Friday, November 8, 2013

Boomerang: Travels in the New Third World by Michael Lewis

 Some time ago, I read Lewis' The Big Short about the collapse of the sub-prime mortgage industry and subsequent crisis in the U.S. Lewis' research for that book led him overseas, as well, and the results are here in Boomerang. It is eerily reassuring to know that Americans aren't the only crazed fools who believed the real estate and financial markets could only go up, as this book travels from Iceland to Ireland to Greece to Germany in search of the roots of the boom and bust cycle.

In Iceland, a cohort of young people got their college degrees in finance, and somehow managed to convince their countrymen that it was a great idea to exchange the national pastime of commercial fishing (which the Icelanders are quite expert at) for foreign exchange currency trading. Much like the U.S., where I saw nearly all of my former colleagues laid off from manufacturing become mortgage brokers, property managers, and real estate agents, Icelanders quit fishing in droves (or perhaps schools) to indulge in this new sport. When it all collapsed, Iceland's currency traders and banks were suddenly broke.

In Ireland, the situation reminds me of the old story about a mining town after the Gold Rush in the 1850s. A group of Chinese moved to town during the boom to do the laundry for all of the suddenly rich gold prospectors. When the lode was exhausted and the miners all left, the Chinese stayed around and did each other's laundry and all became millionaires. All three major Irish banks either created or were sucked into a real estate boom, and lent huge sums of money to developers and builders, who built and sold commercial and residential projects, selling them to other Irish developers and property managers, for ever increasing sums, which the banks would also finance. When it all collapsed, the banks were broke and the government decided to use tax dollars to bail them out, so that the entire economy wouldn't collapse. It's deja vu all over again.

Greece has a somewhat different situation. It seems that the people there believed that they could indefinitely increase public sector salaries and employment, as well as social services, and as long as they increased taxes accordingly, everything would be fine. Unfortunately, as taxes increased, every citizen seemed to feel it was his duty to avoid paying them by any means possible. Nearly every Greek businessperson cheats on their taxes, mostly by failing to report all cash transactions, and property owners routinely falsify sales documents for parcels of land, or obscure their ownership through shell operations, so they don't have to pay taxes on their real estate. When the government put into place "austerity" measures demanded by the ECB in order to get loans from the EU, the people rioted. Same old story - everyone wants to receive government largesse, as long as someone else is paying for it.

In Germany - dear old solid "the trains run on time" Germany - the extraordinarily productive and thrifty populace are the folks who end up footing the bill for the excesses of the rest of the Eurozone. Their big banks also got suckered into buying the CDOs from the big U.S. brokerage houses which lost the majority of their value when the housing market collapsed. And yet, Germany is considered the most financially sound country in Europe...for the moment.

Lewis also takes a detour into a few California city government antics, which may have some very negative repercussions here in the U.S. before too long.

Always interesting, with bits of snarky humor here and there, finance junkies will enjoy Boomerang.
 Charles Kindleberger's Mania, Panics and Crashes (probably the 1989 version)

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