10 Economic Lessons From Michael Lewis' Boomerang

Author Michael Lewis' newest book unravels the world's recent financial knots.

September 27, 2011, 1:18 PM

Sept. 28, 2011 — -- Financial breakdowns and schemes can be found anywhere in the world: from the rocky tundra of Iceland, to the public sector of the Golden state, and in a secluded monastery in Greece. American best-selling author Michael Lewis describes the most recent and devastating bubbles and bets in a part-travel, part-investigative financial journalism book, Boomerang: Travels in the New Third World.

Lewis, author of Moneyball, The Blind Side, and The Big Short, crafts his travel tales such that they echo or foretell of problems within American borders. Here are ten lessons for the U.S. that can be gleaned from his book, which will be released Oct. 3.

1. "In Greece the banks didn't sink the country. The country sank the banks."

As members of the European Union debate over a bailout package for Greece, which is on the brink of a default, bystanders scratch their heads over the genesis of its debt problems.

Lewis describes cultural and political practices that contributed to the country's debt problems. Those include a widespread practice of citizens and companies avoiding taxes with nary a slap on the wrist.

"In Athens, I several times had a feeling new to me as a journalist: a complete lack of interest in what was obviously shocking material," Lewis wrote, describing his many interviews with bankers, tax collectors and a former member of parliament.

"Scandal after scandal poured forth. Twenty minutes into it I'd lose interest. There were simply too many: they could fill libraries, never mind a book."

Lewis wrote that when former Greek minister of finance, George Papaconstantinou, came into office October 2009, he found the country's 2009 budget deficit was 14 percent, not the previous estimate of 2.7 percent.

In an interview with the finance minister, now minister for the environment, energy and climate change, Lewis asks how the country's budget figures and other bookkeeping had been fudged.

"We had no Congressional Budget Office," explains the finance minister, comparing it to the U.S. federal economic agency. "There was no independent statistical service."

2. Investment banks aren't off the hook.

Lewis is direct in his criticism of governments' role in financial collapses, but never fails to point out the sins of the global banking sector.

He seems most direct in describing the involvement of investment bank Goldman Sachs in Greece.

"Here, in 2001, entered Goldman Sachs, which engaged in a series of apparently legal but nonetheless repellent deals designed to hide the Greek government's true level of indebtedness," he wrote.

"The machine that enabled Greece to borrow and spend at will was analogous to the machine created to launder the credit of the American subprime borrower – and the role of the American investment banker in the machine was the same."

3. Fishermen are a lot like American investment bankers.

Lewis describes the origins of Iceland's economic collapse, which included deregulation and the the privatization of its major banks.

The cornerstone of Iceland's economy have been fishing and energy, which begged the question how and why Icelandic financiers "who had no experience in finance were taking out tens of billions of dollars in short-term loans from abroad."

Lewis said the Icelandic financial crisis mirrored how the country's fishing industry took off in the early 1970s: "they privatized the fish," in which fishermen were assigned a quota based on past historical catches.

Lewis writes that like bankers, fishers' "overconfidence leads them to impoverish not just themselves but also their fishing grounds."

He writes: "The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention."

4. Band-aids don't help.

Lewis makes other comparisons between the U.S. financial crisis and that of Iceland, the latter which economics professor Bob Aliber of the University of Chicago calls "the perfect bubble."

Ever since Iceland's three major banks, and thus its economic system, crashed in 2008, the country's massive debt has skyrocketed. The debt of Icelanders is 850 percent of GDP in a country the size of Kentucky, compared to the U.S., which reached 350 percent.

After the IMF agreed to loan over $2 billion to Iceland in addition to loans from other countries in 2008, Lewis wrote that one argument of defense was reminiscent of statements from Lehman Brothers and Citigroup during the U.S. financial crisis.

Lewis writes that those two banks said "if only you'd give us the money to tide us over, we'll survive this little hiccup."

Citigroup received over $25 billion from the U.S. government while Lehman Brothers filed for chapter 11 bankruptcy in September 2008.

5. "Not everything in Iceland is different from other places"

Lewis describes an anecdote in which an Icelandic television show producer invites him to be a guest and explain the country's financial crisis, after being in the country for three days.

He finds her response shocking yet vaguely familiar.

"It doesn't matter, she says, as no one in Iceland understands what's happened. They'd enjoy hearing someone try to explain it, even if that person didn't have any idea what he was talking about…" he wrote.

Lewis also compared the desolate atmosphere in Reykjavik, Iceland's capital, to that of Manhattan just as the financial crisis began in the U.S.

He wrote: "Walking around just before the collapse of Lehman Brothers, you saw empty stores, empty streets, and, even when it was raining, empty taxis; the people had fled before the bomb exploded. Reykjavik had the same feel of incipient doom…"

After an interview with Iceland's former Prime Minister Geir Haarde, Lewis summarizes Haarde's version of his country's collapse.

"Foreigners entrusted their capital to Iceland, and Iceland put it to good use, but then, on September 15, 2008, Lehman Brothers failed and foreigners panicked and demanded their capital back."

6. Countries borrow not only the best practices, but the worst.

Lewis writes that the biggest American financial lesson the Icelanders "took to heart" was the "importance of buying as many assets as possible with borrowed money, as asset prices only rose."

Lewis takes another jab at financial architects when he writes that Icelanders "bought stakes in businesses they knew nothing about and told the people running them what to do – just like real American investment bankers!"

Lewis is brutal in his criticism of Icelanders' role in the country's financial collapse, writing "almost certainly Iceland will adopt the euro as its currency, and the krona will cease to exist."

"When you borrow a lot of money to create a false prosperity, you import the future into the present," he writes. "It isn't the actual future so much as some grotesque silicone version of it. Leverage buys you a glimpse of a prosperity you haven't really earned."

7. The messenger always gets attacked.

As countries in the European Union try to intervene with indebted countries in the Eurozone, Lewis said the warning signs were apparent in countries like Iceland, but no one listened.

"Here is yet another way in which Iceland echoed the American model: all sorts of people, none of them Icelandic, tried to tell them they had a problem."

Lewis does not dwell in the book on Standard & Poor's downgrade of the U.S. credit rating on Aug. 5, nor the political controversy of credit rating agencies' high marks of credit default swaps before the financial crash. You can find that in his previous book, The Big Short.

Lewis does write that "one of the causes of the current global financial crisis is that the people who saw it coming had more to gain from it by taking short positions than they did by trying to publicize the problem. Plus, most of the people who could credibly charge Iceland – or, for that matter, Lehman Brothers – with financial crimes could be dismissed as crass profiteers, talking their own book."

8. Remember the ladies.

Lewis writes "one of the distinctive traits about Iceland's disaster, and Wall Street's, is how little women had to do with it."Lewis describes his observations of the male-dominated fishing and finance industry, the latter which has changed its tide since the crash.

Now Iceland has the world's first openly gay head of state, and the country's first female prime minister, Jóhanna Sigurðardóttir. Previous prime minister Geir Haarde went on trial earlier this month for "failures of ministerial responsibility."

Lewis also compares Ireland's financial disaster with that of Iceland's:

"It was created by the sort of men who ignore their wives' suggestions that maybe they should stop and ask for directions, for instance."

9. Nothing lasts forever, even real estate.

Lewis writes that "while the Icelandic male used foreign money to conquer foreign places - trophy companies in Britain, chunks of Scandinavia - the Irish male used foreign money to conquer Ireland. Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was buy Ireland. From each other."

He describes the start of Ireland's collapse as a real estate boom that evolved into a frenzy which caused the a 500 percent increase in the average price of a house in Dublin before the collapse.

"Their real estate boom had the flavor of a family lie: it was sustainable so long as it went unquestioned and it went unquestioned so long as it appeared sustainable."

By 2007, Lewis wrote that "Irish banks were lending 40 percent more to property developers alone than they had to the entire Irish population."

Lewis writes that Irish banks had avoided lending to American subprime borrowers but "all of Ireland had become subprime."

"Otherwise sound Irish borrowers had been rendered unsound by the size of the loans they had taken out to buy inflated Irish property," Lewis wrote.

The debts of Irish banks were private, "owed by them to investors around the world – and still the Irish people have undertaken to repay them as if they were under obligations of the state."

The Irish government nationalized Anglo Irish Bank and its losses of 34 billion euros in January 2009. Later that year, the government created the National Asset Management Agency, "the Irish version of the Troubled Asset Relief Program (TARP), but, unlike the U.S. government, actually followed through, and bought 80 billion euros' worth of crappy assets from the Irish banks."

10. When everyone is guilty, no one is.

In his fourth chapter, the Secret Lives of Germans, Lewis describes and questions the role of Germany as the sane economy in the unstable Eurozone.

He asks "how did people who seem as intelligent and successful and honest and well-organized as the Germans allow themselves to be drawn into such a mess?"

While describing the historical reminders all over Berlin of World War II and the Nazi era, Lewis writes "it's as if history stopped and assigned roles to people, and the Germans have been required to accept that they will always play the villain."

He writes that for the Germans "the euro isn't just a currency. It's a device for flushing away the past. It's another Holocaust Memorial."

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