Boomerang | Michael Lewis

Summary of: Boomerang: Travels in the New Third World
By: Michael Lewis

Introduction

Embark on a journey through the tumultuous financial landscapes of countries like Iceland, Greece, and Ireland, as well as the state of California, in ‘Boomerang: Travels in the New Third World’ by Michael Lewis. In the aftermath of the 2008 global financial crisis, the book delves into the root causes of economic collapse in these regions, uncovering the irresponsible lending practices, rampant borrowing, and flawed policy decisions behind it all. Along the way, discover how demographics, politics, and national character played roles in creating the booms and busts that have shaped our interconnected world.

Iceland’s Economic Bubble

Iceland’s rapid expansion of its banking system led to disastrous consequences in 2008 when the worldwide financial meltdown began. Iceland’s banks lost $100 billion, equaling roughly $330,000 for each citizen, and racked up liabilities equaling 850% of the country’s GDP. Icelanders made the fatal error of borrowing in foreign currencies to finance their purchases, leaving them with $500,000 houses and $1.5 million mortgages when the housing bubble popped and the krona fell. This further damaged Iceland’s economy as it depended greatly on imports. The entire episode is completely out of sync with the Icelandic national character as they had no inkling of what investment banks did. Iceland’s financial sector had tremendous growth and investment from several European banks before the crisis hit. The government placed catch quotas on the country’s crucial fishing industry, making some Icelanders wealthy, and securitized the country’s other main natural resource, energy. Investment banking was Iceland’s next enterprise after taking these industries to their greatest profitability. No one stopped the predominantly male Icelandic financial sector from plunging the country into economic doom.

Greece’s Recipe for Economic Disaster

This book delves into the economic calamity Greece experienced in the early 2000s when it turned itself into a piñata stuffed with fantastic sums. The government hired more employees, raised salaries, and engaged in bribery and thievery. Greece faked its way through the euro’s adoption, moving major debts off the books to satisfy budget-deficit requirements. Greece’s problem with tax collection compounded the dreadful situation. Tax nonpayment and fraud city rampant in Greece, where cases are resolved at a tedious pace. Real estate became a hiding place for Greeks to stash their assets. The country has no national land registry, so Greece overestimated its property values by using phony reported sale prices. The book explores how the Germans used their money to allow foreigners to behave insanely, countries used foreign money to fuel different types of insanity. The author contends that borrowing a lot of money to create a phony prosperity imports the future into the present and has dire consequences.

Ireland’s Economic Meltdown

The collapse of the Anglo Irish Bank led to Ireland’s economic crisis with unemployment increasing to 10% and a deficit increasing to 32% of its GDP. The crisis did not lead to an immediate change in the government, and foreign regulators and experts came in to help. Observers suggest the removal of trade barriers and negligible corporate taxes, among other issues, contributed to the crisis. Despite economic growth declining, the Irish housing bubble continued to expand, and banks were mostly reliant on foreign funding sources, which led to the revelation that Ireland’s economy was a giant Ponzi scheme. To prevent a complete catastrophe, the European Central Bank loaned €97 billion. Eventually, the Irish government took over the Anglo Irish bank and created its version of America’s TARP. Unlike Greece, Ireland experienced few angry demonstrations.

Germany and the Euro Crisis

Germany’s position as the leading creditor of the financially troubled European countries has put it in a difficult situation. Since joining the euro zone, Germany has been unwilling to bail out its neighbors and insists on fiscal probity. However, if Greece defaults, it could cause a ripple effect on other European countries and their banks. Despite its unscathed economy before the 2008 crisis, German banks funded nearly $200 billion in US subprime-backed bonds, leading some to question its role in the crisis. Germany now faces the challenge of camouflaging its guilt by funding the same entities that must pay it back.

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