October 3, 2011
Michael Lewis Returns with Boomerang
Michael Lewis, the author of Moneyball and The Blind Side, among other things, has a new book about the cheap credit crisis. An interview with National Public Radio is here. There is also an excerpt of the book available here. Rather than paraphrase Mr. Lewis, here is an excerpt of the excerpt, to give you an idea of where this book is headed:
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 no longer talking about the collapse of a few bonds. They were talking about the collapse of entire countries.
And they had a shiny new investment thesis. It ran, roughly, as follows. From 2002 there had been something like a false boom in much of the rich, developed world. What appeared to be economic growth was activity fueled by people borrowing money they probably couldn't afford to repay: by their rough count, worldwide debts, public and private, had more than doubled since 2002, from $84 trillion to $195 trillion. "We've never had this kind of accumulation of debt in world history," said Bass. Critically, the big banks that had extended much of this credit were no longer treated as private enterprises but as extensions of their local governments, sure to be bailed out in a crisis. The public debt of rich countries already stood at what appeared to be dangerously high levels and, in response to the crisis, was rapidly growing. But the public debt of these countries was no longer the official public debt. As a practical matter it included the debts inside each country's banking system, which, in another crisis, would be transferred to the government. "The first thing we tried to figure out," said Bass, "was how big these banking systems were, especially in relation to government revenues. We took about four months to gather the data. No one had it."
I haven't read all of his books, but I always enjoy Mr. Lewis's writing. I hope to get to this, as soon as I work my way through the two books I am currently reading: (1) Predictably Irrational: The Hidden Forces That Shape Our Decisions, by Dan Ariely, and (2) Straight Man: A Novel, by Richard Russo.
I believe the western world is much, much poorer than we realize. Kevin Williamson of National Review wrote an article last spring arguing that when public employee pensions, entitlements, and public debt at the federal, state, and local level are added together, America is liable to the tune of $130 Trillion. If that is indeed the actual number, we're in trouble. There isn't enough money in the world to meet all of those obligations. I think the western world is headed for major course correction in the next couple of decades. The bond markets will eventually bring sanity to government finances, but it will be painful. The market always wins.
Posted by: Trevor Dahl | Oct 12, 2011 5:47:45 PM