Boomerang: Travels in the New Third World
Michael Lewis (2011, W. W. Norton & Co.)
Thanks to books like Michael Lewis’s The Big Short (2011), I was more or less acquainted with the financial crisis of the past ten years. In that book, Lewis followed the trail of collateralized debt obligations and sub-prime mortgage debt that led, in 2008, to the spectacular smash-up of a few Wall Street fortunes and many more American dreams. But I had not paid much attention to the global side of the story, the impact the credit crisis had on banks and governments overseas.
Happily, Michael Lewis was on the job. When international credit seized up, Iceland, Greece, and Ireland all came to the brink of collapse; German banks found that they were holding billions in toxic assets. In Boomerang, Lewis explores the old-fashioned idea of national temperament, in search of the reason for the different way the crisis affected different places. Icelandic fishermen, for instance, have bravado to spare, so when many of them turned to bond trading, they ran outsized risks. It worked, for a while, but primarily as a nation-sized Ponzi scheme: in one case, “Virtually the entire bank’s stated profits were caused by its marking up assets it had bought at inflated prices.” It looked so good while it lasted that German banks put in $21 billion, which has turned out to be a costly mistake.
The problem in Greece was an unholy combination of several forms of corruption. For one thing, the tax collection system was completely broken; the under-the-table economy dwarfs the official one. For another, the public sector was awash in bribery, over and above its generous wages and pension. On top of that, the books are a shambles. The reported 2009 budget deficit was first estimated at 3.7 percent, but the incoming minister of finance searched out better numbers that added up to nearly 14 percent. And, because of the election in 2009, the tax collectors had been called off. Between government borrowing and pension obligations, Greece’s debt amounted to more than a quarter million dollars per working citizen; since they’re members of the European Monetary Union, the problem is more complicated. But, says Lewis, “...this question of whether Greece will repay its debts is really a question of whether Greece will change its culture, and that will happen only if Greeks want to change.”
Ireland used the easy global credit of the early 2000’s to perpetrate a truly spectacular housing bubble. “The Irish construction industry had swollen to become nearly a quarter of Irish GDP–compared to less than 10 percent or so in a normal economy–and Ireland was building half as many new houses a year as the United Kingdom, which had fifteen times as many people to house.” The credit was driving the supply, and the demand wandered along behind. “Their real estate boom had the flavor of a family lie: it was sustainable so long as it went unquestioned and it went unquestioned so long as it appeared sustainable.” But of course, the day that the bubble was questioned in the markets was the day it became unsustainable; real estate lost half its value almost overnight, and the government stepped up to guarantee the debts of the six largest Irish banks. “In retrospect, now that the Irish bank losses are known to be world historically huge, the decision to cover them appears not merely odd but suicidal.” Instead of letting bondholders take losses for stupid loans, the Irish government repaid them with money borrowed from the European Central Bank. Irish homeowners with overpriced mortgages will be repaying both their own and the government’s debts for a very long time.
On Lewis’s visit to Germany he met some of the bankers who bought so many of the bad bonds Wall Street had been churning out. The German bank IKB borrowed money to buy CDOs, and wound up losing some $15 billion. Lewis says, “Perhaps because they were so enamored of the official rules of finance, the Germans proved especially vulnerable to a false idea the rules encouraged: that there is such a thing as a riskless asset.”
This book has a stinger in its tail. As we’ve seen, it’s logical, in the moment, for governments to borrow for necessities, and hope to be out of office when the bills come due. Lewis’s last chapter applies this lens to the state of California, and its municipalities. By the end of the Schwarzenegger administration, the state had unfunded liabilities for salaries and pensions of at least $100 billion; cities like San Jose spend three quarters of their budgets on fire fighters and policemen, and it’s nearly impossible to raise taxes to keep other services running. There and everywhere, this is unsustainable, but a little too painful to face in the present. And things could always work out–after all, tomorrow is another day.
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