1 Dedicated to Dolf van den Brink And Johan Witteveen © 2018 Coen Teulings Cover design Suzan Beijer Translation: Jeanne Bovenberg Photo cover Mischa Keijser/De Beeldunie Photo author Bob Bronshoff www.uitgeverijprometheus.nl ISBN.978 90 446 3812 7 2 Table of contents Preface 4 1 Lehman bankrupt 6 2 Rescuing banks 14 3 The Greek tragedy 24 4 The country of Colijn and Calvin 33 5 Testing ground of Japan 45 6 Crisis meeting in Brussels 55 7 Whatever it takes 69 8 In splendid isolation 82 9 America first 91 10 Beautiful Netherlands, beautiful Europe? 102 For further reading 112 3 Foreword On September 15, 2008 the American investment bank Lehman Brothers went bankrupt. In the days that followed, chaos erupted on the financial markets as had never been seen before. It was the start of the largest financial crisis that the world had witnessed since the Great Depression of the 1930s. Within a few days the world’s largest insurance agency threatened to be dragged down along with Lehman. Stock markets around the world incurred massive losses. Also the Netherlands and Belgium were hit hard. Two weeks after the demise of Lehman, the Belgian bank-insurer Fortis, which shortly before had taken over ABN-Amro, went bankrupt. The financial system was near collapse. Banks in many countries had to be rescued in the subsequent months by way of billions of state support. The consequences were felt everywhere in society. Worldwide, the economy fell into a deep recession— not without reason called the Great Recession. The international commercial credit system was at breaking point, which led to a 30 percent drop in world trade within a few months’ time. One year later, the financial crisis turned into the Euro Crisis in Europe, when Greece announced that it would not be able to meet its financial obligations. For years, the Euro Crisis has held the EU in an iron grip: countries were on the point of bankruptcy and in 2012 the currency teetered on the brink of disaster. Just as the Great Depression of the 1930s, this financial crisis has left an indelible mark on the world. Worldwide, confidence has been deeply shaken in established political institutions. Populist political parties opposing incumbents have been on the rise, in an echo of the 1930s. Great Britain voted for Brexit, and the United States elected Trump. National agendas prevailed above international cooperation. The post-war world order that the US helped to create is now being threatened by the actions of the US President. Trump has begun a trade war— once again, in an echo of the events in the 1930s. Remarkably, it seems as if the EU is now rising from the ashes. This book reports on ten years of financial crisis— ten years that have indelibly changed the world—and describes the Dutch diagnosis of the crisis. This diagnosis is in many respects unclear and inconsistent. The cracks that have become evident in the old world order represent an urgent call for a new look at the position of the Netherlands in the world. With this book I hope to contribute to this process. This book is the fruit of ten years’ close involvement with the events herein described. During this time I benefitted from debates and conversations with many individuals— conversations that continued until the day I turned in the final chapter of this book to the publisher. I’ll take the opportunity now to list these individuals, with my thanks, in alphabetical order: Dick Benschop, Olivier Blanchard, Marieke Blom, Arnoud Boot, Charles Brendon, Willem Buiter, Giancarlo Corsetti, Jeffrey Frieden, Axel Gottfries, Wouter den Haan, Bernard ter Haar, Victor Halberstadt, Frank Heemskerk, Christian Helweg , Bas Jacobs, Gert Jan Koopmans, Jason Lu, Ramon Marimon, Ruud de Mooij, Jean Pisani Ferri, Morten Ravn, Pontus Rehndal, Lucrezia Reichlin, Rick van der Ploeg, Dani Rodrik, Frank Smets, Bas Straathof, Tom de Swaan, Rutger Teulings, Nicolas Veron and Maarten Verweij. I would also like to give my due to many others (particularly my former colleagues at CPB) who have, without their knowing it, contributed to the creation of this book. 4 In record-setting time, and with great tenacity, Bram van der Kroft created the necessary figures. He and Maarten de Ridder, Rem Korteweg and Marieke van Oostrom provided me with incisive comments on earlier versions of this book. That was a great help. Without diminishing their efforts in any way, I would like above all to thank my wife, Salome Bentinck— not only for her support during all the long evenings I spent working late, but especially for her many suggestions on ways to improve the book. Gradually she fell in love with the Empress of Rice Island. You should therefore not blame Empress for her moodiness she shows at the end of the book; that is entirely the author’s doing. Coen Teulings July 18, 2018 5 1 Lehman bankrupt It never occurred to us that the Americans would let Lehman fail. - Staff member of Jean Claude Trichet, head of the European Central Bank, quoted in The New York Times, September 11th, 2009 On that historic night of September 15th 2008 when Lehman Brothers went bankrupt, I attended dinner with a small group to mark the retirement of a colleague professor. The former treasurer- general of the Ministry of Finance and I were exchanging views on the ups and downs of the first Lubbers Cabinet, which took office in the middle of the recession of 1982. I still have great admiration for that cabinet. It put The Netherlands back on track. Some of the guests that evening had close ties with the financial sector. That night they were constantly watching their Blackberries. Something was going on in New York— that much was clear. The year before had seen the bankruptcies of first the English mortgage bank Northern Rock and later the American Investment bank Bear Stearns. So something had been amiss on the financial markets for some time. That night, though, the atmosphere seemed relaxed. I did not have the impression that any of those present were aware that we were on the brink of an historic event. A few days later I attended another dinner, this time at the office of the Permanent Representation of the Netherlands to the EU in Brussels. Several Dutch guests, some from The Hague and some from Brussels, had been invited to discuss the Dutch position in Europe. The people from Brussels described how that position had changed in recent years. Initially, the Netherlands functioned as the little ‘grease-man’ of Europe: always given the floor directly after the large countries and routinely taking up the role of formulating the compromises. In those days, the Dutch in Brussels were also given a great deal of discretion by the government in The Hague. This gave the Netherlands authority. But a shift had occurred, and the Permanent Representation no longer held this position of trust. Conversations with the parliamentarians who visited Brussels seemed to be increasingly strained; ‘ideologists’ (as opposed to ‘brokers of compromise’) was the qualification given most often to the staff members of the Permanent Representation. But the real topic that night was not Brussels, but New York, and the shocking events which seemed to tumble over each other like so many blocks since the downfall of Lehman a few days back. Merrill Lynch had just been taken over by The Bank of America; AIG, which for decades had been the largest insurance company in the world, was bailed out by the FED with an injection of billions. What exactly was going on, nobody knew— but that the situation was becoming serious was now clear to everyone present. Even so, I doubt that any of those present realized at the time that we would still— ten years later— be talking about the events which had taken place the week before. 6 The stock market was in a state of chaos, which was reflected by the VIX index (measuring uncertainty on the stock market about the expected development of the Dow Jones index in the coming year). The VIX had been very low for several years prior to the summer of 2007. The wind of optimism that had been blowing over the world was disturbed in the summer of 2007 when several hedge funds that traded in real estate bonds went bankrupt. This was the first sign of impending doom. But no one could have foreseen what occurred in the weeks after the bankruptcy of Lehman. The VIX reached unprecedented high levels: no one had any idea of what the value of stocks would be in the coming year. There were days when the Dow Jones rose and fell several times during the same day— increasing by as much as 10 percent, and then decreasing as dramatically. If you happened to be a little lucky in buying and selling on such a day, you could have become very rich. Then again, you could have just as easily gone bankrupt. ‘The interbank credit market has been at a stalemate for months now. In my long career as a banker, I have never experienced such a thing. I advise you to immediately sell all your stocks.’ These words were spoken to me by Dolf van den Brink (member of the board of directors of ABN-Amro until 2002, who passed away in 2014) precisely a year before the bankruptcy of Lehman. We now know that he called it well. If the interbank credit market no longer functions, then banks do not 7 dare to extend credit to each other.