Why the next economic crisis will be much harder to fix

China under Xi Jinping and the US under Trump will play different roles than in 2008

Ten years on from the global financial crisis of 2008 it helps to see it in historical and geopolitical terms. Many continuing effects of the crisis generate fears it could recur, triggered next time more from political economy than finance.

Such perspectives reveal 2008 is aptly named. It was a crisis greater in scale and speed than that of 1929, defying claims that capitalism is no longer prone to disaster. It played out financially through the banking system before morphing into the politics of austerity, inequality and reactive populist revolts in the major western states. And it was genuinely global, rolling over from the United States to Europe and immediately affecting China and then major emerging economies.

The crisis revealed how vulnerable this more open structure was to collapse in one country which was then rapidly generalised globally

It is salutary to recall ideas about the “great moderation” in the 2000s. They asserted that economic cycles and crises had been ironed out by self-sustaining markets and policy wisdom arising from the rebellions against Keynesian policies of the 1970s and 1980s now commonly labelled neoliberalism.

Deregulation of national and international financial controls in the 1990s dramatically increased wholesale cross-border lending, which along with far greater world trade is dubbed globalisation.


The crisis revealed how vulnerable this more open structure was to collapse in one country which was then rapidly generalised globally.

Economic historian Adam Tooze vividly documents in his recent book Crashed, How a Decade of Financial Crisis Changed the World the policies followed in Washington after the Lehman bank collapsed following a year's pressure from US subprime mortgages. Some $600 billion in liquidity swap lines for dollars were made available to European central banks to stop deals done in that currency collapsing in a transnational bank run. That financial flow paved the way for the European Central Bank's huge quantitative easing later.

The currency swaps used transatlantic agreements made during the period of US hegemony which will be much more difficult to repeat if dollar shortages recur in the more multipolar world heralded by the crisis. This new political economy was symbolised by the Group of 20 which first met in November 2008. Geopolitical factors determined that emergent states such as Brazil, Mexico, Singapore, Turkey and South Korea received the dollar swaps – not China, Russia or India.

Transatlantic relations are being transformed, partly because the dollar is used by the Trump administration to leverage its policy on Iran against European companies. That is forcing the pace in developing an autonomous European Union security and defence policy, as well as a more distinct economic and political regime.

Alongside Europe and the euro zone, China was the other major player in the counter-crisis measures taken in 2008-2009. An astonishing mobilisation of borrowing and lending will see China's debt rise to a projected 327 per cent of its GDP in 2022, twice that in 2008. It has been poured into infrastructure and urban development that has nearly trebled the size of its economy, creating the surpluses it is now exporting in its "belt and road" policy to Eurasian states. Illustrating the sheer scale involved, China used 45 per cent more concrete in 2011-2013 than the US used in the whole 20th century.

Tooze calls Chinese leader Xi Jinping’s resulting state capitalist Chinese dream “the most spectacular Keynesian promise ever made”. Xi gambles that debt-led growth funding plus rapid high-technology catch-up will provide a better life for most of its people and thereby legitimise the regime, while it heads off democratic unrest by greater repression.

America First

Trump’s America First policy threatens to upset Xi’s vision by a trade war intended to contain or reverse China’s emergence as a front rank power. If that conflict spills over to other emerging states the world is heading into a more unstable period and another possible global recession, according to Nouriel Roubini, an economist who foresaw the 2008 crash. He says the next crisis could arise in emerging markets such as Turkey or Argentina which borrowed heavily in low-interest-rate dollars, and could then spread to China.

An Unctad report this week says global debt has increased from €142 to €250 trillion since 2008, driven mostly by banks and corporations in the developed world, which control most world exports.

Their profits feed the growing inequalities of income and wealth which are another legacy of the 2008 crash. Thomas Piketty, the French economic historian who has comprehensively documented that trend, warned in a recent paper that social democratic parties no longer represent the workers who used to be their electoral base, and who now swing to populists. Jeremy Corbyn’s British Labour Party arguably bucks that trend.