The recurrent global economic crises were not financial in nature, but cultural; this is a central argument to Boomerang, the simultaneously entertaining and unnerving new work by Michael Lewis. The cultural drive that seems self destructive is not limited to any particular region or ethnic group, but relates to a global satiety that has created certain expectations that do not respond logically to a crisis. The global bubble of the 2000s was not about housing, but about cheap and easily available credit, and represented temptation for the world entire. The metaphor he uses is that of the lights in a room being shut off – what would the people in the room do with absolute freedom of action with little to no scrutiny? As it turns out, the answers are unique for each part of the world, but with the same end result. Greed is good only in the short term, and that short term gratification rules the day; long term sustainability is for somebody else to worry about. The conclusions are not novel, but Lewis manages to tour some of the financial disaster hot spots of the world to bring back stories that bring the near future into sharper focus.
Iceland is a bizarre world of alpha male fishermen who overnight became bankers once the prime minister broke down regulations governing finance. With little actual experience, the three newly privatized banks went from holding US$3billion in 2003 to US$140billion in 2006, borrowing tremendous amounts of cash to buy businesses, financial products, expensive houses and developments, and investing in American subprime loans. They were insanely cavalier, and their genuine belief in their exceptionalism led to losses amounting to US$330,000 for every citizen in Iceland. This borrowed money being thrown about led to skyrocketing prices for land and goods in Iceland, inflating the apparent value of these banks and their holdings of what was really fake money. In what becomes a recurrent theme for Boomerang, there are warnings of caution from experts in the know who actually scrutinized the lending habits of the banks and the financial products traded, and these warnings were met with hostility and defensive oafishness. There were others who knew about the impending collapse, but rather than shout it from the rooftops, most of the players shorted the eventual losers.
The Icelanders were optimistic and bullheaded fishermen who via banking demonstrated a deeper megalomania. Greece, on the other hand, had conservative banks that lent primarily to the government which demonstrated a balanced budget and was deemed a safe bet. The government then proceeded to wildly spend beyond its tax revenues; the culture is of thieves. While every citizen dutifully cheats on their taxes and underreports their income and assets, tax collectors do their part by failing to collect any taxes (particularly in an election year) or taking bribes to overlook infractions. The debt is at US$1.2 trillion and rising due to going deeper into debt at increasingly high interest rates while selling worthless bonds to Germany. Future streams of income (lottery, airport fees, loans by EU nations) were securitized and sold for cash that was immediately spent. The public sector pays its people exorbitant salaries while taxing private corporations more stringently, in a model that tea party types would howl about. Despite the warnings of disaster, the people refuse to accept more reasonable wages and higher (or any) taxes while protesting austerity measures meant to hold off the inevitable default. Lewis makes clear that Greece will go bankrupt, and it is only a question of when.
The Irish destroy the Celtic Tiger with ridiculous loans made out to developers so profligately that real estate values soared to the point where a very nice upper middle class house in Dublin was sold and resold with a peak closing price of US$80 million. More homes were built than there are Irish in Ireland, leaving vast empty housing developments, holes in the ground, and abandoned construction vehicles. The Germans refused to take out their own personal loans to fuel consumption, while the banks loaned out money in the billions to fund terrible investments; they were the last to continue buying subprime credit default swaps while Wall Street firms were openly betting against them. Across much of the world, in the 2000s, there was a false boom of the appearance of economic growth fueled by consumption based on borrowed money, amassing debts that could not be repaid. In Ireland, this fueled real estate; in Germany this drove their banks to record profits and later losses; in Greece it drove the tendency to overpay public employees on and off the books to disastrous extremes; in Iceland it made international banking titans of fishermen who bought failed banks until their own sank without a trace. In the United States, this became the greatest heist in history as banks were paid handsomely by taxpayers to continue their risky behaviors and amass even greater wealth at a time of record unemployment and a shrinking job market.
The fun facts in Boomerang are the real selling point here:
A city dump in Dublin was bought for 412 million Euros, now valued at negative 30 million Euros once cleanup costs are factored in.
Kyle Bass, a hedge fund manager, correctly predicted both the credit crash and the eventual default of governments that unwisely backed their banks; he advises investment in gold, automatic weapons, and nickels. Nickels have 6.8 cents worth of metal in them, so he bought a million dollars worth.
Icelanders bought expensive Range Rovers with loans now costing them three times what the vehicle would normally sell for; the sound of explosions occasionally punctuate the quiet of Reykjavik as these are regularly set aflame.
Greece gained entry to the EU by cooking the books to falsify an unbalanced budget and wild spending practices; Goldman-Sachs helped do this for a US$300 million fee.
Germans are obsessed with shit.
30-40% of economic activity in Greece is untaxed.
Vallejo, California had a real estate crash of 66% of lost value; 1/16 homes are in foreclosure, and public services have been slashed including half of all public safety workers. The citizens shy from tax increases while accepting these circumstances or simply moving.
Ultimately all economics, like politics, is local. As nations shift greater burdens to local governments, services are being cut across the board. Americans are in the same boat, being the greatest adherents to a mantra of consuming heavily while refusing to pay taxes. Rather than any sort of cooperation and mutual sacrifice to dig out of the credit hole as a society, every individual is very much for themselves and are willing to do their part to scuttle the ship while grabbing whatever cash is available in the meantime. This is all part of a great class war where the wealthy borrow money that they will never pay back while taxpayers foot the bill. Lewis hits a nail squarely regarding human nature and its refusal to act responsibly in a mutant version of game theory. There will be either a tremendous crash that will topple entire nations, or those countries shall endure with a great deal of pain that will bring people back down to earth. While not an exhaustive work on the subject, Boomerang brings these bewildering issues home with real and absurd examples of what happens when nobody is paying attention. Or rather, when people intentionally ignore an approaching disaster while stuffing pockets, because fuck the other guy.
On a side note, I started to wonder about the next steps in this crisis cycle. Banks loan and profit wildly and expect governments to pay the tab. They do so on the banks’ terms since politicians are largely compromised by either ineptitude or bribery. So when governments start to default en masse, who will bail them out? And somebody will, otherwise very wealthy people stand to lose a fortune in worthless bonds. The only players left large enough to bail out countries are the corporations. Even in this time of crisis, companies are sitting on record levels of cash, both real and borrowed. And when they do bail out the losers, they will do so on terms favorable to them. The era of privatization has yet to begin.