Saturday, April 15, 2017

Boomerang by Michael Lewis (Book Review #8 of 2017)

Boomerang: Travels in the New Third World by Michael Lewis

I finished Liars Poker (1989) and Boomerang (2011) consecutively; I'd read some of Lewis' other works years ago (The Big Short, Moneyball, The Blind Side) and some of his Vanity Fair articles that contributed to this book. It is interesting to observe Lewis' progression as a commentator on Wall Street and the financial system over the years. Liars Poker has a rather humorous feel written from a more innocent time, but by Boomerang the choices of Wall Street traders were no longer funny as they contributed to a massive economic crisis and backlash against government institutions and the Western capitalist-democratic system itself. If Lewis is forgiving in Liars Poker, he is quite caustic and ominous in Boomerang.

Much of this book is made up of long-form articles Lewis wrote as he traveled Europe. Lewis' Vanity Fair article on Greece ("Beware Greeks Bearing Bonds") is a must-read on how the Eurozone is doomed. The government itself cooked the books and lied to the EU, World Bank, the EU, and everyone else about its budgets. What's to keep other countries from doing similarly? Lewis' stories on Greek priests owning assets is humorous, but avoiding and evading taxes is a national sport.
It may have been able to kick the can for a decade now, but the next economic slowdown or financial crisis will doom it.

Lewis starts in Iceland, whose debt crisis attracted far more attention than a country of 300,000 deserves. But the small population and limited economic potential makes the capital inflow and lending boom even more difficult to understand. Lewis was already a celebrity writer and his visit attracted attention. He was invited to speak to the Prime Minister, but everyone can see the PM there whenever he wants. As the bubble inflated, people moved from fishing to banking-- as though Iceland's banks had discovered a magic elixir that made everyone rich. Economists who had visited and given some warning of bubble bursting were roundly ignored. By the time Lewis gets there in the midst of the meltdown, he is awakened by the noise of people blowing up their Range Rovers because they can no longer make the loan payments and instead rip off their insurance company. Debts are nationalized, people are outraged, but change or prevention of the next crisis did not appear forthcoming. One cultural insight is sexism-- the ruling political party is made up entirely of men.

I suppose this book was controversial because of Lewis' commentary on cultural traits. The European crisis is the result of not only violating the Mundell-Fleming criteria for optimal currency areas but also an attempt to join diverse cultures in harmony. Greek is pretty much a developing country, one need only look back to its independence and rebuilding in the mid-1800s (after war with the Ottomans) to see institutions haven't been modern there for a while; and the monks that Lewis highlights are steepend in a culture that is ancient.

From Greece, Lewis goes to Ireland, where the problem was purely a real estate boom and bust that everyone wanted to ignore. A whopping 25% of Ireland's GDP was in the housing sector as people bought and sold houses that there were not enough to live in. Unlike the US, the big shots and CEOs went down with the banks and were bankrupt. In Ireland, people declaring bankruptcy are publicly shamed and face restrictions on activities like traveling abroad. However, Ireland nationalizes the losses of the banks themselves and justifies this in various ways. Lewis points out that Irish politicians cited law that didn't say explicitly that bondholders and creditors needed to be made whole-- they made up reasons for the bailout that just weren't factual.

Lewis then travels to the mainland, Germany. He begins citing from obscure sources about a weird German fascination with... feces. This fascination is evident in German vernacular, there are many words, idioms, and rumored sexual practices that Lewis armchair psychoanalyzes. He then relates this to how Germans got involved in the financial crisis and are currently dealing with filthy countries like Greece, that need German consent to bailouts. In The Big Short, it's the Germans who were still buying subprime mortgage-backed securities after the rest of the market was finally getting the whiff that they might be...well, feces. German bank runs also led to German bank bailouts. It is powerhouse Germany that basically sets monetary policy for the rest of the Eurozone, which is unfortunate. Greece and Ireland would benefit from higher inflation than would be tolerable to Germany, and the ECB maintained a less-expansionary policy than the US or UK central banks.
In Germany, patriotism is "taboo," contra Ireland, where Lewis writes many people are patriotic even though few Irish patriots actually live in Ireland. Lewis explains the insanity of the German-driven Greece debt restructuring, how increased austerity guaranteed that Greece would not be able to hit its next payoff target leading to the Germans to call for even more austerity, and the vicious cycle continues. Greece is the feces that Germans are fascinated with but don't want to own themselves.

Lest the American reader think the financial crisis is behind him, Lewis travels back to the US to look at the looming unfunded pension crisis that was exacerbated by the recession. From New Jersey to California, there are an estimated $3.5 trillion in unfunded state and local pension liabilities. (I live in Kentucky which, not mentioned by Lewis, is among the worst-funded state pensions in the nation, roughly 11% by some estimates.) This is on top of another estimated $3.5 trillion unfunded for federal pensions. Federal funding is one thing, Lewis focuses on California, whose budget crises seem intractable. He begins by bike riding with Arnold Schwarzenegger (there's an amusing anecdote of him hearing a woman on her cellphone mistake Arnold for Bill Clinton, "another guy with a sex scandal," the ex-Governor quips). Lewis recounts Schwarzenegger's political rise and his battle with Republicans and impossibility of balancing the budget in the face of the housing price crash. Lewis pays attention to the city of Vallejo's unfulfilled promises to police and fire fighters and the angst in the community as the bankrupt city had to cut its public protection and find revenue. There were angry meetings where the police and fire fighters held out against making concessions in their benefits while the citizens got angry-- threatening the very fabric of civic culture. This disaster faces Detroit, New Jersey, Kentucky, Illinois, and a host of others -- not to mention Puerto Rico. These unkeepable promises of politicians that drive Lewis to real moralizing, for which he draws on various other writers.

Lewis makes the point that a culture of instant gratification is killing society. We want our cake now, not when we're 67. As Raguram Rajan pointed out in his book on the financial crisis, housing was one vehicle for people to get rich quick. Politicians loved Fannie and Freddie and low-interest loans for low-income people because housing creates jobs for low-skilled, middle-class people, helps people feel wealthy and spend more, raises tax revenue for localities as houses increase in value, and happier communities vote for the incumbent. Americans have a time-consistency problem-- we know for our long-term health we should eat right and exercise, but today it feels so good not to do those things. Same thing with credit, we know we'll have to pay it in the future but we want it now; and then when our interest rates reset we cry "foul." Lewis fears that society, as a whole, has lost its ability to self-regulate. As developing countries embrace Western lifestyles and marketing, they too want to "super-size" their fast food and drive up credit card debt (I would personally point to Turkey, currently, as an example). Like all the other financial crises before it, the problem is so obvious that no one wants to see it. Lewis finds this maddening. He's been writing about this behavior since Liar's Poker, and Boomerang makes it sound like he's finally pulling his hair out, saying "Stop the madness!"

I give this book 4 stars out of 5.

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