Democracy & Government

The Legacy of the Financial Crisis

Worldwide, political leaders have justified authoritarian behavior by saying they're responding to a crisis — then every problem becomes one.

The Legacy of the Financial Crisis

A construction sign announces a planned highway project financed by the American Recovery and Reinvestment Act in Lawndale, a suburb of Los Angeles. (Photo by Axel Koester/Corbis via Getty Images)

This post originally appeared at Project Syndicate.

It has been 10 years since the financial crisis went international. Until July 2007, the subprime mortgage crisis seemed like it was strictly a problem for the United States. But then Landesbank Sachsen and IKB Deutsche Industriebank, two publicly owned regional German banks, had to be bailed out, and it suddenly became clear to policymakers just how interconnected the global financial system had become.

The legacy of 2007 is still with us. Its most devastating and destructive effect was to put a premium on unconventional monetary measures. Unfortunately, when policymakers scrambled in search of “big bazookas” 10 years ago, they set the stage for the return of an old character: a strongman willing to pull the trigger.

To be sure, at the height of the financial crisis, politicians were right to conclude that they could not rely on business as usual.

To be sure, at the height of the financial crisis, politicians were right to conclude that they could not rely on business as usual. Central banks needed to provide liquidity on a massive scale, and governments needed to complement those monetary-policy efforts with fiscal expansion. Accordingly, China and the US, in particular, launched large-scale stimulus programs in 2008 and 2009, respectively.

Some of the extraordinary measures implemented in response to the financial crisis proved to be ill-conceived, and were abandoned or revised. In the US, the Troubled Asset Relief Program (TARP), which former President George W. Bush signed into law in October 2008, started out as a program whereby the Department of the Treasury purchased problematic, largely mortgage-based assets directly from financial institutions. But that turned out to be more complicated than originally thought, and, within weeks, the government simply recapitalized US banks instead.

Other bad decisions were not so easily reversed. Hoping to prevent a bank run, the Irish government offered a blanket guarantee for all banking deposits. With that one unilateral decision, Ireland destabilized the rest of Europe. Suddenly, other governments had to fear that their own banks’ depositors would flee en masse to the backstopped Irish banks (never mind that the cost of the guarantee was too much for the Irish government to bear).

Still, overall, the response to the financial crisis was strikingly successful, and those who led it were right to pat themselves on the back for having prevented a repeat of the Great Depression. But because unconventional policies were so effective, they are now considered appropriate and necessary responses to any problem, while constitutional safeguards are increasingly dismissed as petty bureaucratic concerns.

The response to the financial crisis was strikingly successful … But because unconventional policies were so effective, they are now considered appropriate and necessary responses to any problem, while constitutional safeguards are increasingly dismissed as petty bureaucratic concerns.

Already in 2008, former Federal Reserve Chairman Paul Volcker warned that the Fed was at “the very edge of its lawful and implied powers.” Of course, some might ask why a policymaker should not ignore that edge for the sake of the country’s welfare. But invoking salus populi suprema lex — the maxim that laws should reflect the public interest — is an old way of justifying autocracy. Indeed, who is to say what is in the public’s best interest, let alone determine the supreme law of the land? John Adams, America’s second president, noted the dangerous ambiguity of this concept: “the public good, the salus populi,” he wrote, “is the professed end of all government, the most despotic, as well as the most free.”

The post-crisis view holds that a powerful leader can and should fix things by himself (strongmen are rarely women). This approach was readily apparent in the Russian government’s response to collapsing aluminum prices in 2009, when job losses and unpaid wages gave rise to large-scale protests at a plant in Pikalevo, 150 miles (250 kilometers) southeast of St. Petersburg.

When then-Prime Minister Vladimir Putin toured Pikalevo, he made a show of humiliating the plant’s owner, the oligarch Oleg Deripaska, by calling him a “cockroach.” Putin didn’t announce any new policies to help Russian workers; nonetheless, his performance in Pikalevo was hailed as a bold assertion of state power in the face of capitalist excess.

Strongmen tend to present themselves as being uniquely able to tackle a specific problem. For Philippine President Rodrigo Duterte, that means a “war on drugs” that has led to thousands of extrajudicial killings. Putin and Turkish President Recep Tayyip Erdoğan justify their policies in the context of fighting terrorism. And Hungarian Prime Minister Viktor Orbán has framed his autocratic behavior as a necessary response to a domestic financial crisis. By focusing on one narrow “crisis,” these leaders create a mindset in which all other problems become crises that demand immediate, effective and unconstrained action.

This post-crisis mentality is in keeping with the German political theorist Carl Schmitt’s doctrine of “decisionism.” Schmitt, who joined the Nazi Party in 1933, held that sovereign decision-making is the central feature of the political process. When leaders make political decisions, they are reasserting control over the concept of sovereignty itself, which has been gradually eroded and transformed through various phases of globalization.

According to Schmitt, how leaders arrive at their decisions is secondary to the fact that a decision has been made. A sovereign “needs” to act forcefully to protect particular threatened interests. Often, this entails symbolic gestures. In 1930, for example, America’s Smoot-Hawley Tariff Act singled out Swiss watches, Japanese silk products and other nationally iconic imports.

Protectionism today is no different. Consider US President Donald Trump’s threat to impose tariffs against BMW and Mercedes-Benz: two high-visibility brands that one immediately associates with Germany.

In response to Trump’s threats, Europe has also tapped into the politics of symbolism. If Trump follows through, the European Union may retaliate by targeting bourbon whiskey, a distinctly American spirit that is heavily produced in Kentucky, US Senate Majority Leader Mitch McConnell’s home state.

Unfortunately, this approach has created a political environment in which established norms have been eroded, and no new norms have taken their place. The Soviet-born British journalist Peter Pomerantsev said it best in the title of his brilliant book about post-Soviet life: Nothing Is True and Everything Is Possible. Now that crisis has been normalized as a permanent condition, we are all post-Soviet.

Harold James

Harold James is professor of history and international affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.