Touring the Ruins of the Old Economy
By MICHIKO KAKUTANI
Published: September 26, 2011
Michael Lewis possesses the rare storyteller’s ability to make virtually any subject both lucid and compelling. In his new book, “Boomerang,” he actually makes topics like European sovereign debt, the International Monetary Fund and the European Central Bank not only comprehensible but also fascinating — even, or especially, to readers who rarely open the business pages or watch CNBC. The book could not be more timely given the worries about Europe’s deepening debt crisis and the recent warning issued by Christine Lagarde, managing director of the I.M.F, that “the current economic situation is entering a dangerous phase.”
BOOMERANG
Travels in the New Third World
By Michael Lewis
213 pages. W. W. Norton & Company. $25.95.
Combining his easy familiarity with finance and the talents of a travel writer, Mr. Lewis sets off in these pages to give the reader a guided tour through some of the disparate places hard hit by the fiscal tsunami of 2008, like Greece, Iceland and Ireland, tracing how very different people for very different reasons gorged on the cheap credit available in the prelude to that disaster. The book — based on articles Mr. Lewis wrote for Vanity Fair magazine — is a companion piece of sorts to “The Big Short: Inside the Doomsday Machine,” his bestselling 2010 book about the fiscal crisis. Like that earlier book its focus is narrow. It doesn’t aspire to provide a broad overview of the debt crisis but instead hands the reader a small but sparkling prism by which to view the problem, this time from a global perspective.
Mr. Lewis explains why the world is so worried that Greece could default: “If Greece walks away from $400 billion in debt, then the European banks that lent the money will go down, and other countries now flirting with bankruptcy” might easily follow, destabilizing regional and world economies further. He also explains why taxpayers in Germany — the euro zone’s largest economy, with resources critical to a rescue plan — are reluctant to keep bailing out other countries they regard as profligate, indolent and irresponsible.
This is why, Mr. Lewis writes, “European leaders have done nothing but delay the inevitable reckoning, by scrambling every few months to find cash to plug the ever growing holes in Greece, Ireland and Portugal, and praying that bigger and more alarming holes in Spain, Italy and even France do not reveal themselves.”
How did this situation develop? In “Boomerang” Mr. Lewis captures the utter folly and madness that spread across both sides of the Atlantic during the last decade, as individuals, institutions and entire nations mindlessly embraced instant gratification over long-term planning, the too good to be true over common sense.
Greece, Mr. Lewis writes, ran up astonishing debts — from high-paying government jobsand generous pensions, as well as waste, bribery and theft — that came to “about $1.2 trillion, or more than a quarter-million dollars for every working Greek.” In just the last 12 years, he says, “the wage bill of the Greek public sector has doubled, in real terms” with the average government job now paying almost three times the average private sector job. Those who work in jobs classified as “arduous” can retire and start collecting pensions, he adds, “as early as 55 for men and 50 for women”; more than 600 Greek professions have somehow managed “to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.”
In the prelude to the 2008 economic meltdown, Mr. Lewis reports, British investors, lured by the prospect of 14 percent annual returns, “forked over $30 billion” to dubious Icelandic banks (“$28 billion from companies and individuals and the rest from pension funds, hospitals, universities and other public institutions” including Oxford University which “alone lost $50 million”). And property-related bank losses in Ireland, according to one Irish economist cited by Mr. Lewis, now come to roughly 106 billion euros; and since, Mr. Lewis says, a “handful of Irish politicians and bankers had decided to guarantee all the debts of the biggest Irish banks,” those losses “alone would absorb every penny of Irish taxes for the next four years.”
At times Mr. Lewis can sound a lot like Evelyn Waugh: shrewd, observant and savagely judgmental, dispensing crude generalizations about other countries, even as he pokes fun at himself as a disaster tourist. He asserts that Icelanders “have a feral streak in them, like a horse that’s just pretending to be broken” and suggests that Germans are “obsessed with cleanliness and order yet harbor a secret fascination with filth and chaos” which is bound to result in “some kind of trouble.” He is perhaps toughest on his fellow Americans, concluding that the 2008 economic meltdown stemmed in large part from “people taking what they can, just because they can, without regard to the larger social consequences.”
“It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans,” he says, noting that states like California with ballooning pension obligations and employment costs face deficit problems not unlike those faced by Greece.
“Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom,” he goes on. “They’d been conditioned to grab as much as they could without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans.”
In “The Big Short” Mr. Lewis focused around a handful of investors who were aghast at how the dangers of the subprime mortgage market were being ignored by bank executives and government regulators, and who used their prescience to make a fortune betting against the stability of the system. One of them — left “on the cutting-room floor” of that earlier book — was a hedge-fund manager named Kyle Bass, who by the end of 2008 had already moved on to a “new all-consuming interest, governments.”
Mr. Bass reasoned that the financial crisis wasn’t over, that, in Mr. Lewis’s words, “the bad loans made by highly paid financiers working in the private sector were being eaten by national treasuries and central banks everywhere,” which meant that entire countries could collapse. Months later, when entire countries did indeed start to go bust, Mr. Lewis asked himself, “How did a hedge fund manager in Dallas even think to imagine this strange world?”
In the course of “Boomerang” Mr. Lewis introduces us to other, “disturbingly prescient” people, like Morgan Kelly, a professor of economics at University College Dublin, who began noticing in 2006 that something seemed seriously out of whack with the Irish housing market. He also foresaw the collapse of Irish banks, which had lent staggering amounts of money to property developers during the Irish real estate bubble.
Among the other intriguing individuals in this volume there’s Stefan Alfsson, an Icelandic fisherman who in 2005 quit fishing and joined the stream of young people becoming bankers, setting himself up as “an adviser to companies on currency risk hedging” — without a day of training. And there are some canny Greek monks who built a vast real estate empire that set off a scandal that Mr. Lewis says helped bring down the government of Prime Minister Kostas Karamanlis in October 2009. When a new government took over, it “found so much less money in the government’s coffers than it had expected that it decided there was no choice but to come clean”; those revelations panicked investors, and the new higher interest rates the country was forced to pay, Mr. Lewis says, “left the country — which needed to borrow vast sums to fund its operations — more or less bankrupt.”
Mr. Lewis’s ability to find people who can see what is obvious to others only in retrospect or who somehow embody something larger going on in the financial world is uncanny. And in this book he weaves their stories into a sharp-edged narrative that leaves readers with a visceral understanding of the fiscal recklessness that lies behind today’s headlines about Europe’s growing debt problems and the risk of contagion they now pose to the world.
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