Spiked Review of Books, 25 November 2011
The fallout from the 2008 financial crisis seems to have no end in sight. Eurozone leaders seem unable to solve the sovereign-debt crisis, even after their walk to Canossa to beg China to bail them out, while American politics continues to be shaped by debt and a flat-lining economy. It may be timely, then, that Michael Lewis, author of numerous best-selling financial books, provides us with a personal guide to some of the economies worst affected in his Boomerang: the Meltdown Tour.
Lewis begins Boomerang with an encounter with American hedge-fund manager Kyle Bass, whom he interviewed for The Big Short, his book about the 2008 crisis. Back then, when Greece was still known mostly for its ancient philosophers rather than strikes and debt, and most people were concentrating on the failed banks and their dodgy financial instruments, Kyle Bass was speculating where the crisis was going to go next. In his view, the ‘deeper social and economic problems that gave rise to it remained’, as governments had simply paved over the crisis with public spending. Just as the banks had gone bust, governments would soon follow. Mistakenly, as Lewis himself now admits, he dismissed Bass back in 2008, feeling the crisis there and then was more important.
Lewis’ first stop on his meltdown tour is Iceland. As he sees it, a country with little history of banking was exposed to a new, deregulating government in the early 2000s. Subsequently, young Icelanders fresh out of American business schools, alongside a central bank run by someone trained in poetry, were encouraged to create a ‘Wall Street on the Tundra’, engaging in speculation on assets with seemingly endless price rises. Eventually, when the prices of those inflated assets fell, the Icelandic banking system collapsed. Lewis’ explanation for what happened, however, is rather lacking in insight. As he puts it, the Icelandic character – macho, arrogant and risk-taking – was the nation’s downfall.
Greece is treated little better. Lewis simply ascribes the country’s massive debt problems to Greeks milking the state for everything they could. As he puts it, the Greeks ‘turn[ed] their country into apiñata stuffed with cash, and allow[ed] as many citizens as possible to take a whack’.
The grasping Greeks done with, Boomerang’s national stereotyping continues apace: the Irish supposedly were trying to build too many homes with their cheap credit, out of some innate desire to be ‘no longer Irish’. The Germans, being orderly and rule-following folk, played it safe at home, we are told. However, the nation’s strength was also its weakness. The orderly Germans proved incapable of comprehending that top-rated financial assets might drop in value, and that the sellers of Wall Street might be ripping them off.
Lewis’ focus on the supposed ‘national character’ of nations to explain the state of their economies is far from helpful. He would rather focus on the characteristics of the Greeks and Irish, be it a penchant for borrowing or a desperation to leave Irishness behind, than look at some of the deeper problems that have led to the crisis. For instance, putting the diverging economies of Europe into a single monetary union is surely a greater problem than the national types of Lewis’ caricatures. Peripheral countries such as Greece and Ireland, with their exchange rate valued the same as that of an industrial powerhouse like Germany, were at a severe disadvantage, making their exports more expensive and stunting their economic growth, something that was disguised for a while by a deluge of cheap credit. And growth, lest it be forgotten, would actually be a real solution to the problems of indebted nations.
While recognising that ‘cheap credit rolled across the planet between 2002 and 2008’, Boomerangdoes little to explain why. This prevents Lewis from grasping the fact that cheap credit has largely been the result of government policies. That is, it represented a vain attempt to paper over some of the deeper economic problems afflicting the developed economies, such as low levels of investment, research and development, and innovation. Politicians, lacking the political will to address these underlying problems in their economies, opted instead to extend cheap credit to create a housing boom, to raise government spending and to liberalise lending laws.
However, Boomerang is not all bad. It is full of interesting facts and stories about the countries Lewis visited on his ‘meltdown tour’. We learn, for instance, that Greece was able to run a 15 per cent budget deficit while claiming it was only at three per cent; that a Greek monastery ripped off the Greek tax payer in a land deal; that Iceland has replaced a functioning exchange rate with one set arbitrarily by the government – leading Icelanders to fear what they will be charged if they use a credit card to purchase goods abroad, and a whole host more.
While Boomerang is rather light on economics, it does provide an enjoyable and informative overview of each of the countries covered, including an array of interviews with finance ministers and CEOs. But for those wishing to get to grips with the economic crisis, it serves at best as an introduction or a break from some of the more boring, yet informative, books that have been released on the subject.