Sunday, November 11, 2012

Boom Boom Boom Boom?

Boomerang was definitely one of my favorite reads of all semester! Lewis does a great job of mixing cultural and political stories intertwined with economic analyses of the various global financial crises. Although I would be keeping up with the Euro crisis and what is happening in Greece, I never got a full explanation of the country's issues before they joined the Euro in 2001 all the way to now, which provides a very holistic and yet simple overview of the country's state. Aside from all the differences and culturally outrageous stories Lewis sprinkles throughout, there are definitely running themes throughout all of these chapters though: first of all, financial disasters don't happen overnight, but rather from lack of long-run oversight and neglect of impending warning signs. Secondly, there are dangerous consequences of paying for the present with the future, of which California is the last and most relevant example in the book.

The Germany section was one of the more interesting ones (aside from his argument that Germans are obsessed with defecation in one form or another). He points out that one reason the euro was created was to ensure a newly unified Germany would be fully integrated into the rest of Europe to counteract any dominant power they might gain again. He also points out the irony of Germany emerging as an influential figure not militarily, but economically. It is in its position of economic power today because of their austerity measures, many of which are relevant to the growth vs. austerity debate. Unlike the US and other European countries, Germany did not enjoy a debt-driven real estate boom before the crisis, which resulted in slower growth. In the absence of a real estate bubble, though Germany's economy was still affected by two main channels: finance and export. Lewis mentions in his book that numerous German banks were overexposed to the toxic assets being sold in the US and Ireland. The book cites almost $200 billion in losses (which means even more was simply invested), and it is visually depicted in this OECD graph:
The second, and more important, channel was trade. The export industry suffered both from lost sales in volume as well as a financing crisis because customers interested in buying goods lacked the necessary capital since the shortage of bank lending. Even though GDP declined significantly after 2008, Germany's unemployment rate remained almost unaffected at a 0.3% decline and has actually been decreasing.

Although the German economy was hit harder than people initially expected because of its austerity measures, this only goes to show how interconnected global trade is these days regarding of measures to shield oneself from international domino effects. At the same time, it also goes to show the various impacts of growth vs. austerity. Considering US and Germany's wildly different economic approaches, the data shows that the US has still had faster recovery out of the recession. At the same time, Germany is one of very few economically sustainable countries in its region, which goes to say that the austerity model has worked for them. Based on the examples he cites in the book, Lewis would probably be against over leveraging and growth stimulus measures. And yet the data speaks for itself! This reading has made me only more interested in following the Euro crisis more closely and getting a better opinion on whether Greece is more suited for a growth or austerity approach.

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