The Prospect August 2018 issue – review by Duncan Weldon – How economists predicted the wrong financial crisis. “As the 10th anniversary of the fall of Lehman Brothers approaches, many books on the financial crisis will be published. Few are likely to match Adam Tooze’s Crashed in scope, ambition or rigour. This is truly contemporary history—the book runs right up to the end of 2017. It is hard to think of another author who can write as authoritatively on such a wide range of subjects—from the workings of the credit default swap market to the intricacies of Italian politics and the geopolitics of Ukraine. Tooze, an Anglo-German historian based in the US, is best known for his work on the first half of the 20th century: The Wages of Destruction (2006), a revisionist account of the Nazi economy and war effort; and 2014’s The Deluge dealt with the aftermath of the First World War, and the reshaping of the global order in the 1920s. So Crashed might, at first sight, seem like a radical departure. But the essential themes are familiar territory for him: the interactions of economics, finance and geopolitics—and how the world order is reshaped by catastrophe. The twist is that Crashed examines the financial crisis through a new lens: a sharp focus is kept on bank balance sheets, and the (often cross-border) capital movements between them. This is less a work of contemporary macro-economic history and more a work of contemporary macro-financial history.

It is often said that economists failed to see a crisis coming in 2008, but this is only half true. Before 2008 there was, as Tooze shows, a rising chorus of voices warning a crisis was imminent. The problem was that they predicted the wrong crisis. Using the old macroeconomic lens, they foresaw a crisis in which the patience of creditor countries like China would suddenly snap with persistent spendthrift societies and deficit nations, such as the US. But it turned out the crisis we got wasn’t about countries’ trading surpluses or national debts: it was about the sudden faltering of flows of purely private finance around a remarkably integrated international banking system…”