Making sense of the financial crisis

On 25 November, the Sydney Morning Herald reported that "the [European] region's powerhouse, Germany, suffered probably its worst bond auction ever", with "more than a third of long-term German bonds going unsold in an auction of €6 billion worth of 10-year debt." This poor result sparked fears that Germany is being dragged into the crisis.

Germany counts as the prime example of a stable economy, led by sensible political and financial leaders who try to keep the country steering as much as possible in the right direction in the economic turmoil we have seen over the last years. However, in his book Boomerang: The Meltdown Tour, American financial journalist Michael Lewis finds an explanation for the German role in the current crisis by going back to a rather curious source: a book on German folklore written by American anthropologist Alan Dundes in the 1980s. "The combination of clean and dirty: clean exterior-dirty interior is very much part of the German national character," Dundes wrote, to which Lewis adds: "Germans longed to be near the shit, but not in it. This, as it turns out, is an excellent description of their role in the current financial crisis."

In the past months we have seen how Germany has continuously taken the lead in securing Greece's financial survival. In Boomerang we can read how they also financed the Irish property boom that led to the country's financial downfall in the second half of the past decade. "In the moment of temptation Germany became something like a mirror image to Iceland and Ireland and Greece - and the United States. Other countries used foreign money to fuel various forms of insanity. The Germans, through their bankers, used their own money to enable foreigners to behave insanely."

Lewis gives a most illustrative example: "The German government gives money to the European Union rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks, so the Irish banks can repay their loans to the German banks." To top it all, they also gave $21 million to Icelandic banks.

Apart from Germany, Lewis focuses on four other countries: Iceland, Ireland, Greece and the US, or rather, the state of California.

The Irish got the opportunity to borrow foreign money to build property they didn't need. Where Iceland often invested their borrowed money in overseas assets, the Irish sold property at hugely inflated prices to each other. The result is the bubble we have witnessed and that has left many Irish people with a negative equity that will be hanging around their necks for decades to come. When the Bank of Ireland's CEO said they were going to grow at 30% a year, the writing was on the wall. "How the fuck are you going to do that? Banking is a five-to-seven-percent-a-year growth at best," replied one of the bank's board members, Irish businessman Denis O'Brien. The bubble was just an accident waiting to happen. And so it did.

As in the rest of the book, the chapter on Ireland is littered with great anecdotes, the best one among them relating to former President Brian Cowen, notorious for liking his drink: "Four different Irish people told me, on great authority, that Cowen had faxed Ireland's 440-billion-euro bank guarantee into the European Central Bank from a pub."

In Ireland it was the chance to build property with foreign loans, in Iceland the framework for financial disaster was laid when people discovered they could borrow foreign currency paying low interest rates. "With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. But after the krona collapsed, the yen and Swiss francs they must repay became many times more expensive." As a result, many Icelanders bought houses and cars at three times the current price. At present Iceland has a debt that amounts to $330,000 US per person.

Maybe this situation is not so strange in a country where fishermen turned to banking without having a clue what they were doing, where a poet was the governor of the Central Bank € the architect of Iceland's rise and fall - and with a veterinarian as finance minister.

Boomerang emphasises many of the stereotypes we've heard over the past years. Greece is a corrupt country, and all Greek citizens like to join the game of tax-evasion wherever they can - that is unless they really can't avoid it as they are an employee working in the private sector. Chances that legal action will be taken are so small that everyone dares to take the risk. And in case you do get caught, you can always engage in that other national pastime: bribery. Or you simply pay the ridiculously low fine. An Athenian construction company had a tax bill of 15 million euros, but managed to pay zero. They became the target of that rare thing: a Greek tax collector who didn't take the bribe but blew the whistle. Result: the company got a 2,000 euros fine, which they were happy to pay. No wonder Lewis calls Greece "A nation of people looking for anyone to blame but themselves."

This is only one part of the Greek problem. Another major factor is a financially crippling pension scheme. "The retirement age for Greek jobs classified as "arduous" is as early as fifty-five for men and fifty for women. As this is also the moment when the state begins to shovel out generous pensions, more than six hundred Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on."