Michael Lewis on Germany

Michael Lewis of Vanity Fair is no stranger to Europe.

  • In April 2009, Lewis published ‘Wall Street on the Tundra an article tracing the logic behind the economic meltdown in Iceland.
  • In October 2010, Lewis followed this up with a study into Greece in an article entitled ‘Beware of Greeks Bearing Bonds.’
  • In March 2011 Lewis made waves in Irish political circles (an article published in the March edition of VF but available during the final calamitous days of the Cowen government) with his devastating insight into the banking and political upheavals in Ireland with his ‘When Irish Eyes are Crying.’

In the September 2011 issue of VF, Lewis has focused on Germany – EU lender of last resort and lynchpin of the euro – in an article entitledIt’s the Economy, Dummkopf!’

Heres your summary…

Lewis begins with a valuable insight into the German character – something with has an historical affiliation with…well….’faecal matter.’ From bizarre childhood folklore tales and Gutenberg’s strange choice for his 2nd printing to Martin Luther’s ‘scatological’ original idioms and Hitler sexual desires–a key German character trait is an obsession with waste or at least, taking dirt and cleanliness in equal measure – an affliction deeply ingrained but hidden within.

The article pivots into more analytical territory with a reference to sobering and contrasting statistics. Greece unemployment at 16.2% versus a 20-year low German rate of 6.9%. A job in Germany which pays €55,000 pa, pays €70,000 in Greece – effectively two extra monthly payments. Greece is plaqued by debt and deficits – with the euro like a inverse gastric band meaning the binge cannot stop. Greece, according to Germans, have two choices. Slim down government (and sacrifice growth) and fiscally integrate into Europe or reform how Greeks work and make the Greek people…Germans…with all the efficiency and productivity that goes along with that stereotype. Economically, the only solution is for German to stop bitching, arguing and hoping and just write the cheque. Politically, this isn’t a runner for Merkel. So, Europe trundles on, with regular crises (as in Spain and Italy recently and soon in Cyprus and France) meaning stop gap sticking plaster solutions that solve nothing.

Thanks to the crisis, the ECB is exposed to tune of €55bn of PIG bonds and has lent around €315bn to EU governments and banks. Default is a game changer. The ECB will not buy bonds to solve a country in default even though it stands to lose a fortune and face insolvency. At the bottom of all this, to the Germans, is the Greek refusal to change their behaviour (i.e. stop being Greeks). It all goes back to the cheap credit binge countries embarked on at the outset of the euro. Most ran wild. Germany didn’t as Germans have long memories of the Great Depression and hyperinflation in the 1920s and 30s. The Germans funded the insanity, but they didn’t take part in it. German losses as a result stand around €15bn in Icelandic banks, €70.5 in Irish banks, €42bn in US subprime bonds and more. Effectively, the Germans have a circuitous but economically perilous relationship with bailouts. The German government gives to the EU to give to the Irish/Greeks to give to their banks so they can repay loans to the German banks. Simple really.

The German governments first bailout of a commercial bank was Commerzbank, to the tune of €17.5bn.  German banks such as IKB were caught out because they bought crap during the boom – those bonds sliced and diced by the big NYC banks Morgan Stanley and Goldman Sachs. Whats different about Germany? Patriotism remains taboo and naivety is rampant.

The article then lurches into regaling the story of an offshore German institution IKB a ‘conduit’ rather than a bank which engaged in some risky practices. It used consumer loans to back up its bond issuances and had invested in tools to analyse complicated bonds called collatorised debt obligations (CDOs) which Wall Street was flogging. Other German banks rented IKBs ‘conduit’ (effectively a means to avoid regulation and detection) to buy subprime loans – which was originally profitable. Thus IKB gave awful bonds the German ‘seal of approval’ based on a smokescreen. Subprime collapsed in 2007, leaving IKB as the only buyers. IKB, like other banks, didn’t even know they owned subprime mortgages – because of the complex bond system – lost a fortune and had to be bailed out by the German taxpayer.

What about the euro? Meeting with prominent former Bundesbank economist Wilheim Nolling, Lewis outlines his perceived best option for Germany – split the EU into two. The PIIGS would have one currency, the more reliable countries another (This happens to consist of the current AAA rated countries + Belgium). A big question however is whether France belongs – for social reasons, excluding them would be ‘awkward’ as the project was aimed at ‘yoking Germany to the rest of Europe’ which is bloc theoretically led by France. The problem is that Germans trust people even though people lie. Wall Street about bonds, France about no bailouts and Greek about the health of their finances. The other theory? The euro is a holocaust memorial (to which Piigsty.com wholeheartedly agrees – see the publications section).

Lewis certainly raises a few interesting points in his article. None of these are new but this narrative is compelling.

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