Sounds like it would be a good
book.
David
"Remember,
to a liberal,
anyone who makes money in an endeavor frowned upon by
liberals is 'greedy' and
any person who expresses an idea contrary to basic liberal
dogma is preaching
'hate.' How shallow
these people are."—Neal
Boortz
On 11/23/2011 4:55 PM, [email protected] wrote:
Very Radical Centrist --in a perverse sort of way. You can
almost say
that the thesis is : " Everyone is
wrong and no-one is right except a few contrarians.
Actually, at least for now, that kind of summarizes my own
philosophy.
Billy ( feeling more sarcastic than usual, today )
PS
Some editorial comments in the text by way of BF
emphases.
Lesson to take away :
Herd mentality rules in our age of hyper-specialization.
This applies not only to
money / economics insofar as very few people really know
much about how
the overall system works, but in many other areas of life.
This has been true
in spades about the politics of homosexuality, and was
all-too-true with respect
to the issue of Islam ( there has been improvement in
public understanding
in recent years ) until the early 2000s, and you can add
still other themes.
Fact is, though, there is no substitute for actually
knowing a field / discipline.
This means that none of us can be competent in more than ,
say, 4 or 5 areas.
Maybe a few more if you really work at it, but there are
limits.
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![NYRB Logo]()
Boomerang:
Travels in the New Third World![]()
by Michael Lewis
Norton, 213 pp., $25.95
Most people with a special interest in the events
of the credit crunch and the Great Recession that
followed it have a private benchmark for the
excesses that led up to the crash. These
benchmarks are a rule of thumb, a rough measure of
how far out of control things got; they are
phenomena that at the time seemed normal but that
in retrospect were a brightly flashing warning
light. I came across mine in Iceland, talking to a
waitress in a café in the summer of 2009, about
eight months after the króna collapsed and the
whole country effectively went bankrupt under the
debts incurred by its overextended banks. I asked
her what had changed about her life since the
crash.
“Well,†she said,
“if I’m going to spend some time with friends
at the weekend we go camping in the
countryside.â€
“How is that
different from what you did before?†I asked.
“We used to take a
plane to Milan and go shopping on the via
Linate.â€
Since that conversation, I’ve privately graded
transparently absurd pre-crunch phenomena on a
scale from 0 to 10, with 0 being complete
financial prudence, and 10 being a Reykjavik
waitress thinking it normal to be able to afford
weekend shopping trips to Milan.
Many people all over the world went nuts on cheap
credit in the years of the boom—a boom that was
in large part built on an unsustainable spike in
personal and governmental debt. Michael Lewis has
already written a very good book, The Big
Short, about the mechanics of the crash, by
casting around for people who didn’t just
foresee it, but who made huge bets that it would
happen, and profited vastly when it did.1
Boomerang is about what he has come to see
as the larger phenomenon behind the credit crunch:
the increase in total worldwide debt from $84
trillion in 2002 to $195 trillion now. The thesis
is that “the subprime mortgage crisis was more
symptom than cause. The deeper social and economic
problems that gave rise to it remained.†It is
these deeper problems that are dominating economic
news at the moment, and led to the desperate
measures announced at the European summit on
October 27 and to the aborted Greek plan to hold a
referendum that followed. The G20 Economic Summit
of November 3–4 was dominated by discussion of
the Eurozone crisis, but ended with no coherent
plan in view, and none has emerged since. Boomerang
tells the story of how we got here, and in the
course of doing so gathers together an extensive
arsenal of data at the top end of my 0–10
Reykjavik waitress scale: the fact that Greek
railways have €300 million in other costs; the
fact that the Californian city of Vallejo spent 80
percent of its budget on the pension and pay of
police, firemen, and other “public safetyâ€
workers; the fact that between 2003 and 2007,
Iceland’s stock market went up ninefold; the
fact that in Ireland, a developer paid €412
million in 2006 for a city dump that is now,
because of cleanup costs, valued at negative €30
million.
Lewis has noticed something
important about these excesses: that the precise
details of how people ran amok varied from culture
to culture. Cultural and historical faultlines
were exposed by the boom, and behavior varied
accordingly.
The credit wasn’t just money,
it was temptation. It offered entire societies
the chance to reveal aspects of their characters
they could not normally afford to indulge.
Entire countries were told, “The lights are out,
you can do whatever you want to do and no one will
ever know.†What they wanted to do with money in
the dark varied. 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.
Lewis is an unmatched nonfiction storyteller, and
a large part of his talent is the way he attaches
his stories to the people who help him tell them.
Nonfiction has a payload and a delivery system. In
Lewis’s work, the delivery system is usually a
man, a forthright contrarian who thinks clearly
and talks vividly and whose dissent from the
mainstream is not a matter of theory but of
practice: Lewis likes people who don’t just
speak against the conventional wisdom, but who bet
against it, and whose bets come off. His first
interlocutor, Kyle Bass, is a classic example.
Bass is a fund manager who made a fortune
“shorting†toxic mortgage assets, and then
became preoccupied by the subject of global debt
levels. Bass is, to put it very mildly, a
pessimist on the subject of sovereign debt:
Spain and France had accumulated debts
of more than ten times their annual revenues.
Historically, such levels of government
indebtedness had led to government default.
“Here’s the only way I think things can work
out for these countries,†Bass said. “If they
start running real budget surpluses. Yeah, and
that will happen right after monkeys fly out
of your ass.â€
The prognostications that ensue from Bass’s
analysis are gloomy, and form the basis of Boomerang‘s
big-picture overview. “The financial crisis of
2008 was suspended only because investors believed
that governments could borrow whatever they needed
to rescue their banks. What happened when the
governments themselves ceased to be credible?â€
Bass thinks that the only reliable investments
are guns and gold, and has just bought twenty
million nickels, because the metal in a five-cent
nickel is worth 6.8 cents, and they are going to
be a stable source of value when things go wrong.
(If you’re wondering how easy it is to get hold
of 20 million nickels, the answer is, not very.)
There are many equally vivid pen portraits in Boomerang,
usually of forthright contrarians: a super-frank
German ex-banker, a doomsaying Irish economist,
two Greek tax collectors who hate each other, and
the former governor of California.
Schwarzenegger gives an interview while he and
Lewis and several advisers go zooming through Los
Angeles on their bicycles, part of the
governor’s cardio routine:
He wears no bike helmet, runs red
lights, and rips past DO
NOT ENTER signs
without seeming to notice them, and up one-way
streets. When he wants to cross three lanes of
fast traffic he doesn’t so much as glance over
his shoulder but just sticks out his hand and
follows suit, assuming that whatever is behind him
will stop. His bike has ten speeds but he uses
just two: zero, and pedalling as fast as he
can….
It isn’t until he is forced to stop at
a red light that he makes meaningful contact with
the public. A woman pushing a baby stroller and
talking on a cell phone crosses the street right
in front of him, and does a double take.
“Oh…my…God,†she gasps into her phone.
“It’s Bill Clinton!†She’s not ten feet
away and she keeps talking to the phone, as if the
man is unreal. “I’m here with Bill Clinton.â€
“It’s one of those guys who has had
a sex scandal,†says Arnold, smiling.
Schwarzenegger’s economic adviser gave Lewis
some of the facts of the economic scandal:
This year the state will directly spend
$32 billion on employee pay and benefits, up 65
percent over the past ten years. Compare that to
state spending on higher education [down 5
percent], health and human services [up just 5
percent], and parks and recreation [flat], all
crowded out in large part by fast-rising
employment costs.
Lewis writes that
the same fiscal year that the state
spent $6 billion on prisons, it had invested just
$4.7 billion in its higher education….
Everywhere you turned, the long-term future of the
state was being sacrificed.
By and large, Lewis’s
contrarians tend to be monomaniacs: they are
people who have The Answer. It is a feature of the
financial world, much remarked by Warren Buffett,
that people would rather be wrong in a
group than right on their own; the people who
insist on being right on their own tend to have
the psychological equipment to match.
They are hedgehogs rather than foxes, eyes firmly
on one big thing. There are times when Lewis
himself is a little like that. Boomerang
is unlike his previous books, in that it is a
series of portraits of whole societies. A writer
making society-wide generalizations is picking up
a big and very full bag by a single handle; in
that position, it’s easy to end up writing about
the handle, because it’s the thing on which you
have a secure grip.
For the most part, Lewis’s handles are fitted
to the heavy lifting he makes them do, with the
possible exception of his approach to Germany via
the not-at-all unfamiliar idea that the country
has a national obsession with excrement. [ what
sheiskopf would say any such thing ? ] He quotes
the American anthropologist Alan Dundes: “Clean
exterior–dirty interior, or clean form and dirty
content—is very much a part of the German
national character.â€
That otherwise telling essay is about the state
of the euro, a subject of immense importance at
the moment for the entire global economy. Since
its creation in 1999, the euro has accumulated
enormous imbalances between the economies of its
member states, with Germany in particular running
a big trade surplus and the “peripheralâ€
countries, mainly in Southern Europe, building up
an ever bigger mountain of private and individual
debt. “There was no credit boom in Germany,â€
an official told Lewis. “Real estate prices were
completely flat. There was no borrowing for
consumption. Because this behavior is totally
unacceptable in Germany.â€
It is, or should be, self-evident that this
situation can’t continue forever, but the
problem is that the Germans are showing no
appetite either for becoming less German—i.e.,
paying themselves more, consuming more, and
importing more—or for open-endedly bailing out
the Southern Europeans. “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, that they would
never be required to bail out other countries.â€
That promise has already been broken, and is set
to be broken many times more—though let’s not
forget that these “bailouts†are actually
loans that in principle must be repaid.
Unfortunately, the bailouts are only the
beginning of what is needed to stabilize the euro.
The Eurozone summit of October 27 saw the first
three steps: a “haircut†imposing losses of 50
percent on creditors who own Greek government
debt; a recapitalization of Europe’s banks, to
the tune of €106 billion; and an extension of
the European Financial Stability Facility (EFSF). Further
down the road, some sort of federalization of
European debt is surely inevitable. The likely
step involves the creation of a eurobond, so that
governments can borrow on a continent-wide basis,
with continent-wide guarantees of security. Many
consequences follow from that, not least, as
George Soros has argued in these pages, the need
for some sort of Europe-wide treasury to guarantee
it.2 That in
turn implies the creation of something like a new
European ministry of finance, which must surely
also have powers of collection and enforcement in
relation to taxation.
Say that to Germans, however, and what they hear is that
they will be required to pay other countries’ debts—and
the painful truth is that yes, they will. The only way of
reconciling the economic necessities and political
requirements is for Europe to grow closer in its fiscal
governance, a process that will involve painful losses of
sovereignty and years of difficult adjustment in national
habits. The Treaty of Rome, which founded the European
Economic Community in 1951, plainly states that its goal was
the “ever closer union†of European peoples—but nobody
actually believed that would mean anything difficult or
costly. That “ever closer union†has now become an
economic requirement, one that is likely to bring with it
many years of political and fiscal discomfort. In the
meantime, “the only economically plausible scenario,â€
Lewis writes, “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.â€
This might sound like a harsh truth, but
it’s pretty mild by the standards of Boomerang,
because Germany’s economy is in better condition than any
other place Lewis visits. It will need to be, because the
need for the Germans to pay for the Euro’s failings is
only going to grow. The measures announced on October 27 all
showed movement in the correct direction, but the sums
involved were nowhere near big enough and the mechanism to
extend the EFSF
looked short on detail. When the steps were announced,
attention immediately focused on one number: the price which
the Italian government must pay when it borrows money. Italy
has to roll over €330 billion of debt next year. The cost
of that debt is of huge consequence for the Euro, because if
it is too high, Italy won’t be able to pay it back, and if
Italy can’t pay it back, then the whole Euro project is in
big, potentially terminal trouble.
Unfortunately, the new plan got the thumbs-down: markets
nudged the yield on Italian debt dangerously close to 6.5
percent, a number generally regarded as unsustainable. So
the October 27 deal, generally seen as an attempt to buy
time while more comprehensive plans are made, may not even
do that. I don’t think Lewis would be surprised at the way
this is playing out, and the fact that the full extent of
the debt problems are still not being faced. Some of his
targets in Boomerang date from the boom years, but
many are firmly located in the present. The angriest of
these essays is about Greece, which he sees as a country in
the grip of “total moral collapse.â€
Corruption and tax evasion are endemic, and successive
governments have created a state in which citizens see
themselves as deserving beneficiaries of state patronage;
they expect to live cushioned from economic realities, and
to retire at fifty-five for men and fifty for women if they
do something “arduous,†a definition that includes
“hairdressers, radio announcers, waiters, musicians, and
on and on and on.†Lewis finds Greece seething at the
moment, full of outrage at the demands for “austerityâ€
imposed on it from outside: “a nation of people looking
for anyone to blame but themselves.â€
Even if it is technically possible for these
people to repay their debts, live within their means, and
return to good standing inside the European Union, do they
have the inner resources to do it? Or have they so lost
their ability to feel connected to anything outside their
small worlds that they would rather just shed their
obligations? On the face of it, defaulting on their debts
and walking away would seem a mad act: all Greek banks would
instantly go bankrupt, the country would have no ability to
pay for the many necessities it imports (oil, for instance),
and the government would be punished for many years in the
form of much higher interest rates, if and when it was
allowed to borrow again. But the place does not behave as a
collective…. It behaves as a collection of atomized
particles, each of which has grown accustomed to pursuing
its own interest at the expense of the common good.
There’s no question that the government is resolved to at
least try to re-create Greek civic life. The only question
is: Can such a thing, once lost, ever be re-created?
To Lewis, Greece marks a limit case for just how
far a developed society can go off the rails. The other
case studies, of Iceland, Ireland, and California, involve
a great deal of folly, but those societies don’t refuse
to admit the realities quite as absolutely. That’s
not to say that Lewis is sparing about the behavior he
describes, much of it at the top end of my 0–10 scale.
Some of it verges on black comedy, especially in Iceland:
Yet another hedge fund manager explained Icelandic
banking to me this way: you have a dog, and I have a cat. We
agree that each is worth a billion dollars. You sell me the
dog for a billion, and I sell you the cat for a billion. Now
we are no longer pet owners but Icelandic banks, with a
billion dollars in new assets. “They created fake capital
by trading assets amongst themselves at inflated values,â€
says a London hedge fund manager. “This was how the banks
and investment companies grew and grew.â€
When the value of those assets collapsed, the banks
immediately followed, leaving debts equivalent to $330,000
for every Icelander.
The flavor of the mania in Ireland was different again.
There, it was a classic property bubble, one that followed a
remarkable period of genuine and sustained economic growth.
From the late 1980s, Ireland had a number of good years,
during which the economy grew rapidly (hitting an annual
high of 11.8 percent), prosperity was widely shared, and the
country rocketed up to fifth place in the UN’s Human Development Index. This
was succeeded by a crazy excess of speculation in land
values, beginning in the early years of the new century and
ending with the biggest economic contraction seen in any
country since the Great Depression.
The widely shared analysis in Ireland is that the
disaster was caused by an unholy trinity of bankers,
politicians, and house-builders, and involved a great deal
of systematic corruption on the part of all three
(especially over issues such as rezoning land). Lewis is
gentler on the bankers at the heart of the crash than the
Irish themselves are: he thinks that the bubble “wasn’t
as cynical†as in other countries. The people indulging in
the speculation genuinely believed that they were going to
get rich. It was a bubble of greed and stupidity and excess,
but not one in which the rich systematically stole from the
poor. Perhaps the numbers are so bad that no more grimness
needs to be troweled on:
A single bank, Anglo Irish, which, two years
before, the Irish government claimed was suffering from a
“liquidity problem,†confessed to losses of 34 billion
euros. To get a sense of how “34 billion euros†sounds
to Irish ears, an American thinking in dollars needs to
multiply it by roughly one hundred: $3.4 trillion. And that
was for a single bank. As the sum total of loans
made by Anglo Irish Bank, most of it to property developers,
was only 72 billion euros, the bank had lost nearly half of
every dollar it invested.
When the Irish banks collapsed, the state
stepped in and guaranteed not just the deposits of their
customers, but all the banks’ liabilities. Nobody knows
quite why they covered the losses of the bondholders who had
lent money to these fundamentally broken companies: but they
did, and the promise in turn bankrupted Ireland, leading
directly to a European Union and International Monetary Fund
bailout. The fallout is going to dominate life in Ireland
for years.
It’s a sad story; Boomerang is a sad book, as
well as a vivid and funny and enlightening one. Lewis ends
it with a tentative glimpse of optimism in the formerly
bankrupt Californian town of Vallejo, where a new city
manager and a new head of the fire department are finally
trying to get the municipality functioning again. In a city
of 112,000 people, the fire department was cut from 121 to
67; it handles 13,000 calls a year, most of them pointless.
The new fire chief, Lewis writes,
sat down and made a list of ways to improve the
department…. He began, in short, to rethink firefighting.
When people pile up debts they will find it
difficult and perhaps even impossible to repay, they are
saying several things at once. They are obviously saying
that they want more than they can immediately afford. They
are saying, less obviously, that their present wants are so
important that, to satisfy them, it is worth some future
difficulty. But in making that bargain they are implying
that when the future difficulty arrives, they’ll figure it
out. They don’t always do that. But you can never rule out
the possibility that they will. As idiotic as optimism can
sometimes seem, it has a weird habit of paying off. [ ??? ]
Outside the pages of Boomerang, there are glimpses
of optimism in both Iceland and Ireland—though the
countries have taken interestingly opposite routes to their
longed-for recoveries. Iceland defaulted and effectively
told financial markets where to stick themselves,
administering severe “haircuts†to investors in the
process, and let its banks collapse rather than pour
government money in to prop them up. (Iceland had no choice:
the banks were many times bigger than its entire economy.)
The currency crashed, thus boosting exports and cutting
imports, and now the economy is growing and unemployment is
falling.
Ireland did the opposite: it ruinously stood by its
bankrupt banks, stayed inside the euro, and took the
medicine of austerity packages; it too is now showing signs
of tentative return to growth. Both countries should be able
to recover, absent a full European meltdown. A
crucial component of both countries’ nascent turnaround
has been a willingness to look the severity of their
predicament straight in the eye, and tell themselves the
truth about it.
That doesn’t mean that Boomerang leaves the
reader feeling optimistic; an honest book about the current
economic condition of the Western world couldn’t do that.
One of the lasting feelings I took away from my own
experiences of “financial disaster tourism,†as Lewis
calls it, was one of sadness. I went to the same countries
and met different people who told very similar stories. It
is easy to diagnose a basic failure of responsibility as one
of the causes of the debt crisis; and there’s no denying
that such failures took place on the widest imaginable
scale, from individuals up to governments.
I think, though, that the failure of responsibility was
linked to a failure of agency—the individual’s ability
to affect the course of events. An enormous number of people
today feel as if they have very little economic agency in
their own lives: often, they are right to feel that. The
decisions that affect their fates are taken far above their
heads, and often aren’t conscious decisions at all, so
much as they are the operation of large economic forces over
which they have no control—impersonal forces whose effects
are felt in directly personal ways.
It is difficult to feel responsible when you have
no agency. Many of the people who did stupid things—who
did things on that 0–10 scale—did so because everyone
around them was doing them too, and because loud voices
were telling them to carry on. The Icelanders who
bought cars with foreign currency loans were sold them by
financiers who promised that it was a good idea; the Irish
who bought now-unsellable houses on empty estates were told,
by builders and bankers and the state, that this was a
once-in-a-generation opportunity; the Greeks who are, at the
time of writing, furiously rebelling against austerity
measures were falsely told that the state could afford to
look after them, and arranged their lives accordingly.
The collective momentum of a culture is, for more
or less everybody more or less all of the time,
overwhelming. This is especially true for anything to do
with economics. The evidence is clear: it is easy to
mislead people about money, and easy to lead members of
the public astray both individually and en masse, because
when it comes to money, most of us, most of the time,
don’t know what we’re doing. The corollary is also
clear: the whole Western world misled itself over debt,
and the road back from where we are goes only uphill.
—November 10, 2011
1 Norton, 2010; see Jeff Madrick, "At the Heart of the
Crash," The New York Review , June 10,
2010.
2 "Does the Euro Have a Future?," The New York Review
, October 13, 2011.
--
Centroids: The Center of the Radical Centrist Community
<[email protected]>
Google Group: http://groups.google.com/group/RadicalCentrism
Radical Centrism website and blog: http://RadicalCentrism.org
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Centroids: The Center of the Radical Centrist Community <[email protected]>
Google Group: http://groups.google.com/group/RadicalCentrism
Radical Centrism website and blog: http://RadicalCentrism.org
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