Until the Next Crash

This is the economic backdrop of the populist revolt. To the extent that it is driven by economics, it is a revolt not so much against the crash, or even its immediate aftermath—as Tooze seems to suggest—but against the nature of the recovery. This recovery, sustained by historically unprecedented “accommodative” monetary policies, is now nearly the longest on record. But it has proved to be yet another iteration of a now forty-year macroeconomic pattern for which centrist liberals bear much responsibility. It is the economy whose pre-crisis development they happily facilitated and which, during the 2008 crisis, they brought back to life, if moderately reformed. But since 2008, this same old asset-led global capitalism has slowly but steadily worn down the political establishment’s reserves of legitimacy.

The populist revolt is not against the crash, or even its immediate aftermath, but against the nature of the recovery.

New York, Halloween, 2008.

Adam Tooze. Crashed: How a Decade of Financial Crises Changed the World. Viking, 2018.

“Of the maxims of orthodox finance,” wrote John Maynard Keynes in 1936, “none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities.”

When Keynes wrote these sentences in The General Theory of Employment, Interest, and Money the leading stock exchanges of the world, New York and London, had placed liquidity near the center of their national investment markets. It was a virtue for investors to hold a security for which there was always a willing buyer. That way an investment could quickly be converted into money, and safely guarded until the next purchase of yet another security.

Eight decades later, global finance is feeding off the potential convertibility of capital assets—liquidity—to an extent that Keynes could scarcely have imagined. Today’s global macroeconomy is stitched together by the balance sheets of the great financial corporations of the world. There are no more than thirty banks that matter, all of them entwined with a vast allied network of structured investment vehicles, institutional investors, and asset managers. These institutions prefer to invest in assets from which they can always confidently depart. Designed by banks with that purpose in mind, more and more assets have the liquid attributes of money. The result is that capital is extraordinarily mobile. Today, it moves in and out of different asset classes (stocks, bonds, real estate, et cetera), as well as in and out of different national economies, on a whim.

The consequence is that as vast sums of capital and credit rush around the world in digitized bits every millisecond, the global macroeconomy suffers from a lack of long-term productive investment. Economy-wide productivity gains have disappointed; infrastructure has dilapidated; fossil-based energy systems have remained stuck in place. Keynes called liquidity a “fetish” because liquidity is a relative quality of a capital asset. Yet long-term investment is an aggregate concept. If the owners of capital prefer to hold liquid securities instead of long-term illiquid investments, capital will cycle between the two liquid options of short-term speculation, which occasionally shades into long-term investment, or nervous cash hoarding. Liquidity is a fetish, because for the community as a whole the concept makes no sense. What looks like liquidity to an individual owner of wealth means a decline in the aggregate rate of long-term investment for the macroeconomy—fewer jobs, less wealth, and more wasted human potential.

How did liquidity move to such a central place in capital markets? In the immediate postwar period, even in capitalist economies, many banking systems were not organized around the doctrine of liquidity. Finance followed something more like a national “public utility” model, in which banks deliberately placed long-term blocks of credit into productive enterprise. But there was a flaw in the postwar international economic system: US dollars accumulated outside of the US. US cold war military commitments in Europe, the Soviet Union’s desire not to deposit its dollars in the US, and imbalances in US and European trading relationships were the leading reasons for the piling up of so-called “Eurodollars” in the City of London. At the 1944 negotiations over the postwar international monetary system in Bretton Woods, Keynes himself had wisely proposed a special fiat currency to clear binational trades, and thus forestall the possibility of currency accumulations. He named it the “Bancor.” But the Americans, determined to tie the postwar world economy to the dollar, nixed the proposal. Eurodollars became pools for cross-border speculation—a nearly unregulated onshore/offshore financial playground.

By the 1960s, London had become the hub of global currency speculation, and the home of a dollar-based wholesale money market outside US jurisdiction. All this activity in London helped bring down the Bretton Woods system of fixed national currencies pegged to the US dollar, which was pegged in turn to gold at $35 an ounce. In the midst of national industrial malaise in the wake of the collapse of Bretton Woods in 1971, the global economy entered the world of floating currency exchange rates. To cope, banks began to engineer and trade all manner of financial derivatives to hedge their positions and those of their clients against potential exchange- and interest-rate volatility. Financial securitization, in which banks engineered one newfangled security after another, began to flourish in the 1980s, when the City of London once again became an innovative laboratory. Many of the big players in this century’s financial crisis were headquartered there, including AIG Financial Products, which wrote many of the credit-default-swap insurance contracts on US mortgage bonds that would prove so catastrophic in 2008.

Formerly at the margin, the London Euromarkets moved to the very center of the global economy. How exactly this happened is difficult to say, since a full historical account of the transformation has yet to be written. There are reasons why it has remained largely offstage. Partly this is due to the way many economists juxtapose finance against an underlying “real” economy. Similarly the celebration of the “free market” since the election of Thatcher and Reagan has only obscured the operations of a global financial system that has actually become a tightly networked cross-border cartel of financial corporations that trade mostly with one another. In commentary, there is an obsession over national economic rivalries and differences, with the US facing off against Japan, say, or a rising China. But the global economy is not best depicted as so many national economic islands, connected by oceans of trade in goods. It is more accurate to think of it as trillions of dollars of highly leveraged short-term financial bets made possible because of the presence of liquidity—willing buyers for all securities.

Since the 1980s, leading members of the financial community have begun to recognize that liquidity is the lifeblood of the new global system. Advocates promised that capital would intelligently flow to where it most belonged, earning the highest possible return, benefiting us all. All risks, they said, could be hedged. But left to their own devices liquid capital markets have been rather dumb masters. The 2008 financial crisis was, by all accounts, a “liquidity crisis,” in which interbank lending markets seized up after the banks began to doubt the quality of the US mortgage-backed securities they themselves had engineered—in order to sell to themselves. In September 2008, the banks very nearly stopped trading with one another, liquidity evaporated, and global capital markets nearly collapsed. Aggregate private investment plummeted. The global economy tanked. This, the world suddenly learned, was what an economic system built on liquidity could look like.

Adam Tooze begins Crashed, his chronicle of the financial crisis and its aftermath, in New York City in the fall of 2008, when Wall Street was in full panic. Yet Tooze opens the narrative not on the trading floors but at the United Nations. There, one national leader after another leapt to the floor to attribute the crisis to the US and its model of unregulated free-market capitalism. The problem with this criticism, Tooze says, was that the 2008 financial crisis was inherently global.

The market for US mortgage-backed securities, for example, featured non-US players at every link in the chain. China contributed greatly to the abundant funding available on Wall Street. Chinese government purchases of US assets—using ordinary Chinese savings, often earned from selling exports (think goods like iPhones and flat-screen televisions) to US consumers—ranged from US public debt to the bonds of US government-sponsored enterprises, such as Fannie Mae and Freddie Mac. Meanwhile, leading European banks had bought a significant portion of the “private label” mortgage-backed securities engineered by the great US investment banks.

Tooze is at pains to emphasize the European beachheads of US dollar–based global finance. True enough, the panic first broke out in 2007 when funds controlled by French and German banks invested in US mortgage securities went belly up. In 2008, French president Nicolas Sarkozy strutted in front of the cameras, blaming Wall Street and American hyper-capitalism. But “what were they doing screwing around in the United States?” he privately asked his staff after the French government’s $9.2 billion bailout of the Franco-Belgian bank Dexia. Judged by the size of bank balance sheets relative to national GDP, it turned out that pre-crisis European economies were more “financialized” than the US by a factor of three. Many on the left would have been just as surprised as Sarkozy, a conservative, to learn how central finance had become to the European economy. Tooze twice mocks Jacques Derrida and Jürgen Habermas’s 2003 manifesto “What Binds Europeans Together,” which cited the yawning gap between “continental and Anglo-American countries,” as an index of such left economic ignorance. He repeatedly points out that neither right-wing free-market sloganeering nor left-wing critiques of “neoliberalism” have much to say about the plumbing of the global financial system. Even centrists, so obsessed during the 2000s with national fiscal deficits, missed the main story.

The promise of Crashed is to open up the black box of global finance and to reveal its inner workings, as the indispensable precondition for making sense of contemporary politics ten years after the global financial crisis, in the Age of Trump. It is a daunting task to say the least. If forced to choose one historian to make the attempt, I would have picked Tooze. He is the author of a number of outstanding works of 20th-century political and economic history, all marked by a common theme. They are books about Europe written from a global perspective in which the hegemony of the US always looms large. (Tooze, who is of German and British origins, teaches at Columbia and now lives in the US.) His previous book was The Deluge (2014)—an erudite, occasionally messy but epic history of geopolitics between the end of World War I and the onset of the Great Depression—which tracked warring and war-torn Europe’s financial dependence on Wall Street, along with the inability, or unwillingness, of American statesmen to convert private economic power into stable geopolitical hegemony. In Crashed, Tooze once again embeds geopolitical analysis in the character of transatlantic financial flows. But this time he more explicitly foregrounds an economic framework for making sense of them.

This is the economics of “macrofinance.” This body of academic research runs along a spectrum from more orthodox economists such as former Federal Reserve chair Ben Bernanke, who have studied the ability of exogenous financial “shocks” to affect the real economy, to their more heterodox peers, such as Boston University’s Perry Mehrling, who collapse the distinction between financial and real economies altogether. Tooze relies in particular on the work of Hyun Song Shin, who sits somewhere in the middle of this spectrum. A former Princeton professor and now chief economist at the Bank of International Settlements, Shin and his collaborators emphasize the global macroeconomic linkages among the world’s great banks and the “procyclical,” or boom-and-bust, consequences of their balance sheets for national macroeconomies. They note that gross financial flows through interbank credit markets dwarf the value of trade in goods between national economies, while bank assets and liabilities dwarf the GDP and fiscal budget capacity of the national economies in which they are headquartered.

Distilling Shin’s insights, Tooze makes a brilliant example out of Germany. Despite Germany’s celebrated export economy and current account surplus, as well as the famous obsession of its political establishment with fiscal rectitude, German bankers actively participated in the pre-2008 US dollar–based debt markets. These transactions linked US and German banks and their economies, but had nothing to do with so-called “real” trade relationships in goods between the two countries. For instance, before 2008 Germany’s export trade surplus with the US was running roughly $5 billion a month, while European banks’ pre-crisis dollar operations added up to $2 trillion in borrowing. The term “macrofinanical” captures the fact that finance was in the lead, rather than subsidiary to the “real” economy of trade in goods. This scrambles the metaphysics of orthodox economics: the tail wags the dog, the cart pulls the horse.

Tooze quotes one US Federal Reserve economist saying that pre-crisis European banking was nothing more than a “global hedge fund,” borrowing dollars short and lending them long. European banks moved capital into southern and eastern Europe. Dutch, British, and Belgian banks in particular buoyed the Irish and Spanish economies with speculative investments, while German, Austrian, and Italian banks specialized in the Baltic countries, such as Latvia. The “color revolutions” in Georgia and Ukraine in 2003 and 2004, Tooze insists, should be interpreted as Georgians and Ukrainians wanting to join the financial party. Not missile systems but short-term private capital was the spear’s edge of NATO’s eastward expansion across the 2000s onto Russia’s doorstep. In other words, there were geopolitical consequences to the capital flows.

Given the global character of 2000s finance, Europe is ideal territory for Tooze to lay bare the logic of the US dollar–based system. It is no less fertile ground for him to isolate the most dramatic and consequential government response to the 2008 liquidity crunch: the extraordinary effort made by the US Federal Reserve to bring US dollar liquidity back into global financial system in order to get the banks back to trading with one another again.

Typically, in times of recession, the Fed reduces its short-term interest rate target, which releases more credit into the economy. Likewise, the standard monetary policy playbook says that in times of panic in financial markets a central bank must be a “lender of last resort,” accepting collateral for loans that no one else will. The Fed did both of those things during the crisis of 2008, but it also opened up a number of new policy fronts.

First, the Fed became, in Mehrling’s phrase, the global “dealer of last resort.” While politicians obsessed over bailouts, bonuses, and stimuluses, the Fed, brushing up against the edge of its legal mandate, stepped into a number of markets as the last willing bidder—the third-party dealer that makes markets liquid for other parties. Many credit markets were kept on life support only thanks to the Fed’s intervention. Second, the Fed expanded its global operations. It lent funds directly to a number of non-US banks, especially European banks. (These transactions were kept secret and revealed only in 2009, after a Bloomberg News freedom of information lawsuit against the Fed). It also opened upwards of $10 trillion of currency swap lines with many of the world’s central banks to provide their financial systems access to much needed US dollars. It is no exaggeration to say that without these gigantic liquidity provisions the dollar-based global financial system would likely have imploded.

Instead, global finance became even more dependent on the US dollar. In the midst of the crisis everyone wanted to get their hands on dollars and dollar-denominated assets—still believed to be the world’s most secure stores of value. Dollar supremacy reigned as never before, and continues to do so to this day. This shouldn’t be taken for granted. In 2008, China thought about dumping dollar assets. But when Vladimir Putin—smarting from NATO’s expansion to Russia’s border and demanding recognition of Russia’s great power status in a multipolar world—approached Chinese officials about coordinating efforts to undermine the US dollar, the Chinese balked. Strategically, the Chinese must have judged that they were either too dependent upon the US dollar to strike, or that the dollar-based global economy was too advantageous for them to undermine. Whether that supremacy exists because the global owners of capital are in need of a single safe anchor, or because US hegemony leaves the world no other choice, remains an open question.

In salvaging the US dollar–based global financial system, the Fed saved the banks in the US and around the world. Tooze grudgingly compliments Bernanke’s Fed and the US Treasury’s Troubled Asset Relief Program (TARP), which recapitalized the US banks, for their creativity and success. In doing so, he draws a stark contrast with incompetence in the Eurozone, where the banking crisis morphed into a public debt crisis. While the Fed’s global liquidity provisions kept the European banks alive, European governments failed to follow up and adequately recapitalize them. This then further exacerbated the larger crisis in the Eurozone. In the so-called “doom loop,” the balance sheets of Europe’s largest banks remained weighed down with public debts. While private borrowing, not public borrowing, originally triggered the crisis (Tooze is excellent on this point), the post-crisis failure to recapitalize European banks made the question of whether southern European states could pay those debts back determinative of the future financial health of the entire continent. Embarrassingly, Europe had to call in the IMF, but even that did not solve the problem. The European Central Bank had to enter the markets. Nonetheless, the “doom loop” still threatens to rear its head (in Italy, at this writing).

Back in the US, the Fed embarked upon the third and final round of its last unconventional post-crisis monetary policy known, inelegantly, as “quantitative easing” (QE). Put simply, rather than lending or dealing, the Fed began to purchase assets and hold them on its balance sheet. By increasing the demand for bonds with long maturities, the Fed hoped to bring down long-term interest rates. The goal was to lower the return for parking cash on the sidelines of the economy, and thereby indirectly induce greater private investment, thus stoking recovery. In this respect, QE complemented the Obama Administration’s $831 billion stimulus bill, though it would come to dwarf it. The value of assets on the Fed’s balance sheet in 2008 (almost all US treasuries) hovered just over $800 billion; by the end of 2014, the Fed’s balance sheet counted $4.5 trillion in assets. The Fed bought US public debt, but it also bought government agency debt, and even a quarter of new mortgage-backed securities. Almost all of the world’s leading central banks joined the Fed’s action, with QEs of their own. The European Central Bank, the last holdout, finally announced a program of expanded asset purchases in 2015.

Due to post-crisis central bank policy in general, but also the Fed’s efforts in particular, global economic governance had entered a new era without precedent, from which there was and is no turning back.

Tooze pauses in the fall of 2012, when the Fed announced its third round of QE. Between the Fed’s success in repairing global finance, rising US bank profits, the triage of the Eurozone crisis, the reappointment of Fed chairman Ben Bernanke, and the reelection of Barack Obama, it looked as if the globally-oriented centrist liberalism of the 1990s and 2000s had faced down the crisis. Everything, it seemed, would go back to normal. Instead, what followed was a crisis of political legitimacy. This is the subject of the second half of Crashed.

At this point in the book, the operations of the global economy fade. Tooze hews closely to the standard left-liberal critique of austerity, which is not wrong, if incomplete. According to this account, the US stimulus was effective, but not big enough. In addition, German officials’ demands that Eurozone debtor nations cut back on government services to pay their creditors—banks, and the governments that bailed them out and assumed their debts—were macroeconomically misguided and led to unnecessary human suffering. Tooze is unstinting in his savaging of Eurozone governing elites, if sympathetic to the domestic political situation that constrained German chancellor Angela Merkel. European austerity, Tooze writes, led to a “historic defeat” for “European capital.” That may be a tad dramatic, although it is true that many European banks have clearly fallen behind their American and Asian competitors.

But Tooze largely misses the opportunity to relate the macrofinance-focused account of the crisis, which dominates the first half of the book, to the character of the post-2008 recovery. The links between finance and national and global macroeconomic dynamics, however, remain crucial. They not only explain the run-up to the 2008 crisis; they also reveal the nature of the recovery, which is a critical context for understanding the deepening crisis in politics today.

Since the 1980s, growth in the North Atlantic economies has been asset-led. That is, the appreciation in the market value of liquid financial assets has been the predominant creator of new wealth, rather than increases in labor incomes from enterprise. Income gains have flowed overwhelmingly to the top end of the income distribution—that is, to the people who own the assets to begin with. The use of leverage, or debt, has been crucial to sustaining asset prices on the way up. By taking out mortgages, many ordinary Americans got in on the act during George W. Bush’s “ownership society” of the 2000s—until the crash wiped them out.

After 2008, income gains again arrived through asset price appreciation, across a host of classes, from stocks to real estate. The worst off, who own little wealth and few assets and have been taking out less debt since 2008, have seen labor income remain stagnant until very recently. Meanwhile the rich have once more used debt to lever up profits, aided by the cheap money provided by the Fed. Financial asset appreciation produces income gains for the best off, who tend to live in cosmopolitan cities where finance, high tech, and liberal sensibilities cluster. These high incomes then create employment demand in the high-wage/low-wage service sector: the economy of corporate lawyers and nannies, therapists and busboys, yoga teachers and maids. During these business cycle expansions, labor markets eventually tighten and ordinary labor incomes inch up a bit, as happened in the US in the late 1980s, the late 1990s, and for a moment in the mid-2000s. It is happening again now, finally. But this top-down, urban-led macroeconomic pattern has left many places behind. Intended to increase economic activity, but not target it, the Fed’s QE policies have only abetted this pattern of development. QE has exacerbated existing economic tendencies, effectively channeling capital into one asset class after another, especially corporate stocks that are overwhelmingly owned by the wealthiest segment of the population. The policy has done nothing to reshape investments, which have remained largely short-term and speculative.

This is the economic backdrop of the populist revolt. To the extent that it is driven by economics, it is a revolt not so much against the crash, or even its immediate aftermath—as Tooze seems to suggest—but against the nature of the recovery. This recovery, sustained by historically unprecedented “accommodative” monetary policies, is now nearly the longest on record. But it has proved to be yet another iteration of a now forty-year macroeconomic pattern for which centrist liberals bear much responsibility. It is the economy whose pre-crisis development they happily facilitated and which, during the 2008 crisis, they brought back to life, if moderately reformed. But since 2008, this same old asset-led global capitalism has slowly but steadily worn down the political establishment’s reserves of legitimacy.

A central question posed by the Trump presidency is the degree to which this variety of capitalism even needs the political establishment to function. At this writing, while US stocks have declined since October 2018, since Trump’s inauguration they are up 25 percent. Meanwhile, in the global financial system US dollar supremacy holds steady.

Surely the current boom will not last, and recent signs indicate it may be ending. But for all of Trump’s tweets and the radical uncertainty of his politics, US dollar–denominated assets are still judged by the global owners of capital to be the most desirable in the world. As if on cue, the budget deficits caused by Trump’s 2017 tax cut will lead to the printing of more safe-harbor dollar-denominated assets for the owners of capital to snap up in order to balance out their portfolios, or to flock to during the next moment of financial panic. Global capital is so dependent on US dollar supremacy that, so far, it is willing to turn a blind eye on what happens in Washington, DC.

Will something give? Tooze is caught between at least three minds about the likely future course of global affairs: finance is a global network of “interdependence”; but then there is “the continuing significance of US global power”; yet, in state relations, Tooze underscores “the drama and complexity of the transition to a truly multipolar world.”

The current landscape can be hard to interpret. Consider the global effects of QE. The Fed’s liquidity supports have meant cheap money for the world since 2008, and so capital has rushed to “emerging markets.” But in 2012 Global South officials joined voices to complain about QE. The cheap dollar funding unleashed on the world as a consequence of lowering US interest rates had helped bid up the world’s commodities and currencies. (High food prices were a proximate cause of the 2010–2011 revolution in Tunisia, opening the Arab Spring). Citing its domestic US mandate to fight inflation and unemployment, the Fed declared indifference. But in 2013 when the Fed decided to “taper” its asset purchases, winding down QE, short-term capital swung back to the US. This capital flight rattled the Turkish, Brazilian, Indian, South African, and Indonesian economies—the so-called “taper tantrum.” In response, the Fed eased up on its QE tapering. The result has been that the Fed’s global responsibilities have now been explicitly acknowledged, if not formally by the Fed. This past summer, when the Fed raised interest rates, a replay of the taper tantrum broke out again. “The Fed always tightens until something breaks,” the head of global strategy at the French bank Société Générale told the Financial Times in the wake of capital flight from the Turkish economy in September 2018. “It is usually its own economy but sometimes it is the EM’s [emerging markets].”

The perverse post-crisis consequence was that governments around the world, hoping to benefit from foreign investment but still fearful of the potential for sudden capital flight, began to hoard US dollars as a buffer against global capital’s fickleness. China, which trailblazed this strategy after the 1998 Asian financial crisis, has scaled back US asset purchases, although the People’s Bank of China still holds roughly $3 trillion of foreign currency reserves, leading the world. Since 2008, despite a recent pause, other emerging economies have increased their dollar reserves for fear of the next crisis. This decade’s global political economy again pairs the two liquid options of hoarding and speculation, at the expense of long-term investment.

Government hoarding of US dollars has also become a geopolitical sport. Across the 2000s, for instance, Russia steadily accumulated US dollars from its oil and gas exports. After 2008, private capital flight from Eastern Europe collapsed economies and granted Russia a geopolitical opening, which Western European leaders failed to appreciate, so obsessed had they become with public debts, and blind to the whipsaw effects of dollar-based international funding. Capital flight from Russia itself after 2008, and then again in 2014, was huge. Unlike with the UK and the EU, the Fed offered the Russian central bank not one single currency swap line. But Russia had enough dollars on hand to muddle through and meet its dollar-denominated obligations, thus avoiding a financial collapse that surely would have shaken Putin’s domestic political support to the core. Thus, only by collecting enough dollars was Russia able to then challenge US-led NATO expansion, as it did in Georgia in 2008 and Ukraine in 2014.

The point that Tooze drives home is that so long as there is global dollar supremacy, the Fed, whether it likes it or not, is not only engaged in economic governance—it is also involved in great power politics. That is an inescapable consequence of post-2008 “unconventional” monetary policy. Trump may be President, but today the global economy is chiefly governed by an administrative agency that prides itself on “independence,” and stands outside democratic politics by its very design.

The Fed is the only institution with the power to get out in front of global capital. But instead of taking on this task the Fed after 2008 has largely been in the business of providing liquidity for the world’s biggest banks. The Fed sponsors an economy that lacks a coherent narrative, since capital today is so flighty and fickle. Politics, in turn, remains always at least one step behind, chasing economic events.

Crashed is undoubtedly a major contribution to making sense of the 2008 crisis and its global aftermath. But the book itself manifests a symptom of its subject. As global finance recovers, the narrative in the second half of the book bogs down in the contingent blow-by-blow of political events. Much of Tooze’s post-2008 crisis narrative follows politicians playing catch-up, as they recalibrate their tactics given the ever-shifting landscape of capital mobility. Crashed begins to cover politics, the dependent variable, which can never quite get a grip on the global economy of liquid capital flows. The book struggles in the end to pin down the exact relationship between politics and economics, but that is hardly Tooze’s fault. The relationship is elusive in Crashed because it is in fact elusive. Liquid capital defies narration.

According to Tooze, the fact that Trump commonly makes little sense when he speaks—including about trade—reveals that the political establishment never dealt “factually” with the economic crash. In 2009 Bernanke said he saw “green shoots” of economic recovery. In 2010 the Eurozone and the IMF then practiced “extend and pretend” on Greek debt payments. In 2011, referring to economic and monetary policy in the EU, Jean-Claude Juncker, the current president of the European Commission, admitted, “When it becomes serious, you have to lie.” There was never an honest discussion about the benefits and the costs of the global macroeconomy being sewn back together, and the economic suffering many ordinary people endured to achieve it while the bankers got off scot free. The Fed’s operations were technical, reported in the back pages. This was post-truth politics before Trump.

To this file, one should add Obama’s outgoing quip about Trump’s election: “I’ve got the economy set up well for him. No facts. No consequences. They can just have a cartoon.” But is the economy set up so well? Between 1980 and 2014 the bottom 50 percent of the US income distribution saw their incomes grow by 1 percent. The top 10 percent saw gains of 121 percent. The top 1 percent: 204 percent. The top 0.001 percent: 636 percent. This is what income distribution looks like when growth is asset-led. The 2008 crisis and the recovery after did not alter these trends. Since 2008, it is ever more apparent that we do not know how to grow national economies and create fresh incomes without liquid asset price appreciation, leveraged by private debt. Even China, in recent decades the one great arm of committed long-term public investment, has begun to follow this path.

What is different after the crash is that nobody can say with a straight face that liquidity is an intrinsic property of financial markets. The belief among bankers before 2008 that liquidity was a free good was an ideological illusion. Liquidity is not free. It is a product of the state power lodged inside central banks. The Fed’s balance sheet ballooned to over $4.5 trillion by 2014. At this writing, it is still more than $4 trillion. Today the ECB’s owns €4.6 trillion of assets. It is time to start seeing central banks for what they really are: not only institutions that set short-term interest rates, but also de facto asset managers operating in the name of publics—and therefore potential agents of public investment.

I can see no better way to begin to repair the broken link between capitalism and democracy than to convert central banks’ improvisational post-crisis responses—which cannot be put back into the bottle—into committed programs of long-term public investment. Such a program, a national investment board, could be split off from the task of managing the price level. It could compensate for the private owners of capital’s preference to hold liquid short-term financial securities, for purposes of either hoarding or speculation, which together continues to undermine long-term private investment.

Of course, public investment was exactly what Keynes called for during the Great Depression. But investment in what? Keynes wrote in 1933 that “decadent international but individualistic capitalism . . . is not a success . . . . But when we wonder what to put in its place, we are extremely perplexed.” The great weakness of The General Theory, published three years later in 1936, was that Keynes remained perplexed. Keynes ended up arguing that any investment was better than no investment. In our day, that has been the social philosophy of QE, to the extent there has been one. But what, exactly, should we invest in?

The most obvious answer is that states must redirect the path of investment towards the building of a new energy system, given climate change. In polite conversation about monetary policy, however, the hope is to return to pre-crisis normalcy as soon as possible. The project is not going well. Fed interest rate raises in the second half of 2018, drying up liquidity, sent global markets into a volatile tailspin. Finally soothing investors, Fed governor Jerome Powell promised at the turn of 2019 that the Fed might pause the hikes in the coming year. Meanwhile, the Fed is currently reducing its balance sheet by about $50 billion of assets per month. At that rate, it will take roughly six years to restore the Fed’s balance sheet to its pre-2008 level. The current credit cycle will end long before that. What will the Fed do then? The sheer size of central bank balance sheets today, and almost certainly in the future, invites bold thinking about how to plan for long-term economic development. Otherwise, capital will continue to spin its top, enriching its owners, and warming the climate.

It may go without saying, but such a program would require extraordinary political mobilization, as well as vast legal and institutional changes, linking central bank balance sheets to a much broader notion of the public interest than price stability. For now, while the banks learned in 2008 that liquidity was not a self-generating property of financial markets, they also learned that in a bind they can always get liquidity from the Fed. The owners of capital watch their assets appreciate. In times of panic and crisis, the costs can trickle down to the worst off. That was what happened in 2008. Unless something changes, that is what will happen again, in the next crash.

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