Culture trumps economics, every time

BOOK REVIEW: Boomerang: The Meltdown Tour by Michael Lewis.

In this series of witty and amusing essays Michael Lewis argues that culture trumps economics every time.

How did places as various as Iceland, Ireland, Germany, Greece and California get themselves into so much financial bother?

Young men in Iceland took up merchant banking instead of fishing, the Greeks raised bribery and corruption to a new level, and the Irish banks lent money to developers who subsequently built twice as many houses than the market could sell.

The Germans, rather naively in hindsight, believed that loans would be paid back and that credit ratings actually meant something. Nobody told them the American banks were lending money to borrowers who had no hope of paying, and furthermore were taking side bets on those loans failing.

Why did New Zealand avoid the same fate? Probably unlike Ireland, Iceland, Greece or California nobody would lend us any money, and sadly, unlike Germany, we didn’t have any of the stuff to lend to anybody else.

In Iceland (population 300,000) the three major banks had assets of only a few billion dollars in 2003; however given the magic of leverage, by 2007 they had grown to more than 140 billion.

How did they do it?

One economist explained it thus – “I have a cat, you have a dog. We agree that each is worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners but Icelandic banks with a billion dollars each in new assets.”

Another one wrote that all Icelanders are fishermen and all fishermen are gamblers and incurably optimistic – in other words very much like American investment bankers.

In revenge for all this male risk-taking the Icelanders have subsequently elected the first openly lesbian married to another woman prime minister in the world.

Greek banks didn’t go in for sub primes; instead they borrowed money from the Germans and lent it to the Greek government which then showered it over everybody.

The wage bill of the public sector doubled and generous pensions were given to most people at fifty for women and fifty-five for men.

Waste, theft and bribery were and are rampant – not only are hospitals ransacked by staff, even the tax collectors are on the take.

The German banks believed the rest of the world was playing the game by the official rules, and they took those rules at face value.

Because they had a rule-based culture they were especially vulnerable to the false idea that there is such a thing as a riskless asset, when no matter how many tick boxes have been ticked.

In California Arnold Schwarzenegger come to office believing in the notion that all the system needed to fix itself was an independent-minded leader willing to rise above petty politics and exert the will of the people.

He was defeated by the gerrymandering of legislative districts, voracious public unions and the persistent belief of the Californians that services had to be provided without the bother of paying for them.

An on-going difficulty became a crisis when the subprime mortgages started to go belly up and tax income foundered leaving California teetering on the edge of bankruptcy.

When you or your bank or your nation borrows a lot of money to create a false prosperity, you import the future into the present.

It isn’t the real future so much as some grotesque silicon version of it.

In the last few paragraphs of the book Lewis leaves us with a few optimistic thoughts along the lines that present problems will be solved in the future. Unfortunately that is the notion that got the world into this situation in the first place.

If you are prepared to search for it, most of this book is available free as a series of essays on the net. Amazon sells it on kindle for $US15, or as a hardback for $50 in a bookshop near you.

Whatever your choice, it is worth a read.

Reviewed by Lorraine Craighead.