[9 February 2012]
As I write these words, world leaders from the public and private sectors are convened in Davos, Switzerland for the annual meeting of the World Economic Forum. The current state of the global economy casts an ominous shadow over the gathering as the International Monetary Fund’s recently released World Economic Outlook predicts slower than expected growth and anxiety over the eurozone’s sovereign debt crisis finds little promise of relief. All eyes in Davos are on the Germans, whose economy has somehow emerged from the global financial crisis relatively unscathed, and who now bear the burden of financing the recovery of their less fortunate eurozone neighbors, or standing aside and allowing them to fail.
Countries throughout the region, from the worst offenders such as Greece, Ireland and Portugal to Italy, Spain and even France amassed massive debts throughout the credit boom of the early ‘00s that may prove insurmountable unless they continue to receive bail out funds from Germany, the IMF and the European Central Bank. Nobody really knows what will happen if any or all of these countries default on their loans, but the result would undoubtedly be catastrophic for the world economy.
The conditions of easy credit, wild speculation and obscenely overvalued investments that lead to the current crisis form the subject of best selling author and journalist Michael Lewis’ latest investigation into the complexities and absurdities of the global economy. Lewis’s Boomerang: Travels in the New Third World explores the second wave of the global financial crisis in which the economies of entire nations are collapsing alongside their financial institutions and investment firms.
Lewis, who holds an MSc from the London School of Economics, is famous for reducing complex financial systems into clear, accessible and even entertaining language in books such as The Big Short, Liar’s Poker and Moneyball. Here, he trains his focus upon some of the biggest losers in the current financial calamity: namely Iceland, Greece, Ireland and the state of California, in an attempt to expose the unprecedented levels of greed, irresponsibility and excess that characterized the boom years and lead to the eventual collapse of the world economy. He also considers the unique ability of Germany to withstand the collapse, and its current role as reluctant and ambivalent savior of the eurozone nations.
Throughout, Lewis plays the role of “financial disaster tourist”, traversing the globe in search of people and places that might reveal something about the nature of the ongoing crisis, and its unique manifestations within each locale that he visits. His approach combines historical and economic analysis with first person travel writing, for a style that is, at times, illuminating but also often confounding, as Lewis seeks to locate causal relationships between the conditions of economic collapse and each country’s distinct “national character”.
His travels begin in Iceland, where a group of wildly ambitious, American educated young men transformed this once egalitarian society into a massive hedge fund, taking out billions of dollars in short term loans and using the money to buy assets at vastly inflated prices. Between 2003 and 2007, the Icelandic stock market grew nine times over, real estate values tripled and the entirety of this newly generated wealth was directly connected in one way or another to the investment banking industry. When the markets collapsed, the Icelandic citizens found themselves suddenly accountable for over $100 billion dollars in banking losses, working out to around $330,000 for each citizen, and a national debt totaling 850 percent of GDP.
Lewis describes the strange trajectory of Iceland, from isolated island nation to epicenter of international finance as the result of a combination of historical, economic and cultural factors. Beginning in the ‘70s with the privatization of the fishing industry, and with the more recent harnessing of Iceland’s vast geothermal resources for the production of smelt aluminum, the Icelandic economy generated vast amounts of new wealth. Much of this wealth was directed towards cultivating a highly educated populace that found themselves suddenly “unsuited for the work available to them.” Lewis characterizes the situation as such: “All these exquisitely schooled, sophisticated people… are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. At the dawn of the twenty-first century, Icelanders were still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might do it. Enter investment banking.”
In addition to these unique historical and economic circumstances, Lewis argues that there’s also something inherent in the national character of Iceland that lead the country to such heights of financial success, and resulting depths of ruin: “Icelanders — or at any rate Icelandic men — had their own explanations for why, when they leapt into global finance, they broke world records: the natural superiority of Icelanders.”
It’s in this combination of overconfident masculine egotism and nationalistic pride that Lewis locates the origins of Iceland’s meteoric rise and ensuing collapse within the realm of international finance, and in this case, his diagnosis is quite convincing. But this tendency to locate the preconditions of the financial crisis within characterizations of national identity rather than in the underlying systemic issues of global capitalist markets is carried throughout Lewis’s book in a perplexing and oddly reductive fashion.
In Greece, Lewis finds rampant government waste and corruption, an ailing tax revenue system and wildly irresponsible borrowing enabled by the adoption of the Euro to be an effect of the essentially selfish and mistrustful nature of the Greek people. According to Lewis, in Greece “no success of any kind is regarded without suspicion. Everyone is pretty sure everyone is cheating on their taxes, or bribing politicians or taking bribes, or lying about the value of his real estate. And this total absence of faith in one another is self reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible.”
In Ireland, he likens investor confidence in the dangerously overvalued real estate market to the Irish people’s persisting belief in the existence of fairies, and in Germany he explains the country’s ability to enable the irresponsible financial behavior of other nations while remaining immune to the ensuing systemic collapse as evidence of their deeply ingrained cultural longing “to be near shit, but not in it.” While it’s true that these kinds of generalizations may lend a kind of absurdist entertainment value to Lewis’s investigative reporting, they do little to uncover the underlying systemic causes that lead to the collapse of the financial industry, taking with it the economies of entire nations. Moreover, there is something that is, ironically, very American about traveling to other countries only to return home with a newly formed collection of exotic stereotypes about the people and places that you have visited.
When Lewis turns to domestic disaster tourism in the state of California where the average debt of each citizen is nearly twice that of their income, he finds the root of the crisis in good old fashioned American excess: “Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could, without thinking about the long term consequences.” Against this peculiarly American need for instant gratification, Lewis proposes that a return from overabundance to economic conditions of scarcity might actually be a good thing.
His book ends with the example of a Fire Chief in the recently bankrupt California city of Vallejo whose force had recently been cut from 121 to 67 for a city of 112,000 people: “With fewer fire stations and fewer firefighters in them, the response times were going to be slower. He’d need to find a new way to speed things up. A longer response time meant less room for error; a longer response time meant the fires they’d be fighting would be bigger. He had some thoughts about the most efficient way to fight these bigger fires. He began in short to rethink firefighting.”
From this depressing example of our debt ridden governments’ sacrifice of even the most essential of public services, Lewis somehow transitions to this vague and unconvincing appeal for hope in the economic future: “When people pile up debts they will find difficult and perhaps even impossible to pay, they are saying… 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.”
For the world leaders convened in Davos, the payoff to which Lewis refers has yet to materialize as the eurozone teeters on the brink of total collapse, and yes, this kind of blind faith in the market’s ability to correct itself does seem a bit idiotic in the midst of what appears to be an ever deepening crisis within the structures of globalized capitalism itself. It seems that with Boomerang, Lewis’s widely praised gift for simplifying may have been taken a little too far.