2008 marked globalised capitalism’s near death experience.

A
decade later we have no right to be looking at those events as part
of our economic history. The reason? We are still entangled in the
crisis that the events of 2008 sparked off. They remain very much
at the centre of our present. The same crisis is taking different
shapes in different places, migrating from continent to continent,
from country to country. It morphs from an unemployment-
generator to a deflation-machine, to another banking crisis, to a
maximiser of trade and capital global imbalances. It depletes
middle class savings in Germany and Holland, suppresses wages
across the West, causes credit bubbles in China, keeps Greece and
Europe’s periphery in a permanent Great Depression, it fuels
Brexit and discontent in middle America, in Europe. Last but not
least, it jeopardises the life prospects of millions of people across
the so-called Emerging Countries.
Moreover, I shall be arguing, 2008’s causes are intact, the imbalances that triggered it are
getting worse and, tragically, democratic politics – the only antidote to this crisis and the next
– are in a state of disrepair as a result of the never ending crisis that 2008 bestowed upon
us. But, lest you fear a talk dripping with gloom and doom is in the offing, let me promise that
I shall conclude – when turning from discussing 2008 to the lessons for beyond 2018 – with
an upbeat message: Yes, we can! We can put 2008 behind us in a manner that strengthens
democracy and brings shared green prosperity for a majority of people in a majority of
countries.

ON THE NATURE AND CAUSES OF 2008

2008 was our generation’s 1929. The globalised financial system collapsed and was only
propped up by two massive interventions: First, the institutions of the American state
backstopped the world’s banks and their offshore dollarised business centred in London,
Frankfurt and here in Paris – the Fed with its gigantic swap lines primarily but also the US
Treasury. One European central banker, accurately, referred to Europe’s central banks in
2008 (the ECB, the Central Bank of Switzerland and the Bank of England in particular) as
having become the 13th branch of the US Federal Reserve system. Secondly, China – whose
authorities pumped up credit and investment magnificently in a judicious attempt on the one
hand to replace domestic aggregate demand (lost to the free falling Chine exports) and, on
the other, to buy time for Europe and the US to get their act together.
 While
the world of finance was saved from itself by the American and Chinese states,
financialisation’s near death experience had repercussions that were felt everywhere. The
aggregate effect on output and trade was greater, in the first couple of years, than that of the
Crash of 1929. The certainties created by decades of establishment thinking – for instance
that markets are self-regulating and politics largely irrelevant – were gone, along with around
$40 trillion of equity globally, $14 trillion of household wealth in the US alone, 700,000 US
jobs every month, countless repossessed homes everywhere. Even McDonald’s, for
goodness’ sake, could not secure an overdraft from Bank of America!
Meanwhile the response of governments that had hitherto clinged tenaciously onto fiscal
conservatism, as perhaps the 20th century’s last surviving ideology, caused many eyebrows
to lift in puzzlement. Once they realised it was not enough to pour of trillions of dollars, euros,
yen etc. into a financial system which had been, until a few months before swimming in profits
and liquidity, our Presidents and Prime Ministers, men and women with impeccable anti-
statist free-market credentials, embarked upon a spree of nationalising banks, insurance
companies and automakers that put even Lenin’s exploits to shame.
Here, in continental Europe, where we had created an odd monetary union featuring a central
bank without a state to have its back, and 19 governments responsible for bailing out national
banks but without a central bank to have their back, the result was a remarkably self-
defeating policy of contractionary contraction, that lasted from 2008 to 2015, which caused
a historic defeat for European capitalism – one that, despite the various proclamations that
the crisis has ended, is still with us, depressing real investment as well as productivity and
poisoning our democracies by making them vulnerable to orchestrated xenophobia and a
moral panic around the issue of migration.
So, what caused the events of 2008? After 2008, even those who had argued that 2008 was
impossible are now experts in what caused it. Such is life. But let’s look at the various
explanations:

 Growing trade imbalances

 Financialisation creating a toxic dynamic: the narrative of riskless risk producing
massive systemic risk that fed on itself
 Toxic economic theory aiding and abetting toxic finance; e.g. the Efficient Market
Hypothesis, Rational Expectations Hypothesis, the so-called Real Business Cycle
Model – Regulatory capture
 The entry of 2 billion workers (from the former communist states, China and India)
into the global proletariat
 The global savings glut that these developments engendered
 Central Banks fighting the wrong war against price, not asset, inflation).

All these explanations are true and apt. But, I want to argue that all of these explanations are
themselves symptoms of a deeper cause: an underlying global macro dynamic that has been
unfolding since the 1940s. In short, my argument is that these developments, that
precipitated 2008, were caused by the nature of the transformation of the US from an
hegemonic economy whose surplus was used, by political means, to stabilise Europe and
Japan to a deficit economy whose hegemony grew as a result of stabilising global aggregate
demand via its growing twin deficits.
To see this, we need to begin at the beginning – in 1944 and the Bretton Woods Conference.
As the war was drawing to a close, the New Dealers’ administration in Washington
understood that the only way of avoiding the Great Depression’s return, once the guns had
been silenced, was to recycle America’s surpluses to Europe and to Japan, and thus
generate abroad the demand that would keep American factories producing all the gleaming
new consumer products that American industry would switch to at war’s end.
The result was the project of dollarising Europe, of founding the European Union as a cartel
of heavy industry, and of building up Japan – all within the context of a global currency union
that was the Bretton Woods system and its underlying new philosophy according to which
money was co-owned by those who had it and the global community that backed it. A system
featuring fixed exchange rates regime anchored on the US dollar, almost constant interest
rates, boring banks (operating under severe capital controls) and American-led management
of aggregate demand for global capitalism’s goods and services.
This dazzling design brought us a Golden Age of low unemployment, low inflation, high
growth and massively diminished inequality. Alas, by the late 1960s the foundations of
Bretton Woods were disintegrating. The US surplus, which was the bedrock of the global
monetary system, disappeared. This, combined with the bankers’ perennial attempt to
unschackle themselves from the constraints placed upon them, created the offshore
Eurodollar market that was to become, later, after Bretton Woods was jettisoned in 1971, the
basis for financialisation. Indeed, by 1968, America had lost its surpluses, slipped into a
burgeoning twin deficit and could, therefore, no longer stabilise the global system it had
created by recycling surpluses it no longer had. Never too slow to accept reality, Washington
killed off its finest creation: On August 15th, 1971 President Nixon announced the ejection of
Europe and Japan from the dollar zone.
President Nixon’s decision was founded on the Americans’ refreshing lack of deficit-phobia.
Unwilling to rein in the deficits by imposing austerity (that would shrink the United States’
capacity to project hegemonic power around the world), Washington stepped on the
accelerator boosting its deficits. Thus American markets worked like a giant vacuum cleaner
absorbing massive net exports from Germany, Japan and, later China – ushering in the
second phase of post-war growth (1980-2008). And how were the expanding American
deficits paid? By a tsunami of other people’s money (around 70% of the profits of European,
Japanese and Chinese net exporters) enthusiastically rushing into Wall seeking refuge and
higher returns, a sea change that was aided by three developments: (i) US wage growth that
was lower than that in Europe and Japan (thus, boosting returns to foreign capital flooding
into the US); (ii) Paul Volcker’s 20%+ interest rates; and (iii) the Wall Street-City of London
dollarised financialisation that occasioned self-reinforcing financial paper gains.
By the mid-1980s, the United States were absorbing a large portion of the Rest of the World’s
surplus industrial products while Wall Street would administer the foreign capital flooding into
the US in three ways. First, it provided credit to American consumers (whose wages
stagnated). Secondly, it channelled direct investment into US corporations and, of course,
thirdly, it financed the purchase of US Treasury Bills (i.e. funded the American government
deficits).
But for Wall Street to act as this ‘magnet’ of other people’s capital, and perform the role of
recycling other people’s surpluses so as to pay for America’s deficits, it had to be unshackled
from the New Deal and Bretton Woods era stringent regulations. Put differently, the
eurodollar, unregulated financial market that had grown up in the City of London had to take
over the rest of the world, becoming the dominant financial model in NYC, here in Paris, in
Frankfurt and in the Far East. Institutionalised greed, wholesale de-regulation, the infamous
‘revolving doors’, the exotic derivatives etc. were mere symptoms of this brave new global
recycling mechanism. And, after 1991, an additional two billion workers entered the global
workforce producing new output that boosted the already imbalanced trade flows, capitalism
had entered a new phase. It is what became known as Globalisation.
In Globalisation’s wake, the EU created its common currency. The reason the EU needed a
common currency was that, as all cartels, it had to keep the prices of its main oligopolistic
industries stable across Europe’s single market. To do this, it was necessary to fix exchange
rates within its jurisdiction, as they had been fixed during the Bretton Woods era. However,
from 1972 to the early 1990s each EU attempt to fix European exchange rates had failed
spectacularly. Eventually, the EU decided to go the whole hog: to establish a single currency.
This it did within the supportive environment of (grossly imbalanced yet temporarily
impressive) global stability that the US-anchored Global Surplus Recycling Mechanism
maintained. To get around the political hurdles presented by the Bundesbank’s
understandable reluctance to sacrifice the DM, we ended up with the paradox of the ECB
supplying a single currency to the banks of nineteen countries, whose governments would
have to salvage these banks, at a time of crisis, without a central bank that could support
them!
Meanwhile, Wall Street, the City and the French and German banks were taking advantage
of their central position in the US-anchored global recycling system to build colossal pyramids
of private money on the back of the net profits flowing into the United States from the Rest
of the World. This added much energy to the recycling scheme, as it fuelled an ever-
accelerating level of demand within the United States, in Europe and Asia. It also brought
about the astonishing de-coupling of financial capital flows from the underlying trade flows.
To explain what I mean by the ‘astonishing de-coupling of financial capital flows from the
underlying trade flows’, recall the heady days of August 2007 when the rot set in. My German
friends, to this date, tell me that they don’t get it: How is it that Deutsche Bank, and the rest
of the German banks, went, effectively, bust? How can any economic sector go, within 24
hours, from making zillions to insolvency, demanding massive taxpayer bailouts. The answer
is as simple as it is devastating.
Consider Germany’s banks and exporters back in the summer of 2007. Germany’s national
accounts confirm Germany’s large trade surplus with the United States. In the month of
August of 2007, to give an example, German net export income from the United States was
a cool $5 billion. Germany’s national accounts registered this surplus as well as a counter-
balancing outflow of capital from Germany to the US. However, Germany’s national accounts
do not show was the real behind-the-scenes drama, the real action.
From the early 1990s and until 2007, Frankfurt’s bankers were dying to buy the lucrative
dollar denominated derivatives Wall Street and the City manufactured and did so with dollars
that they were borrowing from… Wall Street. In August 2007, the price of these derivatives
began to fall, underlying debts were going back and, thus, Wall Street institutions faced large
margin calls. German bankers became apoplectic when their panicking New York pals began
to call in their dollar debts. They needed dollars in a hurry but no one would buy the mountain
of US toxic derivatives they had purchased. This is how, from one moment to the next,
German banks swimming in oceans of paper profit found themselves in desperate need of
dollars they did not have. Could Germany’s bankers not borrow dollars from Germany’s
exporters to meet their dollar obligations? They could, but how would the $5 billion the latter
had earned during that August help when the German bankers’ outstanding debt to Wall
Street, that the Americans were now calling in, exceeded $1000 billion? This is what I mean
by the astonishing decoupling of economics from finance, of trade flows from capital flows.

THE AFTERMATH
In summary, what had happened, globally, was that imbalanced dollar-denominated financial
flows, which had initially grown on the back of the US trade deficit, ‘succeeded’ in de-coupling
themselves from the underlying economic values and trade volumes. It would not be far-
fetched to say that they almost achieved escape velocity and nearly left Planet Earth behind
– before crashing down violently in 2008.
From that moment onwards, politicians went into overdrive to shift the losses from those who
created them (the bankers) onto the shoulders of middle class debtors, waged labourers, the
unemployed, those on disability payments and the taxpayers who could not afford to set up
off-shore accounting units. In Europe, in particular, our leadership not only failed to temper
the eurozone crisis but, by implementing to this day fraudulent insolvency concealment,
delivered a historic defeat for European capitalism.
The dominant narrative on what went wrong had no basis in macroeconomics and was, thus,
allowed to obscure the reality that the eurosystem had been designed not to have any shock
absorbers to absorb the shockwave from Wall Street. Consequently, one proud nation was
turned against another by a ruling class determined to disguise: (A) a crisis caused by an
alliance of Northern and Southern bankers and other rent-seeking oligarchs, into (B) a clash
caused by the profligate Southerners and ant-like Northerners, or as as crisis of over-
generous German, Greek, Italian etc. social welfare systems. The political repercussions of
this inane handling of an inevitable crisis are evident to all – and so I shall desist from saying
anything more about it – even though my life is, these days, devoted to fighting against the
Nationalist International that has grown out of this mess.
But let’s set aside these by now well-known developments. The question is: Where are we
now?
While America’s trade deficit returned to its pre-crisis levels within a couple of years, it was
no longer enough to stabilise global demand. The pre-crisis mechanism by which Wall Street
and the City converted – and supercharged – the US trade deficit into fixed capital
investments around the world has broken down. Sure, the Fed and other Central Banks tried
to make amends with tsunamis of QE-induced liquidity. But that only pushed up asset prices
in the West; e.g. giving US corporations an opportunity to buy back their shares while saving
their own profits in offshore accounts. Where monies did flow, in the Emerging Markets,
investment grew but was vulnerable both to the deflationary forces Europe continually
exports (courtesy of its domestic austerity drive) and to the expectation of tapering and higher
long-term interest rates in the United States. Perhaps the only pillar of global demand was
China, although its capacity to maintain that boost was circumscribed by the constant threat
of its credit bubble bursting.
In short, Wall Street’s pre-2008 capacity to continue ‘closing’ the global recycling loop
vanished – and has not been replaced yet. America’s banks can no longer harness the United
States’ twin deficits for the purposes of financing enough demand within America to keep the
net exports of the Rest of the World going. This is why the world today remains in the clasps
of the same crisis that began in 2008.

HAVE ANY LESSONS BEEN LEARNT?

Not really. Global capitalism behaved like a reckless driver who, having been caught for
speeding, sticks to the speed limit for a while but soon floors the accelerator as if nothing had
happened.
DEBT: 40% up since 2007, to 217% of global GDP
BANK REGULATION: Tougher national rules set out to constrain the banks’ balance sheets,
causing a shift of financial intermediation from banks to capital markets, mainly with fixed
income dollar denominated instruments. But, by making banks safer, market-making has
been impaired or shifted to the shadow banking system which has grown from $28 trillion in
2010 to $45 trillion in 2018. Risk has not been eliminated, just taken out of sight and
dispersed geographically; e.g. American banks dominate more than ever (the five larger US
banks that were considered Too Big To Fail are now even bigger – accounting for 47% of all
US banking assets, up from 44% in 2007), Asia’s new banking giants have rapidly expanded
and it is the British and European banks that contracted – as US authorities required
European competitors such as Barclays and Deutsche Bank to provide more capital to their
US operations or to leave.
EMERGING MARKETS LOSE THEIR CAPACITY TO ADJUST VIA DEPRECIATION: It is
well known that QE-monies flowed into Emerging Markets. Indeed, over the past decade,
dollar-denominated loans to EM borrowers grew by 17% every year, flowing into China,
Brazil, Chile, Turkey, Argentina, Indonesia etc. $3.7 trillion all up. This is now causing the
troubles we all read about. Worse still, devaluation seems to make no difference (as
Argentinians will not keep their money in pesos even if offered 100% interest rates). Even
when the government has enough foreign currency reserves to cover its dollar liabilities, the
appreciation of the dollar causes domestic corporates that labour under large dollar debts to
retrench at home, thus blunting the capacity of depreciation to boost domestic economic
activity.
A SENSE OF INJUSTICE: $321 billion fines were imposed on bankers. It was a tiny percent
of the liquidity and public assets sunk into them by taxpayers. Remarkably, unlike the 1980s
when a much smaller banking crisis erupted in the US (the Savings and Loans scandal),
which saw more than one thousand bankers jailed, no arrests were made for financial crimes
related directly with the toxic activities of financiers which led to 2008.
NO PLANS FOR THE NEXT EPISODE: No plan is in place for when the new tail risks hit; a
domino effect that may begin in a variety of ways (e.g. Italian public debt scare, a Chinese
credit bubble meltdown) and made more ominous by the Trump strategy of inciting a
coordination failure at the global level, by Brexit in Europe, by the generalised poisoning of
democratic processes.

WHAT NEXT? The need for a Progressive International

and a sketch of the International New Deal it must
campaign for
The 2008 crisis begat the Great Recession, which begat the Great Deflation, which gave rise
to the Comprehensive Dissolution of any semblance of Global Governance. The European
Union is, sadly, at an advanced stage of disintegration, with the migration debacle fronting
for the underlying macroeconomic imbalances that are inconsistent with the euro’s
institutional framework. The United States has adopted the strategy of shifting to bilateral
negotiations; a framework within which neither the European Union nor the Chinese economy
can continue as at present. The current trends will, almost certainly, lead to: (a) Europe
exporting greater deflation and instability to the rest of the world; and (b) China reducing its
unsustainable levels of investment by more than 10% of GDP, which in conjunction with a
maximum growth rate of 6% and a savings ratio of 40%, leads to the safe prediction of a
capital outflow from China that will exceed 10% of GDP. While particular economies will be
able to do reasonably well in such an environment, the global economy will suffer and
tensions will multiply. If to this picture we add the pressures from the next crisis (i.e. the
deflationary effects of AI and automation), the future looks bleak.
Can the future be brighter? Yes, of course it can. Recently, together with Bernie Sanders, we
issued a call for a Progressive International to campaign for an International New Deal, a
brand new Bretton Woods. What would that mean in practice? Here are three examples of
what that would mean:

 A Large-scale Green Investment Program by which to put to useful purpose

the global glut of savings

This would be equivalent to an International New Deal, borrowing from Franklin D.

Roosevelt’s plan the basic idea of mobilising idle private money for public purpose. But rather
than through tax-and-spend programs at the level of national economies, this should be
administered by a multilateral partnership of central banks (like the Fed, the European
Central Bank and others) and public investment banks (like the World Bank, Germany’s KfW
Development Bank, the Asian Infrastructure Investment Bank and so on). Under the auspices
and direction of, say, the IMF, the OECD even (!), the investment banks could issue bonds
in a coordinated fashion, which these central banks would be ready to purchase, if necessary.
By this means, the available pool of global savings would provide the funds for major
investments in the jobs, the regions, the health and education projects and the green
technologies that humanity needs.

 Fair trade deals, based on minimum living wages for poor countries and a job
guarantee scheme for the deprived regions of the richer countries

To illustrate that tariffs are not the best way of protecting our workers, since they mostly
enrich local oligarchies, we should campaign for trade agreements that commit governments
of poorer countries to legislating minimum living wages for their workers and governments of
the richer countries to legislate a job guarantee scheme for deprived regions – so that
communities can be revived in richer and poorer countries at once.

 A New International Monetary System – a global trade & capital clearing union

The task here is to rebalance trade and create an International Wealth Fund to fund programs
to alleviate poverty, develop human capital, support marginalized communities and invest in
the Green Transition across the world, and not just in the developing world but also in the
rustbelts of the United States and Europe.
While keeping their own currencies, and central banks, members of the New Bretton Woods
would agree to denominate all payments in a common accounting unit, let’s call it the Kosmos
(K) – a common digital currency to be issued and regulated by the IMF on the basis of a
transparent digital distributed ledger and an algorithm that would adjust the Ks total supply
in a pre-agreed manner to the volume of world trade, all of which will be denominated in K
units. Foreign exchange markets would function as they do now and the exchange rate
between K and various currencies would vary in the same way that the IMF’s Special Drawing
Rights do viz. the dollar, the euro, the yen etc. The difference, of course, would be that, under
this system, member-states would allow all payments to each other to pass through their
central bank’s K-account. Further, to exploit the system’s full potential for keeping imbalances
under check, two stabilising transfers would be introduced.
The supply of K will be run on the basis of simple, automated rules which boost global K
supply at times of a global slowdown, minimise politicians’ and bureaucrats’ discretionary
power, regulate heavily the financial sector’s dealing in Ks and keep global trade and capital
imbalances in check using two instruments:

 The Levy: A trade imbalance levy to be charged annually to each central bank’s K-
account in proportion to its current account deficit or surplus and paid into a common
Wealth Fund
 The Charge: Private financial institutions to pay a ‘surge’ fee into the same Fund in
proportion to any surge of capital flows out of a country, reminiscent of the congestion
price-hike that companies like Uber charge their customers at times of peak traffic

The Levy’s rationale is to motivate governments of surplus countries to boost domestic

spending and investment while systematically reducing the international spending power of
deficit countries. Foreign exchange markets will factor this in, adjusting exchange rates faster
in response to current account imbalances and cancelling out much of the capital flows which
today support chronically unbalanced trade. As for the Charge, it will automatically penalise
speculative herd-like capital inflows or outflows without, however, handing discretionary
power to bureaucrats or introducing inflexible capital controls.
Suddenly, through the Common Fund, the world will have acquired, without the need for any
subscribed capital, a Global Sovereign Wealth Fund by which to fund programs to alleviate
poverty, develop human capital, support marginalised communities and invest in the Green
Transition across the world, and not just in the developing world but also in the deprived
areas of United States and Europe.

CONCLUSION
2008 was a wakeup call that fell on deaf ears. The world in 2018 is more precarious than it
was in 2007. Finance continues to suck the oxygen out of the creative workers, corporations
massively under-invest in the things humanity needs, the majority of people face diminishing
life prospects in an uberising labour market, and democratic politics is being poisoned both
by the inane establishment’s business-as-usual fixation and the increasingly triumphant
xenophobic Nationalist International. Only a Progressive International campaigning for the
International New Deal outlined here can inspire hope of the future.