The Global Financial Collapse
Wednesday - December 07, 2011
In his new book, Boomerang: Travels in the New Third World (W.W. Norton, $25.95), Michael Lewis tells further tales of the 2007 global financial collapse. Lewis explored its root cause Wall Streets’ bundling, securitizing and sale of bad to atrocious mortgages two years ago in The Big Short: Inside the Doomsday Machine. In Boomerang he travels to Iceland, Greece, Ireland, Germany and California to examine the damage.
In Iceland, Lewis found “a spectacularly bankrupt nation ... a nation of extremely wellto-do, well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. ... An entire nation without immediate experience or even distant memory of high finance had gazed upon Wall Street and said, ‘We can do that.’”
And they did. Iceland became less a nation than “a hedge fund,” complete with a stock market whose value rose nine times between 2003 and 2007 while its real estate prices and average family income tripled. With money borrowed from abroad, Icelanders bought and bought and bought. When 2007 rolled around, Iceland’s loanfriendly banks and debt-ridden citizens went belly-up.
In Greece, Lewis discovered a nation of tax-dodgers, where “the average government job pays almost three times the average private sector job” and government corruption paid even more.
Greek banks, though, remained virtuous and refrained from buying “U.S. subprimebacked bonds, or leverage themselves to the hilt, or pay themselves large sums of money. ... In Greece the banks didn’t sink the country. The country sank the banks.”
But the stupidity of Irish bankers matched that of Iceland’s.
“Even in an era when capitalists went out of their way to destroy capitalism,” writes Lewis, “the Irish bankers had set some kind of record for destruction.” They lent their euros willy-nilly to developers and their house-hungry fellow citizens. Immigrants flooded the country, along with corporate tax evaders. Everybody looked for loans. Ireland’s banks obliged.
It resulted in an ever-expanding housing bubble.
“A bubble is inflated by nothing firmer than people’s expectations,” writes Lewis. And all such bubbles burst “the moment people cease to believe that house prices will rise forever.” That moment came, Ireland’s real estate market crashed, and Ireland became “the third most likely country in the world to default,” eclipsed only by Venezuela and Iraq.
Germany remains the solid center of the European Union, the economic savior of lost Greece, Ireland, Iceland and whichever other state edges toward the brink of failure. Its citizens refused to take part in the excessive borrowing that seized the rest of Europe and the United States from 2002 to 2008.
“Other countries used foreign money to fuel various forms of insanity,” Lewis writes. “The Germans, through their bankers, used their own money to enable foreigners to behave insanely. ... They lent money to American subprime borrowers, to Irish real estate barons, to Icelandic banking tycoons, to do things that no German would ever do.”
Lewis brings it all home to Arnold Schwarzenegger and the crises of the once most prosperous of the United States. California’s highly partisan, taxadverse, rule-bound political culture reduced Schwarzenegger from one of the country’s most popular governors to one who left office with few accomplishments and a 25 percent approval rating.
Lewis’s Boomerang alternates between terror and laughter. It teaches the globalization of economic insanity.
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