The United States elections in 2008 became an emphatic repudiation of the Bush years. Even the Republican candidate did not find much to defend in the former president’s record. But the most remarkable aspect of the election was that the Democratic Party nominated an African-American, Barack Obama, to be its standard-bearer. Obama’s message was to give America back the hope that it could be a transformational nation, not just domestically but internationally. He repudiated the interventionism of the 2000s, and declared that the United States would wield power by co-operating with others on a global scale. Obama’s popularity, both at home and abroad, initially marked him out as a president who hit the spirit of the age better than anyone since John Kennedy, and his beautifully crafted speeches promised change, although often of a rather undefined kind.
But the capacity for fundamental change eluded Obama, not least because he had inherited from his predecessor the worst global economic crisis since the Great Depression of the 1930s. Some economies had already noticed the potential for severe instability in the late 1990s, during the Asian banking crisis, or in Russia’s fickle casino capitalism (which by the 2000s had made a large majority of its people regret the collapse of Soviet-era security). In the United States the failure of one of its largest energy companies, Enron, in 2001, and, in particular, of the two main government-sponsored mortgage companies in the summer of 2008, should have set off alarm bells about some of the basic operating principles of the market. But the way the Cold War had ended, the seemingly all-conquering power of the marketplace, and some of the more radical free-market ideas that went along with it, had shunted most regulatory mechanisms aside. The system was posed for a fall.
What set the crisis off was a bubble in house prices in the United States. Both banks and buyers behaved as if prices would rise for ever, and as if interest rates would always stay remarkably low. Just a small upward adjustment of rates in 2007 led to the beginning of a decline in property prices; many buyers could no longer afford the higher payments on their mortgages, forcing them to sell and thereby setting off very steep falls in house prices all over the country. In some areas, such as Florida, prices dropped by up to 70 per cent.
For the banks that had issued cheap loans at a low margin this was bad news. But what was worse was that most banks had, directly or indirectly, moved into so-called ‘sub-prime mortgages’, which basically meant loans that the borrower only under the most optimistic of scenarios would be able to pay back. The mix of excessive risk taken by households and banks alike in the 2000s, set off a financial crisis of proportions unprecedented for almost three generations. In September 2008 the fourth largest American investment bank, Lehman Brothers, went bankrupt with debts of $750,000 million. Even though the bank’s assets were enough to cover the major part of the debt, the collapse set off a chain reaction in financial markets that led the value of stocks on one American index to fall by more than 50 per cent in seventeen months.
President Obama, who was inaugurated in January 2009, was forced to put all his other priorities aside to deal with the financial crisis, which was threatening to become a world depression. By a combination of federal financial stimuli – printing money and targeting government expenditure, mostly – the worst of the immediate effects on industry and society was avoided, at least to begin with. The United States government, and governments elsewhere, also forced weak banks to recapitalize (meaning that they were either bought up by the state or by other banks). But public confidence in the market had been badly shaken, and credit became increasingly hard to come by. The effects of the crisis dragged on, fuelled by consumer uncertainty and stock market unpredictability. As late as 2011, unemployment in North America and in Europe remained high: in Spain 20 per cent; Ireland 15 per cent; and 9 per cent in the United States. These are not Great Depression levels, but they are signs of a recession of remarkable duration and depth.
Some people raised the question of whether it was also a sign of more profound change, such as the appearance of structural weaknesses in the capitalist system, or of a global shift in wealth and power from West to East. What was clear was that the lack of regulation and the appetite for risk had produced a crisis of great magnitude, one that most people would not be ready to dismiss as a product of general fluctuations in human fortunes. In Europe the political fall-out was great: public debt crises toppled governments from Ireland to Greece, and for some time the survival of the euro itself was brought into question. The British Labour government was replaced in 2010 by a shaky coalition of Conservatives and Liberal Democrats, who started the biggest public austerity programme since the Second World War. But if people blamed the governments, they blamed the bankers even more. Blatant speculation and irresponsibility were seen as the main causes of the crisis. Few paused to ask whether the complexities of international finance were by now so great that nobody could be expected to understand the system fully. After all, the human brain was developed for very different purposes than following trading algorithms in the stock market (even the great Arab mathematician al-Khwarizmi himself would have been bemused).
Those who believed that the crisis was a symptom of a long-standing trend leading to the increased importance of Asia in human affairs had a field day. China seemed to move through the crisis with far less damage than did the West, and the great Japanese earthquake and tsunami of 2011 (which killed at least 16,000 people) had more of an effect on East Asian economies than had the crisis that gripped much of the rest of the world. The whole North Atlantic world, it was argued, was living beyond its means; its economies were becoming less and less competitive compared to those of Asia, and their excessive borrowing had now defaulted, in more senses than one. But even though there is much truth in this perspective, it is far too simple to pick up the real causes and consequences of the 2008 crisis. The fact is that the world is increasingly interconnected as producers and consumers, as makers and users of tools and ideas, for a crisis in one part of the world not to have effects elsewhere. Asia may be advancing rapidly, but it will, from now on, always be affected to a very high degree by what happens elsewhere.
This interconnectivity of contemporary history became very visible in the spring of 2011, when massive changes in the Arab world suddenly got under way. As do most great revolutions, this one began with a small event, but one that was meaningful to millions. In Sidi Bouzid, a small Tunisian town on the edge of the desert, a young vegetable seller reacted in despair against the local authorities having confiscated his cart and slapped him when he went to protest. He set himself on fire outside the governor’s office. Mohamed Bouazizi’s terrible death caused demonstrations all over town. They then spread to other towns. By the end of January Tunisia’s dictator, who had ruled for twenty-three years, had fled into exile, and the people who chased him out set about introducing democratic reforms of a kind the Arab world had never seen before.