"Lehman's Failure Could Have Been Avoided" But Fed Folded To Political Pressure

On September 15, 2008, the global financial system was on the brink of a collapse. The trigger for the worst financial crisis in generations was the failure of the US investment bank Lehman Brothers. Key policy makers at that time have strongly assorted that they lacked the legal authority to save Lehman because the staggering financial giant did not have adequate collateral for the loan it needed to survive.

Laurence Ball disputes that explanation. In his new book, «The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster», he debunks the official narrative of the crisis. Based on a meticulous four-year study of the Lehman case, he shows that the Federal Reserve could have rescued Lehman, but officials chose not to because of political pressures and because they didn't understand the damage that the Lehman bankruptcy would do to the economy.

Professor Ball, the bankruptcy of Lehman Brothers shocked the world. What's the main takeaway from the outbreak of the financial crisis looking back from the distance of a decade?

In the fall of 2008, all the big investment banks – Lehman Brothers, Bear Stearns, Goldman Sachs and so on – were in a fragile state for the same combination of reasons. First, they all had big investments in real estate which produced losses when the housing bubble burst. Second, they were highly leveraged so that once they started losing money on real estate, their low levels of equity got even lower and people started worrying that they might become unviable. The third factor that proved fatal was that these firms were so heavily dependent on very short term, often overnight, borrowing to operate their business. So, when people started to worry about their viability we had essentially a twenty first century version of a bank run: The investment banks were cut off from funding and couldn't get cash to operate.

But why was Lehman the investment bank which went bankrupt?

All these investment banks had such different faiths and history has judged them so differently. For a lot of people, Lehman Brothers and CEO Dick Fuld were the great villains of the financial crisis. But Lehman didn't do anything very differently from all the other investment banks. For instance, as of 2007 the magazine «Fortune» named Lehman Brothers the most admired securities firm. There was no obvious reason why Lehman should suffer a much worse fate than other investment banks.

Nevertheless, it was Lehman which went belly up in the fall of 2008.

The first thing to say is what's not the explanation for that. Former officials of the Federal Reserve and especially Chairman Ben Bernanke have said repeatedly that the reason they didn't rescue Lehman Brothers was that Lehman did not have enough collateral for an emergency loan. They say that under the law they could not lend to a firm unless there is adequate collateral. They also say that all the firms they did lend to – Bear Stearns, AIG and so on – did have enough collateral. So, it was legal to lend to them.

But long story short: This is not true. Lehman had plenty of collateral. Actually, in the case of some of the firms the Fed lent to, the collateral was more questionable.

How do you come to this conclusion?

The policy makers today keep saying the same thing: The reason that they did not rescue Lehman Brothers was that the bank did not have enough collateral for the amount of cash that it needed to borrow. That is untrue in two distinct ways. It's first of all untrue in the sense that they did not pay any attention to collateral. There is a lot of hard evidence from investigations by the bankruptcy examiner, by the bankruptcy court and by the financial crisis inquiry commission. So, you don't have to do much guesswork. You can see what the policy makers were discussing. On one hand, they were talking about that a rescue of Lehman would be politically horrible. On the other hand, they were talking about that it might hurt the economy if they don't rescue Lehman. But the concept of collateral legality was not brought up. This is a story that was invented after the bankruptcy as an excuse.

Then again, the situation in the fall of 2008 was very messy. Hardly anybody knew what exactly was going on in the financial markets.

But if the policy makers had actually looked at how much collateral Lehman had they would have found that Lehman had plenty of collateral. In my book, I do a version of the calculations they could have done in real time. Sure, Lehman had things like equity stakes in real estate developments or private equity firms which were very hard to value and very illiquid. But Lehman had also corporate equities, corporate bonds and mortgage backed securities on the balance sheet. The other investment banks – both before and after the Lehman failure – were borrowing money from the Fed using those securities as collateral. Of course, there are a lot of details. But the bottom line is that Lehman had plenty of assets that could have been pledged as collateral.

What's the real reason for the Lehman bankruptcy then?

The real reasons had to do with the particular political and economic circumstances which lead the policy makers to rescue some banks and not others. Bear Stearns was the first investment bank to get into trouble and policy makers realized that a failure could do damage to the economy. So, they rescued Bear Stearns.

But then there was tremendous political criticism from all across the spectrum: The liberal Democrats were saying: «You give away tax payer money to Wall Street.» Conservative Republicans were saying: «This is socialism, you're taking over the banking system, you're interfering with free markets».

So, Barack Obama and John McCain who were presidential candidates both came out against any more government help for big banks.

So, who's to blame for the tragedy that unfolded with the Lehman crash?

First of all, a lot of people are to blame for the fact that there was a financial crisis. Certainly, the Lehman executives and the executives of other firms made risky bets that in retrospect they shouldn't have done. Also, people took out mortgages they shouldn't have taken out. Banks made loans they shouldn't have made. Regulators did not do as good a job. Actually, you could have a long list of people to blame why we ended up in a crisis situation.

And what about in the case of Lehman particularly?

Lehman Brothers had the misfortune to be the second bank to get in trouble. Given how much criticism there had been of the first rescue with Bear Stearns policy makers decided not to rescue Lehman. Maybe, they engaged in some wishful thinking that the economic effects wouldn't be too bad. For this big mistake I think Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and Tim Geithner, the head of the Federal Reserve Bank of New York, are to blame in somewhat different ways.

What do you mean by that?

Under the law at the time, the authority to decide whether the Federal Reserve could make a loan or not was entirely the Fed's decision. With respect to this decision, the Treasury Secretary legally had as much authority as the Secretary of Defense or as the Mayor of Chicago or anybody else. But as far as I can tell, what happened in practice was that simply because of the force of his personality, Paulson arrived at the New York Fed and told Geithner what to do. Geithner followed his instructions and Bernanke stayed in Washington. That's why I think one can blame Paulson for making the decision not to rescue Lehman for political reasons. One could also blame Bernanke and Geithner for not standing up to Paulson and saying: «This is none of your business». Legally they could have said: «We don't care about your political problems. We are going to do what's right for the economy.» But they didn't do that.

It's also no secret that Paulson and Lehman CEO Dick Fuld didn't get along. How important was their tense relationship with respect to Lehman's fate?

Dick Fuld and Henry Paulson were rivals on Wall Street when Paulson was the CEO of Goldman Sachs. I don't know it personally. But what people say is that they didn't like each other and maybe that Paulson was happy to have a chance to make Fuld's firm fail. I think that is exaggerated at best. Paulson was not happy that Lehman failed. He tried very hard to avoid that outcome. In his book, he writes: «I worked night and day to try to rescue Lehman. I was desperate for them not to fail. I tried to arrange a take-over.»

That's true, just with the exception that when all else failed Paulson was not willing to allow the Fed to be the lender of the last resort for Lehman.

How about the executives of the other big Wall Street banks? How did they experience what happened during Lehman's final days?

They were very worried. The whole story of the weekend of September 13 and 14 is very complicated. On Saturday, everybody thought there was a deal: Barclays was to acquire Lehman. But as a condition, Lehman was going to spin off about $30 or $40 billion of assets that Barclays didn't want. This was similar to JPMorgan Chase saying Bear Stearns has to get rid of some assets before they buy them. The difference is that in the Bear Stearns case the Fed set up Maiden Lane to buy the unwanted assets. In the Lehman case, a group of the big Wall Street firms had agreed to finance the unwanted assets. So, Goldman Sachs, Citigroup, Credit Suisse  and other firms were worried enough that they were willing to put up several billion dollars each to try to help rescue Lehman. But then on Sunday, at the last minute, the Barclays deal fell apart because of objections by regulators in the UK.

How much money would have been needed to rescue Lehman?

The policy makers made a bad mistake in the case of Lehman. To their credit, they recognized the mistake quickly within a day or two when they saw that everything was falling apart. At that point, they changed course completely and rescued AIG and everybody else. AIG got well over $100 billion in loans and Morgan Stanley got around $100 billion. Of course, we don't know exactly how much funding Lehman would have needed. But I estimate it would have needed around $84 billion – and again: this sum could have been backed by good collateral. It wouldn't have been such a risky loan.

Instead Lehman ended up as the largest corporate bankruptcy in US history. What exactly happened on September 15th?

This was the largest bankruptcy ever. It was incredibly complex. Actually, some bankruptcy proceedings are still going on today. Bankruptcy law is very complex. You do a lot of planning. You have a series of first day motions where you sign you're going to go bankrupt on a certain day and when you go into court you already have a whole bunch of plans for what's going to happen during the bankruptcy. For my research, I had a talk with Harvey Miller who was a famous bankruptcy lawyer and was the lawyer for Lehman Brothers. He stressed that there was an incredible lack of planning. The way he put it was, that the bankruptcy petition Lehman filed was one of the shortest bankruptcy petitions in history. It was written in a few hours although this was arguably the most complex bankruptcy in history. So, it was extremely inadequate and just chaotic.

In an alternative universe: What would have happened if Lehman was rescued?

We will never know for sure. But I feel pretty strongly that the whole financial crisis probably would have been quite a bit less severe. As far as Lehman is concerned, I think it's possible that if Lehman had survived it could still be an independent firm today. It's also possible that Lehman would have had to be wound down over time. But one thing is quite obvious: We would not have had this chaotic bankruptcy.

Then again, Lehman wasn't the only big bank that got into trouble. The whole financial system was drowning in debt.

Of course, there were problems. We had a housing bubble and risky things were happening on Wall Street. People were going to lose some money. If you look at the weeks before the Lehman bankruptcy, the US unemployment had risen somewhat to 6%. There were falling house prices and there were problems in the economy. But nobody expected the catastrophe we saw. This was the result of the panic that broke out when Lehman failed. I think when Lehman would have been rescued we might look back at this episode the way we look back at the savings and loans crisis in the 80s or at the bursting of the dotcom bubble in 2000. Those were cases in which financial mistakes were made. Billions of dollars were lost and there was some effect on the economy. But nothing like the catastrophe of 2008/09.

What were the consequences of the Lehman crash?

Again, nobody can know for sure. But I think the whole crisis and the great recession would have been quite a bit less severe if Lehman would have been saved.

Also, a big question is how US politics might have been different. American voters turned out to be very angry in 2016. As a result, they elected the kind of person I might have thought would never be elected president. Maybe things would have been different if the economy had not suffered such a big blow.

So, what's the big lesson of the Lehman crisis?

One big lesson is that the Federal Reserve should be ready to do its job as the lender of last resort. We don't know when the next financial crisis will occur. This last time it was subprime mortgages, the next time it will be something else. Important is that at some point there will be another big financial institution in which people lose confidence. Therefore, we need the Fed to be ready to provide liquidity. It's very worrisome whether that will actually happen because a lot of people have taken away the wrong lesson. I fear that the next time there is a crisis there will once again be political pressure on the Federal Reserve not to commit any funds. Also, the Dodd-Frank Act goes in the wrong direction in one way because it puts some legal restrictions on the Fed's ability to lend. The details are a little bit complex. But if we had the same history and there was some firm just like Lehman in the same situation, it's possible that under the current law it would be illegal for the Fed to rescue it.

Today, Mr. Paulson, Mr. Bernanke and Mr. Geithner are celebrated as courageous heroes who saved the global economy from the financial crisis. What are your personal thoughts on that?

I can imagine some kind of counterfactual world in which Fed officials said: «Well yes, we were not perfect. We did our best to combat the financial crisis on September 14 when we had a few hours to figure out what to do in this incredibly complex situation. We hadn't slept, and we didn't get it quite right. But when we realized our mistake we changed gears the next day and did all these great things.» So, I would not criticize them for not being perfect. But that is not what they've said. They have absolutely refused to own up to any kind of mistake. They stuck to this line that «we didn't have the legal authority» – and that's just not true.

Ray Dalio 'History Repeats' - Understanding Big Debt Crises, Part 1

Ten years ago this month, the world's financial system nearly ground to a halt. It was a dramatic and pivotal time, which has had lasting effects on many people's lives. But, as the founder of the world's largest hedge fund, Bridgewater's Ray Dalio, notes, it was also something that has happened many times in history and will happen many times in the future.

As you know, I believe that everything happens over and over again and that by looking at those things happening many times, one can see the patterns and understand the cause-effect relationships to develop principles for dealing with them. Prior to 2008, I had studied these relationships for debt crises with my colleagues at Bridgewater, and because we understood these relationships, we were able to navigate the crisis well when many others struggled. 

Today I am sharing our understanding of how debt crises work and how to navigate them well in a new book called "A Template for Understanding Big Debt Crises." 

I am making it available for free because I am now at a stage of life where what's most important to me is to pass along the principles that have helped me. My hope is that sharing this template will reduce the chances of big debt crises happening and help them be better managed in the future.

The template comes in three parts. 

The first explains the template for understanding how debt cycles work and provides principles for dealing with them well.

In the second, I look at how three big debt crises worked in depth - the 2008 financial crisis, the US Great Depression of the 1930s, and Germany's inflationary depression of the 1920s. That way you can experience them in the context of the template. In that part, I also share the notes that I and others at Bridgewater wrote during the 2008 financial crisis so that you can see it unfold through our eyes. 

Then, in part three, I show all the major debt crises that happened over the last 100 years - all 48 of them - in brief form so that you can see how the template applied to all of these cases.   

 To summarize some of the key points found in the book:

1. All big debt cycles go through six stages, which I describe and explain how to navigate:.

• The Early Part of the Cycle

• The Bubble

• The Top

• The Depression

• The Beautiful Deleveraging

• Pushing on a String/Normalization

2. Getting the balance right between having too much debt (that causes debt crises) and too little debt (which causes suboptimal development) is never done perfectly. Cycles always swing from having too little debt relative to the opportunities to having too much and back to having too little and back to having too much. These swings are exacerbated because people tend to remember what happened to them more recently rather than what happened a long time ago. As a result, it is pretty much inevitable that the system will face a big debt crisis every 15 years or so. 

3. There are two major types of debt crises - deflationary and inflationary - with the inflationary ones typically occurring in countries that have significant debt dominated in foreign currency. The template explains how both types transpire. 

4. Most debt crises can be well-managed if 1) the debts denominated in one's own currency and 2) the policy makers both know how to handle the crisis and have the authority to do so.As I write in the book: "Managing debt crises is all about spreading out the pain of the bad debts, and this can almost always be done well if one's debts are in one's own currency. The biggest risks are typically not from the debts themselves, but from the failure of policy makers to do the right things due to a lack of knowledge and/or lack of authority."

5. There are four ways of managing debt crises to produce a deleveraging.They are:

• Austerity

• Printing money to stimulate the economy

• Debt defaults/restructuring

• Wealth redistribution 

6. The way to manage a debt crisis well so there is a "beautiful deleveraging" (i.e. a deleveraging in which debt burdens go down at the same time as economic growth is positive and inflation is not a problem) is to balance these paths so that the deflationary forces balance with the inflationary ones.

7. In general, central bankers could do better jobs of smoothing the cycles and preventing big debt crises if, rather than having a single mandate to control inflation or a dual mandate to control inflation and growth, they have a three-part mandate that includes preventing investment bubbles by curtailing the excess debt growth that is funding them. 

8. When in a big debt crisis, saving the system (by providing lots of liquidity, guarantees, etc.) is most important – and not trying to be precise about it. This includes putting aside moral hazard considerations at that time. As I write: "How quickly and aggressively policy makers respond is among the most important factors in determining the severity and length of the depression."

9. It's important that economic policy makers have sufficient knowledge and emergency powers to handle crises well and don't get caught by legal or regulatory barriers: "ignorance and lack of authority are bigger problems than the debts themselves." I am particularly worried about how these factors will affect the next debt crisis due to the way regulations now constrain the freedoms to do the right throngs and the fragmented political state of affairs. 

10. After the restructurings and the passing of the debt crisis, policy makers typically need to provide significant stimulus for a number of years (5 to 10) until the hangover effects wear off."The recovery in economic activity and capital formation tends to be slow, even during a beautiful deleveraging. It typically takes 5-10 years (hence the term "lost decade") for real economic activity to reach its former peak level."

Bubble Watch: The Fed Has Burst the Everything Bubble

The Fed has burst the Everything Bubble.

No one has noticed it. Indeed, everyone in the US seems to be blissfully unaware. But the reality is that the massive bubble created between 2008 and 2018 is in the process of bursting.

And the Fed was the needle.

If you think I'm being dramatic, consider what has happened around the world in the last nine months.

While US stocks have continued to move higher courtesy of capital flowing into the US as a result of the Fed's policies (more on this shortly), the rest of the world is entering a meltdown.

China'sstock market is down 10% year to date. But if you go from the 2018 recent highs, Chinese stocks are down OVER 24%...meaning they are in a full-fledged bear market.

China is not unique.

Germany is down 17% peak to trough…just a few bad days away from a bear market too.

Even Japan, which is being propped up by its Central Bank on a near daily basis,is down 12%.

So why is the US not in trouble yet?

Because the Fed policies of raising rates is making the US EXTREMELY attractive to capital. Today, the yield on short-term US debt is over 2%.

This is happening at a time when MOST of the world is still posting NEGATIVE yields.

Put simply, the Fed is making US debt EXTREMELY attractiveto capital… at a time when other nations are PUNISHING their debt holders.As a result of this, capital is moving into the US propping up our markets, while the rest of the world collapses.

The black line is the US stock market. The blue line represents global stocks excluding the US.

Again, the Everything Bubble is bursting. 

10 Years Later: Lehman Is Still Shaping Our Post-Modern '1930s' Moment

In the autumn of 2008 events unfolded in Wall Street that the crushing majority of people around the world had been led to believe could never occur. It was the financial equivalent of watching the sun spinning out of control soon after it rose above the horizon. Humanity watched on in collective disbelief. The ancient Greeks had a term for moments like that one: aporia – a state of intense bafflement urgently demanding a new model of the world we live in. The Crash of 2008 was such a moment. Suddenly, the world ceased to make sense in terms of what, a few weeks before, passed as conventional wisdom.

Before long, the repercussions were felt everywhere. The certainties created by decades of of establishment thinking were gone, along with around $40 trillion of equity globally, $14 trillion of household wealth in the US alone, 700,000 US jobs every month, countless repossessed homes everywhere; the list is as long as the numbers it includes are unfathomable. Even McDonald's, for goodness' sake, could not secure an overdraft from Bank of America!

The collective aporia intensified by the response of governments that had hitherto clinged tenaciously onto fiscal conservatism, as perhaps the 20th century's last surviving ideology: the pouring of trillions of dollars, euros, yen etc. into a financial system which had been, until a few months before, on a huge roll, accumulating fabulous profits and provocatively professing to have found the pot of gold at the end of some globalised rainbow. And when that response proved too feeble, our Presidents and Prime Ministers, men and women with impeccable anti-statist neoliberal credentials, embarked upon a spree of nationalising banks, insurance companies and automakers that put even Lenin's 1917 exploits to shame.

Ten years on, the crisis unleashed in Wall Street in 2008 is still with us. It takes different forms in different countries (i.e. a Great Depression in places like Greece, a scourge of middle class savers in countries like Germany, history's greatest sponsor of brutal inequality in the United States, a permanent cause of geopolitical and trade tensions in Asia, Eastern Europe etc.). It migrates from continent to continent, from country to country. It morphs from an unemployment-generator to a deflation-machine, to another banking crisis, to a maximiser of trade and capital global imbalances.

Forcing Europe's ruling elites into a series of laughable errors, it has succeeded in destroying the moral and political foundation of the European Union while, on the other side of the Atlantic, it has resulted in Donald Trump's Presidency. The more our rulers proclaim the crisis' taming the deeper the crisis is becoming. Indeed, the only beneficiaries from the crisis' incessant mutations are the top 0.1% of earners, primarily the financiers, and what I once called the Nationalist International that is creating a new fascist, putridly xenophobic moment in Europe, America and beyond.

So, what happened in 2008?

To answer the question, we need to begin at the beginning – in 1944. As the war was drawing to a close, the New Dealers' administration in Washington understood that the only way of avoiding the Great Depression's return, once the guns had been silenced, was to recycle America's surpluses to Europe and to Japan, and thus generate abroad the demand that would keep their own factories producing all the gleaming new products (washing machines, cars, television sets, passenger jets) that American industry would switch to.

The result was the project of dollarising Europe, of founding the European Union as a cartel of heavy industry, and of building up Japan – all within the context of a global currency union known as the Bretton Woods system: a fixed exchange rates regime anchored on the US dollar, featuring almost constant interest rates, boring banks (operating under severe capital controls) and American management of aggregate demand for global capitalism's goods and services.

This dazzling design brought us a Golden Age of low unemployment, low inflation, high growth and massively diminished inequality. Alas, by the late 1960s Bretton Woods was dead in the water. Why? Because America lost its surpluses, slipped into a burgeoning twin deficit (trade and government budget) and could, therefore, no longer stabilise the global system by recycling surpluses it no longer had. Never too slow to accept reality, Washington killed off its finest creation: On August 15th, 1971 President Nixon announced the ejection of Europe and Japan from the dollar zone.

Nixon's decision was founded on the Americans' refreshing lack of deficit-phobia. Unwilling to rein in the deficits by imposing austerity (that would shrink the United States' capacity to project hegemonic power around the world), Washington stepped on the accelerator boosting its deficits. Thus American markets worked like a giant vacuum cleaner absorbing massive net exports from Germany, Japan and, later China – ushering in the second phase of post-war growth (1980-2008). And how were the expanding American deficits paid? By a tsunami of other people's money (around 70% of the profits of European, Japanese and Chinese net exporters) enthusiastically rushing into Wall seeking refuge and higher returns.

In effect, the 1970s inaugurated a remarkable Global Surplus Recycling Mechanism(which I have likened to a Global Minotaur elsewhere): the United States were absorbing a large portion of the Rest of the World's surplus industrial products while Wall Street would administer the foreign capital flooding into the US in three ways. First, it provided credit to American consumers (whose wages stagnated as part of the same process that boosted the US profit rate and made Wall Street a destination for foreign capital more lucrative that Europe or Japan). Secondly, it channelled direct investment into US corporations and, of course, thirdly, it financed the purchase of US Treasury Bills (i.e. funded the American government deficits).

But for Wall Street to act as this 'magnet' of other people's capital, and perform the role of recycling other people's surpluses so as to pay for America's deficits, it had to be unshackled from the New Deal and Bretton Woods era stringent regulations.Institutionalised greed, wholesale de-regulation, the infamous 'revolving doors', the exotic derivatives etc. were mere symptoms of this brave new global recycling mechanism. Financialisation was upon us, Europe's financial centres joined in enthusiastically and, after 1991, an additional two billion workers (from the former Soviet Union, China and India) entered the global proletariat producing new output that boosted imbalanced trade flows – Globalisation had begun!

In Globalisation's wake, the EU created its common currency. The reason the EU needed a common currency was that, as all cartels, it had to keep the prices of its main oligopolistic industries stable across Europe's single market. To do this, it was necessary to fix exchange rates within its jurisdiction, as they had been fixed during the Bretton Woods era. However, from 1972 to the early 1990s each EU attempt to fix European exchange rates had failed spectacularly. Eventually, the EU decided to go the whole hog: to establish a single currency. This it did within the supportive environment of (grossly imbalanced yet temporarily impressive) global stability that the US-anchored Global Surplus Recycling Mechanism maintained. Alas, in its infinite inanity, the EU created the euro on the basis of a delicious paradox: A Central Bank (the European Central Bank) without a government to have its back, and nineteen governments without a central bank to have their back. Effectively, the ECB would be supplying a single currency to the banks of nineteen countries, whose governments would have to salvage these banks, at a time of crisis, without a central bank that could support them!

Meanwhile, Wall Street, the City and the French and German banks were taking advantage of their central position in the US-anchored global recycling system to build colossal pyramids of private money on the back of the net profits flowing into the United States from the Rest of the World. This added much energy to the recycling scheme, as it fuelled an ever-accelerating level of demand within the United States, in Europe and Asia. It also brought about the de-coupling of financial capital flows from the underlying trade flows.

When, in 2008, Wall Street's pyramids of private money auto-combusted, and turned into ashes, Wall Street's capacity to continue 'closing' the global recycling loop vanished.America's banks could no longer harness the United States' twin deficits for the purposes of financing enough demand within America to keep the net exports of the Rest of the World going. To boot, Europe's common currency came unstuck following shockwaves it did not possess the shock absorbers to withstand.

From that dark moment onwards, the world economy, especially Europe's, would find it impossible to regain its poise.

Taking stock: Socialism for bankers, austerity for the many, and the inexorable rise of the Nationalist International

Most of my German friends tell me that, to this day, they don't get it: How is it that Deutsche Bank, and the rest of the German banks, went, effectively, bust in 2008? How can any economic sector go, within 24 hours, from making zillions to insolvency, demanding massive taxpayer bailouts. The answer is as simple as it is devastating.

Consider Germany's banks and exporters back in the summer of 2007. Germany's national accounts confirm Germany's large trade surplus with the United States. In the month of August of 2007, to be precise, German net export income from selling Mercedes-Benzes and the like to American consumers was a cool $5 billion. What Germany's national accounts do not, however, show was the real behind-the-scenes drama, the real action.

From the early 1990s and until 2007, Wall Street bankers manufactured quasi-money toxic derivatives and succeeded in ensuring that their market price was rising fast. Frankfurt's bankers were dying to buy these lucrative derivatives and did so with dollars that they were borrowing from… Wall Street. In August 2007, Wall Street entered its annus horribilis (which culminated in September 2008 with Lehman's collapse) when, as it was inevitable, the price of these derivatives began to fall. German bankers became apoplectic when their panicking New York pals began to call in their dollar debts. They needed dollars in a hurry but no one would buy the mountain of US toxic derivatives they had purchased. This is how, from one moment to the next, German banks swimming in oceans of paper profit found themselves in desperate need of dollars they did not have. Could Germany's bankers not borrow dollars from Germany's exporters to meet their dollar obligations? They could, but how would the $5 billion the latter had earned during that August help when the German bankers' outstanding debt to Wall Street, that the Americans were now calling in, exceeded $1000 billion?

In summary, what had happened, globally, was that imbalanced dollar-denominated financial flows, which had initially grown on the back of the US trade deficit, 'succeeded' in de-coupling themselves from the underlying economic values and trade volumes. It would not be far-fetched to say that they almost achieved escape velocity and nearly left Planet Earth behind (once the bankers invented, created and… kept on their own balance sheets toxic dollar-denominated instruments) – before crashing down violently in 2008.

From that moment onwards, politicians went into overdrive to shift the losses from those who created them (the bankers) onto the shoulders of the innocent (middle class debtors, waged labourers, the unemployed, those on disability payments and the taxpayers who could not afford to set up off-shore accounting units). In Europe, in particular, one proud nation was turned against another by political elites determined to disguise: (A) a crisis caused by an alliance of Northern and Southern bankers and other rent-seeking oligarchs, into (B) a clash caused by the profligate Southerners and ant-like Northerners or as as crisis of over-generous German, Greek, Italian etc. social welfare systems.

It takes no genius to put all this together and to grasp why, in the absence of a serious, effective, articulate Left, nationalism, racism and generalised misanthropy is now triumphing in the United States and, especially, in Europe.

Where are we now?

Back in 1967, John Kenneth Galbraith described how capitalism had shifted from a market society to a hierarchical system owned by a cartel of corporations: the Technostructure, as he called it. Run by a global elite that usurped markets, fixed prices and controlled demand, the Technostructure replaced the New Deal's full employment objective with that of GDP growth.

From the late 1970s onwards, that Technostructure extended its realm by adding the black magic of financialisation to its structure (through, for example, turning car companies like General Motors into large speculative financial corporations, that also made some cars!), magnifying by a dizzying factor its power and, ultimately, replacing the aim of GDP growth with that of 'financial resilience': enduring paper asset inflation for the few and permanent austerity for the many.

The result was the strengthening of the Technostructure's dollar-based hegemony in a manner that no macroeconomic approach (limited, by design, to looking at the national accounts of states) can even recognise as, from the 1990s onwards, the 'real action' was taking place in the balance sheets of the global financiers.

In the end, this financialised Technostucture was brought to its knees by the weight of its hubris. That's what the Crash of 2008 was all about. Two powers proceeded to save the financialised Technostructure from itself:

The US government, and in particular the trillions of dollars that the Federal Reserve pumped into European private and central banks (through what is known in the trade as 'swap lines').

And China, whose skilful economic management boosted domestic investment to unheard of levels, kept on its books worthless dollar assets that many others were shedding, and even went so far as to propose the elimination of trade imbalances via the adoption of a multilateral clearing union of the type that John Maynard Keynes had proposed at the Bretton Woods conference in 1944 (only to be denied by the Obama administration, who preferred to keep the dollar's privilege intact at the expense of a seriously unstable capitalism).

While the Technostructure was saved by two governments (America's and China's), those in authority blamed government debt, the cost of welfare, high wages, inflexible labour markets (i.e. the survival of some trades unions struggling to prevent the uberisation of waged workers) – and embarked on a massive, self-defeating austerity drive causing avoidable, industrial-scale suffering. Based on the toxic fantasy of apolitical macroeconomic management, the Technostructure is, to this day, shrouding in techno-bubble the undeclared class war with which the establishment has been shifting all the risks and all the losses onto the weak, instructing them to "suffer what they must", delivering whole populations (in the absence of a progressive internationalist alternative) into the arms of a post-modern fascism.

Ten years on, the Technostructure is still hanging on to the levers of power. But, nevertheless, the neoliberal populist myth (i.e. the myth that wholesale deregulation will make everyone's dreams come true under the rule of democracy and… Montesquieu), on which it used to rely for manufacturing consent, is now dead. Is it any wonder that racism and geopolitical tensions are all the rage? Was it not inevitable, as some of us have been warning since before 2008, that a Nationalist International would soon gain power, on the back of an explicitly xenophobic narrative, in the White House, in Italy, Austria, Poland, Hungary, the Netherlands, shortly in Germany (once Mrs Merkel is shoved aside)?

And so, here we are: At our generation's 1930 moment. Soon after the Crash and with a fascist moment upon us. The pressing question facing this generation is a harsh one that, while no young person deserves to face, none of us have the right to evade: When and how will we rise up against the Nationalist International bred across the West by the Technostructure's inane handling of its inevitable crisis?