What had seemed like an inevitably rising tide with a limitless ATM machine floating on every wave was, instead, just another bubble, the Tulip Mania of the 17th Century, the South Sea Bubble of the 18th Century, and the bull market of the early 20th Century. And as Warren Buffett pointed out, when the tide goes out you can see who’s not wearing a swim suit. Perhaps it was that image that the Irish Prime Minister Bertie Ahern had in mind when he fumbled his observation of the global nature of the economic downturn: “Lehman’s was a world investment bank. They had testicles everywhere.”
Tolstoy famously observed that each unhappy family is unhappy in its own way. For his part, Michael Lewis argues in his new book, “Boomerang,” that each of the economically distressed countries was distressed in its own way. “The tsunami of cheap credit that rolled across the planet between 2002 and 2007…offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge,” he writes. “Entire countries were told ‘the lights are out, you can do whatever you want to do and no one will ever know.’”
“What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German, the Irish wanted to stop being Irish. All these different societies were touched by the same event, but each responded in its own peculiar way.”
So when Lewis kept getting jostled on the sidewalks of Icelandic cities, he didn’t get irritated but educated, seeing in this macho behavior the roots of the mystery of how Iceland got into such a financial crisis that it came to be called a hedge fund with lava. Nordic men, who celebrated in the Viking sagas, wanted to stop being the rough-hewn captains of fishing boats and become the rough-hewn captains of finance. As Lewis remarks: “Icelanders have a feral streak in them, like a horse that’s just pretending to be broken” which, of course, carried the seeds of its own destruction in a society where the greatest indoor sport is finding ways not to pay taxes while finding the political levers to increase the amount of money that the government pays for irrationally lavish lifestyles.
Lewis’s insights about Germany’s road to financial pain came not from walking the sidewalks but from touring in the back seat of a car in which his hired driver, a young, attractive German woman, acceded to Lewis’s request to rattle off all the different German phrases and expressions that contain the word “scheiss” (shit). Lewis cites scholars who have concluded that Germans have an unnaturally strong interest in excrement and filth, occupied with an obsession with cleanliness. This idea is to keep the filth distant and contained in clean containers. Couple that with Germany’s deep fear of inflation -- Germans remember the Weimar Republic as if it were yesterday -- and it’s not surprising that German banks didn’t follow their U.S. counterparts into ridiculously over-leveraged positions. But they did buy a lot of the ‘dirty’ investments, perhaps in the hope those positions could be sanitized inside the sparkling offices of the German banks.
For Greece, the signs of deep trouble came clearly into view in 2009 when the tax collection receipts collapsed. The reason was simple: it was an election year. As the finance minister put it, “the first thing a government does during an election year is take the tax collectors off the street.” That was in line with the Greek reaction to the easy credit that submerged the globe in a blind -- and false -- faith in continuous economic joy: “What the Greeks wanted to do, once the lights went out and they were alone in the dark with a pile of borrowed money, was turn their government into a piñata and give as many citizens as possible a whack at it.” He found the model for this in an obscure Greek monastery that started by doing good but, having discovered certain business strategies inherent in a market flooded with credit, learned how to do very well indeed.
The global crisis showed up a little differently in Ireland. At the Dublin airport, short-term parking lot attendants noticed that they were getting no new customers, even though the lots were filled with cars. A little research revealed that the cars belonged to Polish construction workers who had bought them with cheap Irish loans. As the Irish economic “miracle” began to seem more like a nightmare, the migrant workers simply headed back to Poland from the Dublin airport, abandoning the unpaid-for cars sitting in the parking lot. The Bank of Ireland sent three collectors to Poland but their efforts were entirely unavailing. It seemed just about everyone was caught in the undertow.
But not everyone. As is his wont, Michael Lewis also searched out characters who were able to see around corners and spot the disaster before it happened. And profit handsomely from it. (that was the essence of his earlier book, “The Big Short.”)
One of those savvy investors is a Texan, Kyle Bass, who made gobs of money from seeing that the big financial firms were going down. Then, in what almost everyone else took to be the messy aftermath of a concluded debacle. Then, in 2008, Bass became convinced that it wasn’t over at all. Instead, as the bad loans made by private companies were being taken on the books of the big rich countries, it was those countries themselves that now were teetering on the edge. But hardly anybody had dared to look down. Lewis writes: “In Kyle Bass’s opinion, the financial crisis wasn’t over. It was simply being smothered by the full faith and credit of rich Western governments. I spent a day listening to him and his colleagues discuss, almost giddily, where this might lead. They were not talking about the collapse of a few bonds. They were talking about the collapse of entire countries.”
And, to repeat Tolstoy’s observation, each failing country was unhappy in its own way. The Harvard Economist, Joseph Schumpter, took the view that a monetary system cannot be separated from the society that underlies it. And a great deal of the charm of Lewis’ book derives from the ways in which he can turn the scattered cultural apercus of a tourist (the subtitle of his book is “Travels in the New Third World”) into a synecdoche for the entire nation: the number of German expressions containing the word “scheiss,” the strutting of Icelandic men on city streets and so on.
To be sure, not every serious thinker has been as enthusiastic about theories of national character: In the Fall of 1939, the Austrian Philosopher Ludwig Wittgenstein and his Cambridge student and friend, Norman Malcolm, took a walk along the Thames. Referring to a headline in the London Times, Malcolm made a comment about the ‘British National Character’.
This was not a concept that was congenial to Wittgenstein, the logician and philosopher. In fact, five years after their walk, Wittgenstein remained sufficiently exercised by Malcolm’s use of the term that he wrote in a letter to him, “whenever I thought of you I couldn’t help thinking of a particular incident which seemed to me very important…You made a remark about ‘national character’ that shocked me by its primitiveness.”
Wittgenstein would not be a very enthusiastic reader of Michael Lewis’ most recent book. But the relevant question is whether seeing the current global economic crisis through the prism of various historical national characteristics is helpful or not. And the answer, with regard to Lewis’ book is, I think, a resounding “yes.”
In fact, the book called to my mind two other vignettes that illuminate today’s crisis, even though one of them dates back about three-quarters of a century and the other about twenty centuries.
During the spring and summer of wartime 1942, two of the most brilliant economists of the 20th century kept a nightly vigil on the roof of King’s College, Cambridge. Residents of the college, they were scanning the British skies for German bombers and they were armed only with shovels and brooms to defend the massive limestone structure against the onslaught.
One of them was Alfred Lord Keynes, the British economist, and the other was the Austrian economist Frederick von Hayek on the right. Both of their theories have been invoked and vigorously advocated by a variety of commentators and economists to solve the current crisis. Yet the economic crisis continues, suggesting that the theories of Keynes and Hayek are as unlikely to be effective against the global economic crisis as their shovels and brooms would have been against the Werhmacht.
The final vignette is in Plato’s Republic, when the philosopher argues that in a political debate between two aspiring leaders in which one proposes a regime of strict discipline and personal responsibility while the other promises pleasure and indulgence, the winner will always be the second candidate. Plato compares it to a debate between a nutritionist and a pastry chef in front of an audience of children.
Put another way, Plato would well understand today’s Greece, where tax collectors are taken off the streets on election day.
And he would well understand the U.S. Congress, where it seems that no compromise is possible between two parties unwilling to tell any truths or propose any actions that might ruffle the sensibilities of their core constituencies. That means a structural inability to plot a steady course to the future, but instead endless circles of conflict. What goes around comes around. Like a boomerang.
--Robert Steck is a corporate consultant and sometime philosophy professor and a contributing writer to European Affairs.