Book review: Boomerang — Travels in the New Third World
This review first ran in The Hamilton Spectator on Oct. 24.
W.W. Norton and Company
You walk into a room.
The room’s dark. No one else is around.
In the middle of the room is a huge pile of someone else’s money.
So what do you do?
Walk away empty handed or stuff all of your pockets with borrowed cash?
Author Michael Lewis can make an educated guess based on what he’s witnessed as a financial disaster tourist. In his latest book, the author of Moneyball, The Blind Side and Big Short recounts his visits to Iceland, Ireland, Greece and California where bankers, politicians, unions and citizens appear to have lost their minds in a mass delusion.
“The tsunami of cheap credit that rolled across the planet between 2002 and 2008 was more than a simple financial phenomenon,” says Lewis. “It was temptation, offering entire societies the chance to reveal aspects of their characters they could not normally afford to indulge.
“Entire countries were told the lights are out, you can do whatever you want to do and no one will ever know.”
In Iceland, they stopped fishing, became investment bankers, turned their country into a hedge fund, went on a spending spree and racked up losses of $100 billion, or $330,000 for every Icelandic man, woman and child.
In Ireland, a single bank ran up $3.4 trillion in losses. “The Irish used foreign money to conquer Ireland,” says Lewis. “Left alone in a dark room with a pile of money, the Irish decided what they really wanted to do with it was buy Ireland. From each other.”
When the real estate bubble burst, the country’s entire banking system collapsed and the government stuck Ireland’s citizens with the bill in what Lewis calls a suicidal decision.
The Greeks turned their country into a piñata stuffed with cash and invited as many of their 11 million citizens as possible to take a whack. The average government worker earns three times more than the average worker in the private sector. Along with $400 billion of outstanding government debt, there’s another $800 billion owing for pensions. Against $1.2 trillion in debts, a $145 billion bailout is more of a gesture than a solution, says Lewis.
But it’s not just countries that are sliding into default. Municipalities are in a heap of trouble.
Lewis paid a visit to San Jose, which has the highest per capital income of any city in the United States after New York. It’s one of the few cities in the U.S. with a triple-A rating from Moody’s and Standard and Poor’s.
And it’s close to going bankrupt.
Lewis spent time with the city’s mayor Chuck Reed. “He’s got a problem so big that it overwhelms ordinary politics: the city owes so much more money than it can afford to pay its employees that it could cut its debts in half and still wind up broke.”
San Jose’s budget turns on the pay of its public safety workers. Police and firefighters account for 75 per cent of the city’s discretionary spending.
“Over the past decade, the city had repeatedly caved to the demands of its public safety unions,” says Lewis. “What politician wants to spat publicly with police officers and fire fighters?”
The mayor told Lewis that when the police or fire department of any neighbouring city struck a better deal for itself, it became a fresh argument for improving the pay of San Jose police and fire and the starting point for the next round of negotiations.
But it’s not just pay hikes that are crippling San Jose. Pension costs for retired city workers are soaring. In 2002, pension costs were projected to run $73 million a year. Those costs are now pegged at $245 million. Pension and health costs of retired workers account for more than half the city’s budget.
The city is legally obligated to cover those costs so deep cuts are happening across the board. The workforce is down from 7,450 to 5,400 city staffers and everyone’s taken a 10 per cent pay cut. Libraries are closed three days a week. The police union recently suggested to the mayor that he close the libraries for the other four days.
By 2014, the mayor has calculated that the 10th largest city in the U.S. will be served by 1,600 public workers. He says the future is not far off when the city will have a single employee, presumably with a focus on paying pensions.
“The problem with police officers and firefighters isn’t a public-sector problem,” says Lewis, reflecting on all that he’s witnessed as a financial disaster tourist. “It isn’t a problem with government; it’s a problem with the entire society. It’s a problem of people taking what they can, just because they can, without regard to the larger social consequences.
“It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could, without thinking about the long-term consequences.”
Three things will happen after you read Lewis’ road trip through the financial ruins of the new third world. You’ll want to send a thank you card to Jim Flaherty and ask if he’ll agree to a lifetime term as Canada’s Minister of Finance. You’ll start paying attention to the salaries, pay hikes, pension costs and liabilities for City of Hamilton workers and retirees. And you’ll be tempted to start burying gold bars in your backyard because the financial world appears to have a serious lack of parental supervision.