Boomerang

“When people pile up debts they will find it difficult and perhaps even impossible to repay, they are saying several things at once. They are obviously saying that they want more than they can immediately afford. They are saying less obviously that their present wants are so important that, to satisfy them, it is worth some future difficulty.”(conclusion)

“Boomerang” is a book by Michael Lewis, the author of Liars Poker. The book was published in 2011. In this book, the author gives an account of events which led to the current European crisis. The author dedicates a chapter each for four countries, namely Iceland, Greece, Ireland and Germany. These four countries are pivotal in the European Debt crisis.

Iceland, a country where fishermen turned into investment bankers. The author gives an account of the phenomenal growth in the banking sector of the country between the years 2003 and 2007, assets in the sector grew from 100% of GDP to over $140 billion in this time period (The GDP of Iceland in 2014 was $17 billion). These banks ultimately collapsed and were too big to be bailed out by the government.

Greece, if it wasn’t for the corruption scandal involving the Vatopaidi monastery, we may never have known of the Greek crisis. Corruption, tax evasion and an inefficient public sector were just a few of the issues which led to the Greek crisis. The author traces the foundation of the crisis to the late 1990’s and early 2000’s, when Greece was required to meet certain fiscal deficit and inflation targets to enter the European Union. Instead of meeting them through honest means, the Greeks decided to use complex financial instruments and “innovative” accounting methods to meet these targets.

Ireland, the country which guaranteed all its banks debts since the banks were “fundamentally strong”. In the 1980’s, 1 million people out of 3.2 million people lived below the poverty line in Ireland. Ireland entered the 21st century as the second richest country in the world. One of the main reasons for this growth was the real estate sector. A real estate bubble meant more than a fifth of the Irish workforce was employed in the construction sector. But, as we all know a bubble must burst. The bursting of the real estate bubble nearly caused the entire banking sector to collapse.

Germany, if you’re obsessed with cleanliness and order yet harbour a secret ambition for filth, you’re in trouble. While the German economy didn’t experience much of a crisis, when it came to foreign lending, the German banks were just as irresponsible as their European counterparts. They invested in complex securities which were rated highly by rating institutions (as the 2008 crisis showed us, these ratings weren’t very credible). This lending led to the formation of bubbles in multiple countries including USA and Ireland.

In conclusion, the author discusses the current debt situation in many cities in the United States and how this debt is a ticking time bomb.

Through the course of the book, the author gives readers a detailed account of the crises in each of the above four countries. He argues that cheap credit is one of the main reasons for the current crisis. This book is highly informative and would be of great value to anyone interested in the European Debt Crisis.

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