Crashed

Why did the 2008 financial crisis spread from American subprime mortgages to every major economy? Adam Tooze argues that the core reason lies in the dollar system — an immense web of cross‑border balance sheets, shadow funding mechanisms, and political dependencies that made global finance inseparable from US monetary power. You’re asked to see the world not as a series of isolated national economies but as one giant dollar network whose plumbing binds New York, London, Frankfurt, Beijing and beyond.

The transatlantic root of the crisis

Tooze insists that the 2008 collapse was not merely an “American” story. European banks were heavily exposed to dollar assets and funded themselves through short‑term dollar markets in London and New York. When confidence vanished, these banks couldn’t roll over dollar funding. The Federal Reserve—the only institution able to supply dollars at scale—had to rescue non‑US banks via emergency swap lines. (Note: BIS data showed European banks owed $1.1–1.3 trillion more dollars than they held in assets.) This intervention made the Fed, momentarily, the world’s lender of last resort.

The dollar as global apex

You’re encouraged to think of the dollar as the top of a pyramid. Global banks, sovereigns and asset managers held dollar assets—Treasuries, MBS, and repo collateral—as their ultimate stores of safety. When the pyramid trembled, liquidity crises cascaded through this hierarchy. The “North‑Atlantic system” linking US and European banks proved more entangled than trade flows suggested: in 2007 money moved from Britain to the US at magnitudes larger than China’s holdings.

Macrofinance replaces the island model

Traditional macroeconomics—the one that treats nations as self‑contained islands—missed how the crisis propagated. Hyun Song Shin’s macrofinance lens that Tooze adopts teaches you to map the interbank matrix instead: trace liquidity channels, repo chains, and SIFI connections. Once you see the global system as linked balance‑sheets, you grasp why the Fed’s interventions were decisive and why Eurozone policy lagged. It’s a network, not a market of countries.

Core insight

The 2008 financial system was globalized through private balance sheets, not trade. When short‑term dollar funding froze, the Fed—not the IMF—became the global stabilizer, revealing the hierarchy of modern finance.

Why this redefines crisis politics

Tooze’s story is not only economics; it’s politics. The Fed’s swap lines to Europe quietly propped up banks outside US jurisdiction, while politicians debated bailouts at home. Europe’s weak institutions—no unified fiscal mechanism, no deposit guarantee—meant national governments resorted to unilateral fixes. The asymmetry between the US’s federal capacity and Europe’s fragmented architecture became the central dividing line of post‑2008 recovery.

Preview of what follows

Across the rest of Tooze’s argument, you’ll watch how this North‑Atlantic implosion transformed into sovereign stress inside the eurozone, political breakdowns across Europe and America, and a renewed geopolitical cycle—from China’s massive stimulus to Russia’s assertive return. The dollar system’s reach shapes everything: who rescues whom, who bears the costs, how inequality and populism rise, and why today’s global order still depends on one central currency hub whose power—and fragility—define our age.

To understand how ordinary mortgages turned into a global threat, Tooze takes you through the layers of financial engineering, modern securitization, and shadow funding. It begins with the originate‑to‑distribute model, where local lenders packaged loans into securities, and ends with the wholesale dollar markets that made those securities the collateral backbone of global finance.

From home loans to structured products

In the 2000s, banks like Countrywide and Lehman’s originators pooled subprime and Alt‑A mortgages into MBS, which rating agencies blessed with AAA marks. Engineers then repackaged mezzanine tranches into CDOs and CDO‑squared products—creating synthetic layers of “safety.” European banks and global funds snapped them up for dollar yields. Originators earned fees; risk was dispersed but never eliminated.

Short‑term funding: repo and ABCP

The real magic—and danger—was maturity transformation. Structured Investment Vehicles (SIVs) bought mortgage securities and funded them with ultra‑short instruments like asset‑backed commercial paper (ABCP). Repo markets let institutions borrow overnight against MBS collateral. This setup meant long‑term, risky assets depended on continuous short‑term rollovers. When confidence faded, funding vanished overnight.

The European link

As Tooze shows, European banks were central players, not innocent bystanders. London’s eurodollar hub allowed high leverage, collateral reuse via rehypothecation, and dollar borrowing at scale. Institutions like Deutsche Bank, UBS, Barclays and the Landesbanken carried leverage ratios above 40:1—financing US mortgage assets with wholesale dollar debt. When Lehman collapsed, they faced dollar shortages that the ECB could not fix. Only the Fed’s swap lines saved them.

Perverse incentives

The shadow system’s structure rewarded deal volume over loan quality. Everyone earned fees as long as the machine spun. When asset prices fell, maturity mismatch turned leverage into fragility, causing a dollar funding panic.

From local bubble to systemic crisis

Tooze’s takeaway is structural: securitization and short‑term funding built a bridge from US housing to global stability. The “subprime” crisis was actually global shadow banking implosion—a reminder that safety built on liquidity illusion can crumble faster than credit models predict.

Why did Europe’s crisis last longer? Because the eurozone combined shared monetary policy with fragmented fiscal authority. Tooze calls this mismatch Europe’s “doom loop” architecture: banks and sovereigns trapped each other in cycles of dependency. The design flaws of euro integration transformed a private credit bubble into a sovereign debt drama.

How convergence became contagion

Before 2008, yields converged across the eurozone—Greek, Spanish and Irish bonds traded like German Bunds. Cheap credit fueled private lending booms. When funding reversed, governments had to backstop banks. Ireland’s 2008 blanket guarantee (€440bn) turned private debts into public liabilities. Greece’s deficit revisions in 2009 exposed unsustainable debts. Both became test cases for Europe’s flawed institutions.

The bank-sovereign loop

Banks held sovereign bonds; sovereigns guaranteed banks. As losses mounted, fiscal credibility collapsed. The ECB hesitated to act as lender of last resort until Draghi’s famous “whatever it takes” in 2012. LTRO operations injected nearly €1 trillion but reinforced the nexus as banks recycled liquidity into sovereign debt—a temporary calm that deepened long‑term weaknesses.

Austerity’s trap

Troika programs imposed austerity that cut GDP faster than debt, worsening ratios and generating social upheaval—Spain’s indignados, Greece’s Syriza. Fiscal discipline became political punishment.

Politics and German dominance

Berlin’s insistence on intergovernmental control—“each sweep in front of their own door”—blocked collective rescue mechanisms. The ECB’s later QE and ESM programs saved the currency but left solidarity fractured. Tooze concludes that Europe’s trauma was not inevitable; it was the outcome of institutional incompleteness and political choice.

The crisis forced states into emergency action unseen since wartime. Tooze’s narrative follows how governments deployed fiscal and monetary tools with lightning speed—and how those actions reshaped politics from Washington to Berlin.

The United States: centralized rescue

The US implemented fast, coordinated interventions: TARP recapitalized major banks; the Fed rolled out alphabet‑soup facilities (TAF, PDCF, CPFF) and swap lines. The synergy between Bernanke’s Fed and Paulson’s Treasury produced a rapid, federal response that stabilized markets and kept a unified narrative. Stress tests in 2009 restored confidence and paved recovery.

Europe: the patchwork response

Europe’s national governments acted separately. Germany, France, Britain, and Ireland each designed domestic packages. Merkel’s unilateral guarantee of all German deposits shocked neighbors; Ireland’s guarantee triggered fiscal ruin. Without EU‑level authority, rescue efforts distorted competition and turned banking crises into sovereign burdens.

Political consequences

Bailouts saved institutions but cost legitimacy. In both America and Europe, anger at rescuing financiers first and citizens later fueled populism.

Global extensions

China’s 4‑trillion‑yuan stimulus offset Western contraction by mobilizing state credit and infrastructure investment. Emerging Europe turned to the IMF after sudden capital stops. Together these responses prevented global depression—but left behind an uneven world recovery driven by state intervention and moral resentment.

Tooze’s insight: crisis management cemented new hierarchies of power—Fed at the center, China rising as fiscal counterweight, Europe struggling with coordination—and set the stage for later conflict between technocracy and populist revolt.

The book also ties finance to geopolitics. Tooze traces how the financial seizures of 2008 coincided with Russia’s assertive revival, NATO tensions, and China’s strategic ascent. Economic power became geopolitical leverage.

Russia and Eastern Europe

Russia’s oil boom rebuilt state capacity; Putin’s Munich speech (2007) marked overt confrontation with Western expansion. During the crisis, Eastern Europe—dependent on Western bank credit—suffered severe sudden stops. Hungary, Latvia, and Ukraine required IMF rescues. The region’s vulnerability was financial and political: currency mismatches amplified panic, while EU‑NATO tensions shaped policy constraints.

Ukraine and sanctions politics

The 2014 Ukraine crisis pushed confrontation from financial to strategic. Russia annexed Crimea; the West imposed sanctions. Falling oil prices and capital flight struck Russia hard. Moscow pivoted toward China, accelerating a multipolar financial landscape. Western unity came at economic cost, especially for European energy markets.

Global governance and the G20 moment

In 2009 the G20 emerged as a new coordination forum. Gordon Brown spoke of a “new Bretton Woods,” while China’s Zhou Xiaochuan proposed using IMF Special Drawing Rights to challenge dollar dominance. The US maintained its central role, aided by the Fed’s liquidity and the dollar’s safe‑haven status. Yet, these debates revealed rivalry: who governs globalization in crisis—Washington, Beijing, Berlin or a shaky multilateral patchwork?

Tooze shows you that financial interdependence and geopolitical competition now coexist: swap lines, sanctions, and stimulus are all instruments of power in a contested world economy.

Crisis outcomes were economic, but the fallout became political. After 2008, stagnation and inequality reshaped societies. This is where Tooze’s narrative meets Piketty and Summers: fiscal choices and distribution failures bred movements that upended established politics.

Secular stagnation and inequality

Larry Summers argued growth was structurally weak — bubbles merely masked demand shortfalls. Piketty and Saez showed income gains concentrated at the top. The result: disillusionment with technocracy and a loss of democratic legitimacy. Occupy Wall Street, Syriza, Podemos and later Brexit became expressions of the same underlying anger.

From bailout resentment to populist revolt

The 2016 populist wave—Trump, Sanders, Brexit—was not an aberration but a logical continuation. Voters who saw elites bail out banks yet impose austerity embraced anti‑establishment narratives. Trump’s nationalist “America First” rhetoric and Sanders’s progressive anti‑Wall Street campaign used distinct languages but drew from shared frustration.

The institutional erosion

Repeated crises and patchwork fixes weakened trust in central banks, parties, and supranational bodies. Legitimacy eroded faster than output recovered.

Regulation and fiscal backlash

Post‑crisis reforms like Dodd‑Frank and Basel III tried to contain risk. Yet lobbying and later rollback efforts under Trump (the CHOICE Act, 2017 tax cuts) reintroduced fragility. Meanwhile, Europe’s austerity insisted on debt brakes instead of demand revival. The political economy of inequality and fiscal restraint merged — breeding populism on both ends of the spectrum.

Tooze ends with caution: the structures that saved finance in 2008—central bank discretion, state intervention—also undermined democratic confidence. Economic recovery without social inclusion gives rise to a new era of political volatility where financial resilience coexists with institutional fragility.