Saturday, 7 July 2012

“Boomerang” by Michael Lewis (Allen Lane/W.W. Norton)

LewisM-BoomerangUKThe Meltdown Tour

As Pogo once said, "We have met the enemy and he is us."

The tsunami of cheap credit that rolled across the planet between 2002 and 2008 was more than a simple financial phenomenon: it was temptation, offering entire societies the chance to reveal aspects of their characters they could not normally afford to indulge.

Icelanders wanted to stop fishing and become investment bankers. The Greeks wanted to turn their country into a piñata stuffed with cash and allow as many citizens as possible to take a whack at it. The Germans wanted to be even more German; the Irish wanted to stop being Irish.

Michael Lewis’s investigation of bubbles beyond our shores is so brilliantly, sadly hilarious that it leads the American reader to a comfortable complacency: oh, those foolish foreigners. But when he turns a merciless eye on California and Washington, DC, we see that the narrative is a trap baited with humor, and we understand the reckoning that awaits the greatest and greediest of debtor nations.

Lewis’s Boomerang is a fine example of Financial-Disaster Travel Journalism, and anyone with an interest in the global economy of the past couple of years should absolutely read it. He takes a number of case studies and details how the global economic crisis either effected them, or how they had a hand in creating it: Iceland, Greece, Germany, and the United States. The author makes the case that the way nations acted when the money was made freely available to them “obviously told you a lot about them: their desires, their constraints, their secret sense of themselves. How they reacted when the money was taken away was equally revealing.” The international credit glut

“offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge… Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish. All these different societies were touched by the same event, but each responded to it in its own peculiar way. No response was as peculiar as the Greeks’, however: anyone who had spent even a few days talking to people in charge of the place could see that.”

Boomerang is Lewis’s account of what he saw in these countries. The book is packed with quotable comments and statistics. As a result, this review is rather long, but I have reigned myself in somewhat.

Lewis is a great journalist, able to give you a lot of information in a relatively small space. He adheres superbly to the dictum from J-School of conveying “complexity through simplicity”, and I never felt lost or overwhelmed by what he was explaining. In the chapter on Iceland, in particular, he summarises the problem in a very conversational page-and-a-half. Perfect. This is to be commended, and I really wish some other writers on the financial collapse and its repercussions around the world would take a look at Lewis’s style and learn from it (while they’re at it, check out Matt Taibbi’s and Tim Dickinson’s – both write for Rolling Stone). Lewis’s writing is also quite funny, injecting asides and absurdist observations to maximum effect, to keep the text from becoming too stuffy or gloomy. He reminds me of Taibbi, only without the swearing and early self-indulgence. That being said, some chapters are a little self-indulgent. For example, the American chapter, while using some great research as a jumping off point, launches into an anecdote-filled investigation of California complete with reckless bike riding through Santa Monica with Arnold Schwarzenegger.

Boomerang offers a welcome, alternative perspective on the global crash – it’s not only American financiers and bankers who acted irresponsibly (well, let’s be honest: like greedy assholes). Other countries’ bankers and financiers were also caught up in the irrational exuberance that pervaded the Western economic system. The ease of making masses of money was infectious, and a lot of people ended up screwed because they thought too short term, or not at all. The people in Iceland and elsewhere were, Lewis accurately describes, acting like “lunatics”.

ICELAND

According to Lewis, “no one in Iceland understands what’s happened”. This is not actually surprising, given the characters involved and also because “What the prime minister might say to the Icelanders about their collapse is an open question.” There is a “charming lack of financial experience in Icelandic financial-policymaking circles”. For example, the minister for business affairs is a philosopher; the finance minister is a veterinarian; the governor of the Central Bank is a poet (!). The Prime Minister, Haarde, though, is a trained economist – “just not a very good one”. It’s worth returning to the poet, David Oddsson, who Lewis describes as “the architect of Iceland’s rise and fall”. Oddson fell under the spell of Milton Friedman back in the 1980s. Oddson “went on a quest to give Icelandic people their freedom, by which he meant freedom from government controls of any sort.” Before he was governor of the Central Bank, he was a tax-cutting prime minister who privatized industry, freed up trade, and privatized the banks (in 2002). When he became “weary of prime-ministering, he got himself appointed governor of the Central Bank – even though he had no experience in banking”. These are the types of people who got us all into this big mess. He is certainly one of the more colourful and absurd examples, but he is by no means on his own.

From what I can gather from Boomerang, the Icelandic bankers took the Viking approach to raiding (point boat in one direction, and go at it with absolute gusto) and applied it to finance. To extend the metaphor, it just happened that the boat they were using had giant holes in it, and the captain was actually the court jester. They, like America, also have politicians who have no actual expertise and spurn those who do.

When Iceland’s three brand-new global-size banks collapsed, Iceland’s 300,000 citizens “found that they bore some kind of responsibility for $100 billion in banking losses”, which is approximately equivalent to “$330,000 for every Icelandic man, woman, and child.”

“Iceland instantly became the only nation on earth that Americans could point to and say, ‘Well, at least we didn’t do that.’ In the end, Icelanders amassed debts amounting to 850 percent of their GDP.”

GREECE

In Greece, to refer back to Lewis’s assertion of how each country reacted differently,

“the money was borrowed by the state: the debts are the debts of the Greek people, but the people want no part of them. The Greeks already have taken to the streets, violently, and have been quick to find people outside of Greece to blame for their problems: monks, Turks, foreign bankers.”

Over just two pages, Lewis paints a horrendously damaging portrait of Greece’s economy and financial health (“illness” would be better word) – transportation, education, pensions, healthcare... It’s all an almighty mess – this has, of course, become far more widely known thanks to Greece’s continued collapse and trouble. The Greek chapter wasn’t quite as well structured as the Iceland one – the frequent reference to a particular group of Monks was slightly strange and frustrating, because I knew nothing about them – it took far longer than I would have preferred for him to actually get to them and offer an explanation of what that was all about and why they were relevant. As it turned out, it was pretty interesting. Just the structuring of the chapter wasn’t as strong as others.

Nevertheless, Lewis makes the case of Greece being a unique case in today’s economically disastrous age:

“Virtually alone among Europe’s bankers, they did not buy U.S. subprime-backed bonds, or leverage themselves to the hilt, or pay themselves huge sums of money. The biggest problem the banks had was that they had lent roughly 30 billion euros to the Greek government – where it was stolen or squandered. In Greece the banks didn’t sink the country. The country sank the banks.”

The IMF and the European Central Bank had between them agreed to lend Greece up to $145 billion. In the short term, Greece would be removed from the free financial markets and “become a ward of other states”. “That was the good news”, Lewis writes, as the “long-term picture was far bleaker”. In addition to roughly $400 billion (and growing) outstanding government debt, Greek number crunchers worked out that their government “owed another $800 billion or more in pensions”. In total, therefore, the Greek government owed approximately $1.2 trillion, “or more than a quarter-million dollars for every working Greek.” One more problem? “Those were just the official numbers; the truth is surely worse.”

The Greek system was (and still is) an unsustainable mess, and Lewis provides a damning picture of the country. One major problem is that “the average government job pays almost three times the average private-sector job.” This has led to the truly absurd reality that it is “cheaper to put all Greece’s rail passengers into taxicabs”. This is not a new reality, either, as it was first pointed out by successful businessman-turned-Minister of Finance Stefanos Manos twenty years ago. The picture gets worse when you look at education, defence, and population aging (and connected issues), and healthcare.

The country’s public-school system, “one of the lowest-ranked systems in Europe”, is “breathtaking” in its inefficiency, but “it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland’s”, and parents of public school students “simply assume that they will need to hire private tutors to make sure they actually learn something”. The three government-owned defense companies have billions of euros in collective debts, and ever-mounting losses. The retirement age for Greek jobs classified as “arduous” can be as early as fifty-five for men and fifty for women. This is also the age when the state “begins to shovel out generous pensions”, and more than six hundred Greek professions have somehow managed to get themselves classified as arduous, including hairdressers, radio announcers, waiters, musicians, and many more. The Greek public health-care system “spends far more on supplies than the European average” and, Lewis reports, rife with graft.

Lewis doesn’t spare the criticism when discussing the demonstrations that rocked Greece last summer, either, and has a particularly scathing, unsympathetic impression of the demonstrators:

“Here is Greece’s version of the Tea Party: tax collectors on the take, public-school teachers who don’t really teach, well-paid employees of bankrupt state railroads whose trains never run on time, state hospital workers bribed to buy overpriced supplies. Here they are, and here we are: a nation of people looking for anyone to blame but themselves.”

IRELAND

The financial disaster that befell Ireland shared some elements in common with Iceland’s. It was “created by the sort of men who ignore their wives’ suggestions that maybe they should stop and ask for directions, for instance.” Unlike in Icelandic, where they used foreign money to conquer and buy up foreign places – “trophy companies in Britain, chunks of Scandinavia” – the Irish “used foreign money to conquer Ireland”: “Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was buy Ireland. From each other.”

The book is filled with examples of people who made accurate predictions being demonised, only to be right in the end (a cold comfort, really). Take Morgan Kelly, a University College Dublin economics professor, for example: he figured out what was wrong with the Irish economy, wrote it up and was vilified and attacked by almost everyone. Kelly’s researched showed that,

“more than a fifth of the Irish workforce was now employed building houses. 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.”

Since 1994, the average price for a Dublin home had risen more than 500%, which meant that in some parts of Dublin rents had fallen to less than 1% of the purchase price. Which meant, Lewis offers, “you could rent a million-dollar home for less than $833 a month.” It got to the point when “Irish home prices implied an economic growth rate that would leave Ireland, in twenty-five years, three times as rich as the United States.” Since 2000, Irish exports had stalled and the economy had become consumed with a fervent need to build houses, offices, and hotels. “Competitiveness didn’t matter,” says Kelly. “From now on we were going to get rich building houses for each other.” The extent of the house-building-fever in Ireland is ultimately what brought it down. And when you look at the facts, it’s a madness that took over the country:

“Ireland’s Department of the Environment published its first audit of the country’s new housing stock in 2009, after inspecting 2,846 housing developments, many of them ghost estates. The government granted planning permission for 180,000 units, of which more than 100,000 are unoccupied. Some of those that are occupied remain unfinished. Virtually all construction has now ceased. There aren’t enough people in Ireland to fill the new houses; there were never enough people in Ireland to fill the new houses.”

GERMANY

It’s not just the financial sectors that Lewis looks at – he casts his eye over the societies as well, looking at how they interact amongst themselves, and so on. For Iceland, he looks at the difference between men and women. The introduction to his chapter on Germany, sadly, took a more sophomoric approach. I’m really not sure we needed four pages to establish the centrality of scatological imagery and vocabulary to German culture. Seemed excessive, and became less interesting with each page. It was all a rather extended way to set up his argument (quote from p.136 – “Germans long to be near the shit...”). After we get beyond this, Lewis lays out the two sides of the economic argument and reality of Germany’s role in the Euro crisis. And, I must say, I’m somewhat more sympathetic to the Germans than I am to the Greeks or Irish or Icelandics (although, no Icelander is asking for sympathy, as far as I could tell from Lewis’s chapter on the cold island nation).

“The German people all know at least one fact about the euro: that before they agreed to trade in their deutsche marks their leaders promised them, explicitly, they would never be required to bail out other countries.”

The German people seem to have been left with the severely fuzzy-end of the Euro-economic lollipop, and German public opinion clearly expresses and “incomprehension and outrage that other people can behave so irresponsibly.”

This chapter examines the role Germany finds itself with – that of either saviour or destroyer. It is presented with two choices (which it has still not properly settled on, today) – either it bails out the rest of irresponsible Europe, or it insists on painful structural reforms that will, in Lewis’s words, “magically and radically” transform the Greeks et al “into a people as efficient and productive as the Germans”.

“The only economically plausible scenario is that the Germans, with a bit of help from a rapidly shrinking population of solvent European countries, suck it up, work harder, and pay for everyone else. But what is economically plausible appears to be politically unacceptable.”

Germany is not as blameless as some of the facts would suggest. They did, after all, play the part of enabler:

“during the boom German bankers had gone out of their way to get dirty. They lent money to American subprime borrowers, to Irish real estate barons, to Icelandic banking tycoons, to do things that no German ever would do.”

USA/CALIFORNIA

Lewis uses Arnold Schwarzenegger’s experiences as governor as a perfect way to explain how California and, in some ways and by extension, the United States is broken. Schwarzenegger tried for years to convince legislators to act appropriately and against their parochial short-term agendas. California, like much of the rest of the United States, has “organized itself, not accidentally, into highly partisan legislative districts”. Californians are electing “highly partisan people to office and then requir[ing] these people to reach a two-thirds majority to enact any new tax or meddle with big spending decisions.” What sets California apart from many other states is the ballot initiative system, which means that, “on the off chance” legislators find common ground, it can be “pulled out from under them by voters”. On top of that, term limits mean that “no elected official now serves in California government long enough to fully understand it”. This is,

“a recipe for generating maximum contempt for elected officials. Politicians are elected to get things done and are prevented by the system from doing it, leading the people to grow even more disgusted with them.”

Lewis builds on California as a case study to extrapolate and comment on the state of America as a whole, and he’s spot-on. Lewis quotes one analyst as describing the Californian system as “actually very good at giving Californians what they want”, which are plentiful services while not having to pay for them – “And that’s exactly what they have now got.””

One of the ever-present, classic characteristics of human nature is “people taking what they can, just because they can, without regard to the larger social consequences.” This, Lewis writes,

“isn’t a problem with government; it’s a problem with the entire society. It’s what happened on Wall Street in the run-up to the subprime crisis… Everywhere you turn you see Americans sacrifice their long-term interests for a short-term reward.”

Conclusions

Each chapter in Boomerang builds on and refers back to what has come before it, so we start to see comparisons between the various cultures he examines as the book progresses. This is all well and good, but I think it does mean the chapters get ever-longer, and feel a little like they’re dragging from time-to-time. It might have been better to keep much of the comparison until a concluding chapter, rather than merely extend each successive chapter? There are plenty of conclusions that can be drawn from the text, certainly, and I’ve included many of them in this review. I just think it would have been helpful to offer some closing remarks to sum up the book.

So, for me, the main weakness of Boomerang lay in its structure. It feels a little aimless without a conclusion, and many people might just think to seek out the chapters/articles in their original media (for example, the California chapter was originally in Vanity Fair). There is sort of an overall, unifying theme, but it’s difficult to put one’s finger on it. Really, this is a number of articles tied together without a huge amount of effort to turn it into a single body of work. This is a pity, as it’s got a lot of great content.

Lewis’s trademark fluid and accessible prose are certainly here, and Boomerang taught me a lot about wider effects and causes of the recent economic collapse. I certainly feel better informed afterwards than I did before. That Lewis is able to write about these topics in such a clear way should be applauded and rewarded with ever-bigger audiences.

If readers think of this as a collection of articles, and that’s all, then there should be no problem. Readers looking for a single, unified body of work will probably come away slightly disappointed, if entertained and a little the wiser. It’s perhaps a bit strange to say so, given my issues with the structure, but this is a pretty important book, and I strongly urge everyone to read it.

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