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Introduction

The end of the Cold War marked a significant shift in Western societies, as the traditional left-right divide gave way to a broad consensus on the benefits of free markets. However, this consensus was shattered in 2008 when the global financial crisis pushed the world to the brink of economic collapse. The resulting turmoil reignited political passions, with Republicans and Democrats engaging in bitter debates over the largest bailout in US history, while European governments struggled to contain the fallout from the banking crisis.

According to Adam Tooze, the 2008 financial crisis was a watershed moment that exposed deep-seated flaws in the global economic system. The crisis has had far-reaching consequences, contributing to widespread instability and undermining trust in institutions. As Tooze argues, understanding the history of the crisis is crucial to finding a way back to economic and political stability.

To get to the root of the crisis, it’s essential to examine the key factors that contributed to the meltdown. This includes understanding why bankers took such huge risks on subprime mortgages, how policymakers responded to the crisis, and why the political center has lost so much ground in the decade since the crash.

By exploring these questions, we can gain a deeper understanding of the complex interplay between economics, politics, and society. Ultimately, this knowledge can help us navigate the challenges ahead and find a path towards greater stability and prosperity.

One: The 2008 Financial Crisis

The US mortgage industry was a ticking time bomb, waiting to unleash a global financial catastrophe. The crisis that exploded in 2008 had its roots in the 1970s, when US lending markets were deregulated, creating a lucrative but risky environment.

Between 1996 and 2006, US house prices nearly doubled, and household wealth surged by $6.5 trillion. This fueled a demand for houses, and lenders responded by making it easier for people to get mortgages, including high-risk “subprime” loans.

To mitigate the risk, lenders used securitization, bundling mortgages into packages and selling shares to investors. In theory, this would spread the risk, but in reality, it created a perfect storm.

When the housing bubble burst in 2008, homeowners defaulted on their loans, and the value of their properties plummeted. This left lenders with worthless mortgages and a massive problem. Banks that had invested heavily in subprime mortgage bundles found themselves on the hook.

The first domino to fall was Lehman Brothers, which had invested a staggering two-thirds of its $133 billion worth of securities in subprime mortgages. The collapse of Lehman Brothers triggered a global financial crisis.

Ironically, the financial industry had been warned about the dangers of excessive risk-taking. In 2005, Indian economist Raghuram Rajan presented a paper titled “Has Financial Development Made the World Riskier?” at a gathering of top economic policymakers. Unfortunately, his warning fell on deaf ears.

Two: The European Financial Crisis; A Domino Effect of the US Crash

The European financial crisis was a direct consequence of the US crash, as European banks had heavily invested in American mortgage securities. European banks had enthusiastically participated in the US housing boom, often borrowing money from Wall Street lenders to finance their investments. By 2008, a quarter of all securitized US mortgages were held by foreign banks, mostly European. European banks also held 29% of high-risk securities, with British bank HSBC alone investing $70 billion in US mortgages before 2005.

When the US housing market crashed, European banks found themselves at the center of the crisis. The situation was dire, with European banks realizing they were in deeper trouble than their American counterparts. A key indicator of this was leverage, the ratio of borrowed money to actual holdings. While US banks had an average leverage of 20:1, European banks like Deutsche Bank, UBS, and Barclays had leverage ratios of at least 40:1. This meant European banks lacked the necessary cash to cover their debts in an emergency.

The European Central Bank (ECB) and national central banks held insufficient funds to bail out the struggling banks. The ECB had only $200 billion, while the Swiss and British central banks held less than $50 billion each. European banks needed $1.1 to $1.3 trillion to cover their lending, a shortfall that was unsustainable.

The crisis began to unfold in August 2007, when French bank BNP Paribas froze its funds due to the unreliable US property market. This triggered a panic among investors, who rushed to withdraw their cash. The resulting liquidity crisis was unprecedented, with trillions of dollars being pulled out of the financial system.

Three: The Eurozone’s Inadequate Response to the 2008 Crisis

The 2008 housing crash sent global financial markets into a tailspin, with trade between wealthy countries plummeting from $17 trillion to $1.5 trillion. The US government responded swiftly, with the Federal Reserve nationalizing parts of the mortgage finance system and implementing quantitative easing, injecting $1.85 trillion into the banking system.

In contrast, the Eurozone’s response was slow and disjointed. Angela Merkel‘s German government blocked a joint approach to resolving the crisis, which was essential due to the Eurozone’s unique structure. The introduction of the euro allowed weaker economies like Greece to borrow at the same rates as stronger economies like Germany, creating an unsustainable situation.

When the crisis hit, individual Eurozone countries couldn’t print euros to stimulate their economies, as the European Central Bank (ECB) controlled the printing presses. A coordinated response was necessary, but Germany refused to agree, citing two main reasons. Firstly, the government didn’t want to alienate its voters by using their taxes to bail out struggling countries. Secondly, Germany’s historical experience with reunification and “shouldering the debts” of the former East Germany made them reluctant to repeat the process.

As a result, Eurozone countries were left to fend for themselves, resolving their debt issues on a national basis. However, some countries lacked the capacity to do so, leading to further instability and crisis.

Four: The lack of European unity left smaller countries ill-equipped to handle the fallout from the 2008 financial crash.

With key European leaders, like Angela Merkel, unwilling to risk their political capital by offering debt relief to struggling Eurozone members, nations like Greece and Ireland quickly found themselves overwhelmed. Take Ireland, for example, a country roughly half the size of New York City. Its largest banks had accumulated debts totaling more than 700 times the nation’s entire GDP! As a bank run became increasingly likely, the government intervened, assuring creditors it would guarantee the debt of Ireland’s six biggest banks. But this promise was impossible to keep, and attempting to do so ultimately bankrupted the state.

Greece’s situation was even worse. Before the crash, its deficit had already reached ten percent of its GDP. By 2010, it was set to repay 53 billion euros to creditors—a sum it simply couldn’t afford. The country was officially insolvent. This posed a serious risk not only for Greece, but for the entire Eurozone, as the collapse of smaller nations could potentially drag larger members like Germany and France down with them. However, Germany remained resolute in its refusal to support a collective recovery plan.

Radical action was needed if countries like Greece, along with Portugal, Ireland, Cyprus, and Spain, were to remain afloat. This is when the International Monetary Fund (IMF) stepped in to break the deadlock. Merkel and U.S. President Barack Obama were the primary supporters of involving the IMF. Merkel favored the idea because it would likely be more palatable to her voters than having the European Central Bank intervene directly. Obama, on the other hand, was concerned that the worsening crisis in the Eurozone could undermine America’s own recovery.

The IMF’s involvement was seen as a significant blow to European pride. Historically, it was poorer, developing countries that had their policies dictated by the IMF, not wealthy Western democracies. But in the spring of 2010, the “troika”—composed of the IMF, the European Central Bank (ECB), and the European Commission (the EU’s legislative body)—began imposing its will on Greece and other ailing Eurozone nations. The agreement was simple: in exchange for bailout payments, these countries would have to implement severe austerity measures. Greece endured the harshest cuts, with the retirement age and VAT increased, while public sector jobs and wages were slashed. Though the immediate threat of economic contagion was averted, the political consequences of these austerity measures would continue to resonate for years.

Five: Russia took advantage of the economic vulnerability of the former Eastern Bloc, manipulating tensions between the East and West to its benefit.

The recession affected not just the Eurozone, but also the former Eastern Bloc, leading to economic instability and the resurfacing of old geopolitical conflicts, particularly in Ukraine. By the 2000s, countries like Poland, Latvia, and Estonia—once part of the Eastern Bloc—had economies heavily reliant on foreign investment. In the carmaking industry, for instance, while Eastern Europe produced 15 percent of Europe’s motor vehicles in the 1990s, 90 percent of the industry was foreign-owned.

Caught between the historical rivalry of Russia and the West, these countries had to decide where to draw their investments from: NATO in the West or the Russian-led Eurasian Customs Union. Choosing one meant rejecting the other. Ukraine, having watched Poland thrive after aligning with the West, decided in February 2008 to apply for fast-track NATO membership. Two months later, German Chancellor Angela Merkel announced at a NATO summit in Bucharest that Ukraine would be welcomed into the alliance. For Russian President Vladimir Putin, this was a direct provocation.

Meanwhile, Ukraine faced its own economic crisis, with its steel industry at the heart of the issue. In 2009, Ukraine’s steel production—responsible for 42 percent of its export earnings—fell by 34 percent, further straining the nation. In desperation, Ukraine sought help from the West, but the IMF and EU offered only a modest $5.6 billion in aid. In contrast, Russia presented a far more enticing offer: a cheap gas contract and $15 billion in loans, conditional on Ukraine joining the Eurasian Customs Union.

This Russian proposal tipped the balance, and Ukrainian President Viktor Yanukovych accepted. In response, pro-European protesters flooded the streets of Kiev. The government’s violent crackdown failed to quell the protests, and by February 22, 2014, Yanukovych fled the country. An interim government quickly signed the IMF-EU deal, angering Russia, which refused to recognize the new government. In retaliation, Russia annexed Crimea and supported separatist movements in the Donbass region of eastern Ukraine. This conflict has since claimed over 10,000 lives.

Six: The 2008 financial crash marked the beginning of a decline for London’s status as a global trading hub.

The crash had far-reaching effects, shaking the foundations of London’s financial sector and altering the UK’s economic landscape, potentially forever. But to understand the full impact, it’s important to first look at how London rose to prominence as the world’s leading financial center.

From 1944 to 1971, the Bretton Woods Agreement regulated the trading relationships between 44 countries. Its goal was to promote global growth, simplify trade rules, and reduce economic volatility. A key aspect of the agreement was its currency system, where member currencies were pegged to the US dollar, which was itself linked to gold. This system helped the dollar become the world’s reserve currency. The Bretton Woods arrangement also gave the US Federal Reserve and Treasury more control over monetary policy, making banking in postwar America more regulated and restricted.

Investment bankers, who thrive on risk and less regulation, needed a more flexible environment to make bigger bets and reap larger profits. London provided exactly that. From the 1950s onward, London became a hub for offshore dollar lending and borrowing, attracting banks from the US, Europe, and Asia. By the 2000s, the City of London was handling $1 trillion in foreign currency trades daily and hosted 250 foreign banks—double the number based in New York.

However, the 2008 crash significantly damaged this thriving hub. British banking giants like Lloyds-HBOS and RBS were nationalized, and major European banks in London, including Deutsche Bank, Barclays, and Credit Suisse, struggled in comparison to their Wall Street counterparts. By 2014, the British think tank Z/Yen ranked Wall Street above the City for the first time in its influential annual report.

Looking ahead, London’s future as a financial center appears uncertain. The mishandling of the financial crisis, combined with the ongoing Brexit process, suggests that American-Asian trade will increasingly bypass Europe, signaling a further decline for London’s once-dominant position.

Seven: The Brexit referendum initially served as a strategy to pressure the EU into safeguarding London’s position as a global offshore hub.

Given the challenges and uncertain outcomes of the Brexit negotiations, many have wondered why the UK ever decided to leave the EU in the first place. The reasons are multifaceted. First, there has long been a strong undercurrent of Euroscepticism within both the UK at large and the Conservative party specifically. A key concern was the belief that the EU would undermine London’s status as a leading financial center. These worries were amplified after the 2008 financial crash.

In 2010, after the Conservative-led coalition took power from Labour, austerity measures were introduced. As cuts began to affect public services like the National Health Service, many began to seek scapegoats. Migrants from Eastern Europe became an easy target, and dissatisfaction with what were seen as out-of-touch elites in both Brussels and London grew. By 2011, polls showed that less than half of Britons supported staying in the EU. In response, 80 Eurosceptic Members of Parliament (MPs) demanded a referendum on the country’s EU membership.

At that point, anti-EU sentiment was undeniable, and in January 2013, the coalition government announced plans for a referendum on EU membership within the next four years. Prime Minister David Cameron, though in favor of remaining in the EU, recognized that a vote would help unite his party. He believed that, by the time the referendum took place, the Remain campaign would have the upper hand. However, the situation didn’t unfold as he anticipated. The Eurozone crisis remained unresolved, and the EU had yet to address key concerns such as deeper integration and issues surrounding EU nationals claiming benefits in the UK.

By 2014, Eurosceptic groups like the UK Independence Party (UKIP) and the French National Front had made significant strides in European elections, further complicating Cameron’s efforts to secure concessions from the EU. When the referendum was held in June 2016, Cameron had only secured a temporary cap on migrant benefits and a vague assurance from EU President Donald Tusk that the notion of an “ever closer union” would not apply to the UK. Despite a lackluster campaign to stay in the EU, a narrow but decisive majority voted to leave.

Eight: The aftermath of the 2008 financial crash left a deep and divisive mark on the United States, particularly in the way it shaped the political landscape.

A key issue that fueled discontent was the growing perception among recession victims that the individuals responsible for the crisis not only escaped unscathed but were actually rewarded. In 2008, Wall Street handed out $18.4 billion in bonuses, with some of the most infamous executives cashing in on these payouts.

Take AIG, for example. Prior to the crash, the insurer was responsible for backing banks like Morgan Stanley and Goldman Sachs, which were later bailed out with taxpayer money. AIG failed to hedge its investments, meaning it lacked a contingency plan in case the banks needed emergency funds—an unforgivable oversight for a company in the business of risk management. By December 2008, AIG was on the brink of bankruptcy with losses totaling an astounding $61.7 billion. Yet, in March 2009, the company announced plans to reward employees in its financial products division—the very department responsible for AIG’s reckless behavior—with bonuses ranging from $165 million to $450 million. This sparked outrage, especially during a time when millions of Americans, many of whom had taken out subprime mortgages, had lost their homes. In Florida alone, 12 percent of all properties were foreclosed or abandoned by 2010.

The notion that the system had been designed to serve a wealthy elite gained traction across the political spectrum. Both left-wing and right-wing voices, who would have otherwise been dismissed as radical in a more stable economy, suddenly gained credibility. On the right, Breitbart blamed the working class for being deliberately set up to fail, while on the left, the “Occupy” movement condemned a small elite for hoarding the nation’s wealth, claiming, “The system isn’t broken – it’s rigged.” Political figures like Robert Reich, former labor secretary under Bill Clinton, argued that the issue was not the size of government but who it served. Meanwhile, billionaire investor Warren Buffett called for a 35 percent income tax on the wealthiest Americans, a proposal swiftly rejected by Republicans in Congress. As the evidence mounted that the government was serving only a privileged few, the political center began to unravel, with voters on both sides of the aisle growing increasingly disillusioned.

Nine: The anger over the unequal distribution of pain and profit in the aftermath of the financial crash ultimately found its way into the ballot box in the 2016 US presidential election.

But why did it take so long for voters to channel their frustration? The 2012 election didn’t provide much of an outlet for discontent. While President Obama had criticized Wall Street bonuses in 2009, his primary focus remained on stabilizing failing banks, not holding them accountable. This was hardly surprising, given that his administration was filled with figures like Larry Summers, a former Wall Street economist who had dismissed warnings about the crash. Obama’s 2012 opponent, Mitt Romney, a banker and venture capitalist, was another insider with close ties to the financial establishment. While Obama secured re-election, the dissatisfaction that simmered beneath the surface of American politics remained.

By 2016, voters tired of the status quo found candidates who seemed to share their frustration. On the left, Bernie Sanders energized his base by openly criticizing the establishment and decrying Wall Street’s undue influence over politics. On the right, Donald Trump, a billionaire businessman, promised to break from conventional politics and focus on the needs of everyday Americans. Trump’s primary target was China, which he blamed for destroying American jobs.

The Democratic Party, however, chose Hillary Clinton as their candidate. Her ties to Wall Street, including a $600,000 payday for speeches to Goldman Sachs, seemed to reflect the party’s complacency. Many former Obama supporters weren’t convinced by Clinton, and in 2016, around seven million of them switched their support to Trump, flipping crucial states like Michigan, Pennsylvania, and Wisconsin in his favor.

Instead of addressing inequality, Trump pursued tax cuts for businesses, reducing corporate taxes by 40 percent and raising the estate tax threshold to $11 million—policies that primarily benefited the wealthiest Americans and Wall Street elites. This raises an important question: Where will this anger go next? Given the shocking and unpredictable political shifts of the last decade, it seems likely that the financial crash’s legacy will continue to influence American politics for years to come.

Conclusion

Few governments and institutions were prepared to handle the aftermath of the 2008 financial crisis. Their inaction and lack of coordination only exacerbated the situation, while their failure to hold those responsible accountable for the global economic collapse sparked widespread anger among ordinary citizens. As a result, the economic crisis quickly evolved into a political one. Over a decade later, amid events like the Ukraine war, Brexit, and the election of Trump in the US, the lingering effects of the worst financial crash since 1929 continue to shape our world.

About the author

Adam Tooze is a distinguished professor and director of the European Institute at Columbia University in New York. A prolific author, his notable works include “The Wages of Destruction” (2006), a groundbreaking study of Nazi Germany’s economic policies that earned the prestigious Wolfson History Prize. Tooze’s other notable publication is “The Deluge” (2014), a comprehensive analysis of World War I and the emergence of a new international order.

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