Friday, January 20, 2012

Boomerang by Michael Lewis - review

Boomerang: Travels in the New Third World, by Michael Lewis

My review: Monkeys and posteriors do not mix. Except when governments start doing financial planning.

Money and morals also do not mix. Lewis captured this in "Liar's Poker", and he travels to Europe to find the same holds true for countries too. A morbidly funny disaster-financial tourist's travelogue.

And oh yes, who would have thought that Arnold Schwarzenegger, former Governor of California, would turn out to be a far, far better governor than actor, not that that bar was too high to begin with. Nonetheless, who woulda thunk?
The financial meltdown of 2008 didn't just end with a massive bailout of Wall Street. Its origins had spawned similar disasters, waiting to happen elsewhere also. And a couple of years later, the disasters began to strike. One by one, across Europe, in Iceland, Ireland, Greece, and elsewhere. The stickler-for-rules, overly trusting Germans were left holding the bag. To round it all off, Lewis returns to the United States to observe that California can serve as a microcosm of things to come. Of bad things, lurking in the darkness. Whereas financial shenanigans had sunk only banks and crippled the financial system in 2008, the second apocalypse now threatens to bring down entire countries and their economies.

The origins of this book lie in the author's earlier book, "The Big Short", and the enigmatic hedge fund manager Kyle Bass, who made a fortune by betting on the venality and avarice of Wall Street. In 2011, Kyle Bass remained as optimistically bullish in his belief that the worst was still to come. He opined that "...the financial crisis wasn’t over. It was simply being smothered by the full faith and credit of rich Western governments." How so? Well, consider the numbers. "Ireland, for instance, with its large and growing annual deficits, had amassed debts of more than twenty-five times its annual tax revenues. Spain and France had accumulated debts of more than ten times their annual revenues. Historically, such levels of government indebtedness had led to government default. “Here’s the only way I think things can work out for these countries,” Bass said. “If they start running real budget surpluses. Yeah, and that will happen right after monkeys fly out of your ass.”" [bold-emphasis mine]

And so starts the author's travels around the world, observing first-hand the travails that greed has wrought upon European economies. It begins with Iceland, and ends up in California.

Iceland turned, almost overnight, from a nation of fishermen, to a nation of bankers and hedge fund managers. And they had the United States to look upto for inspiration. "An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that". ... That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money", which resulted in a couple of things happening. On the one hand, "By 2007, Icelanders owned roughly fifty times more foreign assets than they had in 2002.". On the other hand, when disaster struck, you had "Iceland’s 300,000 citizens ... bore some kind of responsibility for $100 billion in banking losses - which works out to roughly $330,000 for every Icelandic man, woman, and child." When you looked at the people running the country's finances, you had to just know that a full-blown, unmitigated disaster was just round the corner. "The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student."

The biggest Greek tragedy, was perhaps fittingly, to be found in Greece. Reading about Greece, the average Indian may well be tempted to think that they were reading about India. Consider these snippets offered as evidence:
The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses.
Where waste ends and theft begins almost doesn’t matter; the one masks and thus enables the other.
It’s simply assumed, for instance, that anyone who is working for the government is meant to be bribed.
Government ministers who have spent their lives in public service emerge from office able to afford multi-million-dollar mansions and two or three country homes.
“This wasn’t all due to misreporting,” he says. “In 2009, tax collection disintegrated, because it was an election year.” “What?” He smiles. “The first thing a government does in an election year is to pull the tax collectors off the streets.”
an estimated two-thirds of Greek doctors reported incomes under 12,000 euros a year—which meant, because incomes below that amount weren’t taxable, that even plastic surgeons making millions a year paid no tax at all.
“If the law was enforced,” the tax collector said, “every doctor in Greece would be in jail.”
In short, "the banks didn’t sink the country. The country sank the banks."

Ireland is different, but only in the palette of colors used. The painting is still a mix of the macabre and grotesque.
Even in an era when capitalists went out of their way to destroy capitalism, the Irish bankers had set some kind of record for destruction.
Germany is the country everyone has been looking up to bail these economies out of the doghouse. And Germans were obsessed with rules, and believed, incredibly enough and naively enough, that others did too.
Germans longed to be near the shit, but not in it. This, as it turns out, is an excellent description of their role in the current financial crisis.
The author finally ends in California, where there is a surreal bicycle ride with the governor, Arnold Schwarzenegger, and an even more surreal visit to the city of Valejo. As with the economies of countries, California has perhaps itself to blame for the mess it finds itself in. Its laws, that make it almost impossible for the government to raise taxes, is further compounded by the behavior of its citizens themselves, who, when given a chance to effect some reform, stood up and said no.
In November 2005 he [Arnold] called a special election that sought votes on four reforms: limiting state spending, putting an end to the gerrymandering of legislative districts, limiting public employee union spending on elections, and lengthening the time it took for public school teachers to get tenure. All four propositions addressed, directly or indirectly, the state’s large and growing financial mess. All four were defeated;
And that was pretty much the end of any hopes of reform that California had.

© 2012, Abhinav Agarwal. All rights reserved.