The New Third World

Just finished Michael Lewis's latest, a short book about the budget problems in what he calls "the new third world".  There are chapters on Iceland, Greece, Ireland, Germany, and the US and how each country reacted in its own way to the free money that was flowing everywhere.  In Iceland, ex-fishermen speculated wildly in foreign exchange and real estate markets.  In Greece the government just lost all control of expenses and grew to pay its workers ridiculous salaries that have bankrupted the country.  In Ireland the government was very responsible, but the banks were completely crazy and funded massive development of housing and office buildings in Ireland for which there was clearly no market- and then the government, not understanding how bad it was, guaranteed the debts of the Irish banks, so that German creditors who should have lost their investments got paid, but the Irish government went broke.

In Germany, the people continued to live as they always had, soberly and carefully guarding their money.  But the investment bankers were played for suckers by the bond creators in the US and elsewhere, and were the last rubes still buying Credit Default Swaps when everyone else was selling.  It strikes me (though this isn't really stressed in the book) that German bankers are now holding much of the sovereign debt of countries that may default, especially Greece.  These were in many cases bad investments, and on some level the banks deserve to lose money on them.  But they have the advantage of a very powerful government serving as Collection Agency for them- since Germany basically runs the European Central Bank, they are in charge.  Germany has replaced their military control of the past with economic control in the present.

Finally there is a chapter about the mess in state and especially local governments in the US, with a focus on some cities in California (San Jose, Vallejo).  These cities have given away the store to public sector unions, and have future liabilities that they can't possibly pay- in the case of San Jose they can't pay because the People won't accept tax hikes, and in Vallejo it's more of a Greece situation in which the place is bankrupt.

Depressing stuff.