Boomerang
The Greece chapter on hidden deficits, the tax base and off-balance-sheet borrowing.
Summary
Lewis collects reporting from Iceland, Greece, Ireland, Germany and California, examining how the credit available before 2008 was used differently in each place and arguing that the pattern reveals something about each society. His framing device is that cheap money functioned as a test of what each country did when nobody was watching.
Iceland's fishermen and small-country bankers built a leveraged financial sector many times the size of the economy on trades they did not understand. Ireland's banks lent against domestic property to a degree that made the state insolvent when it guaranteed them, and Lewis focuses on why the government issued a blanket guarantee without knowing the size of the exposure. Greece's problem was a state that had lost the ability to collect taxes and had concealed its deficits, with public sector employment and pensions as the mechanism. Germany's banks bought the worst of everyone else's securities, which Lewis attributes to a rule-following disposition that trusted the ratings. California's chapter covers municipal finances and public pension obligations.
The reporting is vivid and Lewis is a very good writer of scenes.
The method is the problem. Lewis explains national outcomes through national character in ways that reduce to stereotype, and the Greek and German chapters in particular drew heavy criticism on this basis. He selects colourful sources and the analysis is thin relative to the storytelling. Several predictions, particularly about municipal defaults in the United States, did not occur. The reporting on Ireland's guarantee decision and on Iceland's banking expansion is the most substantive material, and the national character framing should be disregarded.
Key takeaways 8
- Cheap credit before 2008 was used differently in each country, and the differences reveal what each financial system was actually doing.
- Iceland built a banking sector many times its economy on trades its participants did not understand, funded entirely by foreign borrowing.
- Ireland's government issued a blanket guarantee of its banks without knowing the size of the liabilities, which converted a banking crisis into a sovereign one.
- Greece's central problem was a state that could not collect taxes and had misreported its deficits for years.
- German banks bought the worst securities other countries produced, and Lewis attributes this to trust in ratings and in stated rules.
- Public pension obligations at the municipal level in the United States represent commitments made without any funding mechanism.
- Sovereign and banking crises are the same crisis once a state guarantees its banks, since the guarantee transfers the liability without reducing it.
- Lewis explains national outcomes through national character, which is the book's central weakness and should be set aside.
Who should read it
Readers who want vivid reporting on how the 2008 credit cycle played out differently by country, discounting the national character explanations.
About Michael Lewis
Financial journalist and author; former Salomon Brothers bond salesman
Liar's Poker, The Big Short and Flash Boys are the primary narrative sources later writers build on for Wall Street of the 1980s, the subprime crisis and high-frequency trading.
Where it sits in the reference 7
Who recommended it 3 · 1 direct
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