ‘How do we make policy under the circumstance in which the other party in the two party system is “no longer normal” and may never be normal again?’ I mean what do you do under those circumstances? Do you choose your own lack of normality and exploit, as it were, the bargaining position you have when you were in power? Do something crazy and “irresponsible” and force their hand, as they routinely do? Or do you become the people who again and again and again pick up the pieces in a system which is broken because of the combination of that constitutional structure with that type of partisanship is a recipe for total deadlock. [59:21]

HELEN: I think the next crisis is twofold. The obvious one is the one that's coming for Italy because it's already started in terms of the deterioration of its spreads and what happens in October-November when the ECB is supposed to be cutting its monthly asset purchases in half. And the Italian budget it's got to be approved by the commission. That one’s kind of just sitting there.

DAVID: That’s baked in.

HELEN: It might not have much contagion but it will have political contagion for the EU without question. It can’t not. I think the other one is the interaction between the dollar shortage and the geopolitics of what's going on at the moment. So I think you could argue that there's kind of been an emerging market set of financial crises going on since 2015.

ADAM: ‘14 even with Brazil. I mean Brazil, we ask this question, like, ‘When's the next crisis coming?’ You ask a Brazilian…

HELEN: Now. But I was going to start with a Chinese stock market crash. And underneath all this, including Brazil's problems, is the Fed tightening that is causing dollar shortage. And at the same time you have a president who is moving towards a confrontation with Iran that involves other states. He would like to think China as well but that's clearly not going to happen. Adopting these sanctions that the U.S. wants and is going to use access to dollars as a means of trying to have his sanctions. And these two things are going to have profound consequences, the way that they interact with each other.

DAVID: And can I just ask you, given where we are now, people talk about what's happening in Turkey as the possible beginning of something. Is it the possible beginning of something or not?

ADAM: As I interjected, I mean I’m in complete agreement with Helen. I think we've actually been living through a series of localized crises. The one which could have generalized it would have been China. They weren't truly local in the sense that many of them were driven by the commodity supercycle and as soon as that came off with taper tantrum… independently even of the taper tantrum, that was going to hit a bunch of them. So commodity prices collapse. So that hits all the oil producers, all of Central Asia along with Russia, large parts of sub-Saharan Africa as well, which were riding on the commodity boom. So Turkey to my mind is just the latest instance of that. It's a country, which to my mind receives economic shocks, it receives geopolitical shocks through the Arab Spring, the withdrawal of EU accession as a possibility. It's been at the receiving end of buffeting shocks. People have looked hard for contagion. The only thing anyone can find is BBVA, this big Spanish bank which owns the second largest Turkish bank, and that… but you have to figure that the eurozone would have the capacity to deal with one… BBVA is a big bank but you have to figure they could cauterize that. I mean it might be if they had a total write off of their Turkish business they would need recapitalizing, not totally but they would need an injection. That's the extent of it I think, unless it becomes rhetorically, and as it were meme-wise, the signal for a general risk-off across all of the emerging markets, which would hugely reinforce the pressure that Helen was talking about when she said a dollar shortage. It’s just the price of dollars in short term funding markets is continuously going up. That can happen either because the Fed changes interest rates or because no one in the markets wants to lend anymore. Because they're all linked in these index funds, right? And so you could re-evaluate all of your positions in the MSCI Emerging Market index and that would require you retreat from everyone symmetrically. That would be bad news.

DAVID: And that reminds me of the last, last question I want to ask you because we're were talking about this before. The German edition of your book has on its cover a dollar bill which is broken, which seems to me… The one thing we haven’t talked about is the breaking of the dollar because that’s not coming.

ADAM: No, the opposite. It's kind of like the lowest common denominator in the world economy right now.

HELEN: This is why this whole idea that there's some kind of crisis of U.S. power or crisis of neoliberalism...  all these things, or Anglo-American capitalism… is such a distorting European narrative that was imposed onto the crisis.

DAVID: And imposed on Adam’s book in Germany by its cover.

HELEN: In this respect, American power has increased very significantly since 2008. There are other ways, militarily in the Middle East, where it clearly is not. It's been a geopolitical disaster for them in the Middle East since 2008. But the monetary and financial side they have much more power than they didn't before 2007.

ADAM: Even just in global commercial competition, the American banks destroyed the Europeans.

I mean the casualties of this, which the Europeans will simply not admit to, but I think the reporting on business in the Economist has been very good about this. There has been an epic shock to the standing of large European corporates in the global rankings since 2008. And it comes from the hit of ‘08 and then the double dip recession that followed. And if you do not have a rapidly growing domestic market no amount of the cancel of German exports will help you. And the Germans are nowhere now in the global rankings. And so then the Europeans go to this like sort crude-honest, consumerist retreat where we'll just be the kind of global consumer policeman and impose data protection on other people's technology, other people's money. You know you don’t need to be a Macronite  kind of supporter of industrial policy to think that there has been a very considerable power shift here. And obviously the European banks were a source of huge danger before 2008 but they were at least contending for position as global investment banks, And that's that's over. The competition is over and the new competition is from Asia. We should be thinking more of the défi Americain… that’s the mindset which I think actually is dawning in Paris. I think part of the Macron agenda is that the industrial policy that Europe needs is not just directed against Asia, it's also directed against against the U.S.

DAVID: Oh we could go on, but we have to stop. My name is David Runciman and we've been talking politics.