Boomerang in the Classroom: Lessons in Personal Finance from the Global Crisis

In an effort to explore some of the contributing causes of the financial crisis in selected countries, author Michael Lewis traveled to Iceland, Greece, Ireland, Germany, and California. Lewis documented his findings in the book Boomerang: Travels in the New Third World. The title of the book, published in 2011, implies a degree of inevitability to the crisis: as a boomerang comes flying back to the thrower, so careless or uninformed actions taken during the expansion of credit during the mid-2000s ultimately proved disastrous to the actors.

Lewis, who also wrote the highly popular books Liar's Poker and The Big Short, emphasizes the role that fundamental cultural traits played in triggering the crisis. In the classroom, you can apply the conclusions Lewis reaches about the roots of countries' problems to personal finance lessons. Although he notes cultural differences that influenced each country's behavior during the expansion of credit, Boomerang offers many universal lessons. For example, you can discuss the author's conclusions about the roots of these countries' financial problems to help students better understand the importance of saving to foster both personal and public financial security.

Other situations in Boomerang can help illustrate concepts of personal finance:

  • The human desire for instant gratification was at the root of many of these countries' financial troubles. This drive for instant gratification crossed all borders.
  • Opportunity costs and asymmetric information in markets led many investors to purchase bad assets.
  • Housing bubbles have occurred throughout history. (You can relate them to the current wave of foreclosures in the United States, and explain mortgage lending.)
  • Many investors operated under the mistaken assumption that the assets they were purchasing were riskless or very low risk.

After summarizing the book, we include a list of questions that you can use to supplement your discussion of the book with students. It is important to note that throughout the book, Lewis generalizes about cultures, possibly to make for a more entertaining read.

Iceland: What goes up must come down
Lewis begins Boomerang by recounting his trip to Iceland and the bursting of this country's asset bubble in 2008. Perhaps he starts the book by discussing such a distant place to demonstrate that, just as many other European countries and the United States did, Iceland fell victim to the overconfidence of its citizens. For years before the meltdown, Icelandic bankers borrowed tens of billions of dollars in loans from overseas and lent this money to other Icelanders, who then bought such foreign assets as shares in American businesses and expensive real estate. These Icelanders held the same over-optimistic expectations that many others around the world held at the time: "The biggest American financial lesson the Icelanders took to heart was the importance of buying as many assets as possible with borrowed money, as asset prices only rose." Consequently, "by 2007, Icelanders owned roughly fifty times more foreign assets than they had in 2002" (p. 15).

Lewis explains that Iceland's government policies of decades ago ultimately fostered investment banking in the country. (Here is one example of why he selected the title Boomerang.) In the 1970s, for example, the government implemented a policy that assigned a quota of fish, based on past performance, to every fisherman. These fishermen could sell their quotas to others. Eventually, the best fishermen obtained the quotas, and Icelanders who had previously been fishermen now had time to further their education. Better educated Icelanders wanted to pursue more prestigious occupations, such as investment banking.

Greece: The country sank the banks
On his trip to Greece, Lewis witnessed the ways in which years of careless government financing destroyed Greece's economy. He notes that until the crisis, Greece had nothing like the United States' Congressional Budget Office—the party in power simply reported the revenue and spending numbers it wanted, with no outside confirmation. Furthermore, Greece's tax collecting system was corrupt. According to Lewis, Greek citizens were hardly punished for not paying taxes. The Greek custom of tax evasion encouraged a cycle of lying and cheating. Exposure to a seemingly endless supply of credit during the 2005–08 period augmented Greece's problems: in 2009, the deficit made up 15 percent of GDP, and debt amounted to $400 billion.

Although Greek bankers did not buy U.S. subprime-backed bonds, they did lend the Greek government about 30 billion euros to fund spending that spun out of control. In this sense, as Lewis states, "the country sank the banks" (p. 46). However, according to Lewis, the new government has made efforts recently to transform some critical elements of Greek society, including trying to convince citizens to comply with taxes.

Ireland: Build, build!
Many countries experienced housing bubbles before the bust. After Ireland's housing bubble burst in 2008, house prices fell precipitously. By mid-2010, prices were about 35 percent less than they were at the peak of the bubble in 2007. Lewis's portrayal of Ireland in Boomerang exemplifies the consequences of both the false optimism that many around the globe had regarding rising home prices and the reckless homebuilding. Lewis discusses Irish economist Morgan Kelly, who in 2007 predicted that the housing market would soon be in trouble. Kelly had been alarmed to learn that during the real estate boom, "the Irish construction industry had swollen to become nearly a quarter of Irish GDP—compared to less than 10 percent or so in a normal economy" (p. 91). Kelly's warning that "real estate bubbles never end with soft landings" was largely ignored (p. 90).

The real estate crisis in Ireland was largely a result of the government's poor bank regulation, according to Lewis. Irish banks made extremely risky construction and real estate loans with money borrowed from foreign bondholders. Then, in 2008, the Irish Finance Ministry hired investment bankers from Merrill Lynch—the lead underwriter of Anglo Irish Bank's bonds—for advice on the state of banks' commercial real estate loans. These investment bankers claimed that the banks were "fundamentally sound" (p. 117). Irish Finance Minister Brian Lenihan then proceeded to have the government guarantee the debts of the six largest Irish banks. Largely as a result of this decision, Lewis writes, the country is now bankrupt and the government owns the banks.

Germany: Risk-free assets?
In Germany, Lewis observed that people seemed to place a great deal of faith in others' adherence to rules. (This is one of those broad cultural generalizations we mentioned.) He writes, "Perhaps because they were so enamored of the official rules of finance, the Germans proved especially vulnerable to a false idea the rules encouraged: that there is such a thing as a riskless asset" (p. 163). So when Wall Street bonds seemed fine on the "outside"—the ratings agencies, were, after all, giving them triple-A ratings—German buyers "knew" that Americans would repay the loans. This is why, according to Lewis, Germans bought so many bonds that were in reality subprime U.S. bonds backed by consumers who were not, in fact, likely to repay the loans. Of course, the same questionable securities were bought enthusiastically in the United States and throughout Europe during this period, so a better lesson for students might be that virtually all assets have some risk and it is unwise to buy assets that you don't fully understand.

The classroom: Learn, learn!

  • Boomerang offers an opportunity fresh from the front pages for developing analytical skills, including comparing and contrasting historical and cultural difference among countries, the tension between instant gratification and saving for the future, and basic components of good investing (diversification, risk/return trade-off, etc.) Following are some questions for discussion or short essay assignments after reading the book. How do the goals of the Greek Vatopaidi monks differ from the goals of the rest of Greece? How have these goals influenced the monks' behavior? (Relate to cross-cultural interactions.)
  • How did Iceland's fishing policy "turn cod into PhDs" and ultimately spur investment banking in the country?
  • Discuss the perception that outsiders have of Iceland and the reasons this perception is most likely incorrect.
  • How did the Irish real estate bubble differ from the bubble in America? What do these differences reveal about the cultures (103)?
  • How does the "collective memory" in Germany of the Great Depression and hyperinflation of the 1920s differ from the lack of collective purpose in Greece? How did these differences influence the countries' actions during the boom period?
  • Discuss the obstacles faced by those who warned of the impending crisis, namely Joan Burton and Morgan Kelly in Ireland and Meredith Whitney in the United States.
  • How has the crisis affected the reputations of the various countries? What do you think is in store for them in the future?
  • What are some aspects of American culture that perpetuate the need for instant gratification?

By Elizabeth Bruml, an economics major at Emory University in Atlanta, who contributed this article as part of her internship at the Federal Reserve Bank of Atlanta.
August 29, 2012