Michael Lewis on Germany Post author By Philip Lane Post date August 10, 2011 The Vanity Fair article is now online here. Categories In Uncategorized 37 Comments on Michael Lewis on Germany ← Do More, Go Faster → Trading Volumes in Irish Bonds 37 replies on “Michael Lewis on Germany” Entertaining as usual, but Lewis makes one aspect of the story seem peculiarly German, which it isn’t. I’m thinking of the way bondholders have managed to convince the political establishment that they must always be protected, whatever happens to anyone else. That’s part of a worldwide trend, which we’ve seen in US bank bailouts since the Clinto era and in the evolution of IMF policy, as documented and denounced by Joe Stiglitz. There’s been a shift to rentier-friendly policies, precisely opposite to the trend in the 1960s, when bondholders and those on fixed money-incomes were impoverished by inflation to the benefit of borrowers. I can see the ebb and flow of the rentier-borrower conflict becoming a hot topic in political economy in years to come. Maybe it already is? For Clinto read Clinton. The German government was equally prudent because, he went on, “there is a consensus among the different parties about this: if you’re not adhering to fiscal responsibility, you have no chance in elections, because the people are that way.” Different attitude entirely to the disgraceful Charlie McCreevy “when I have it I spend it”, safe in the knowledge that this sentiment/policy would go down well with the Irish electorate. Well the rainy day came folks and we did not have any savings, unlike the Germans who still have all the gold they were allocated after the second world war. Scheiss entertaining! @Robert Brown The Irish government was in a healthy position in 2007 with a debt to GDP ratio of 27%. We fed oxygen to the building boom blast furnace that should have burnt primarly the bankers and developers. Instead the Irish government stepped in and threw the Irish taxpayers on the fire. Instead of bankrupt banks we are finishing up with both the banks and the country in receivership. When that happens all the bonds, loans and guarantees propped up by the ECB become due and payable. That leaves the Germans and the British banks (and others) to absorb the losses and if they cannot, then the German and British taxpayers will prop them up. The German voters will decimate any party that bails out banks that in their eyes were sadly remiss in their duty to perform due diligence. The Irish government will still be on the hook all that will change is the names of the creditors. The VF Lewis article is a piece of cheap American anti German crap, a good kick in the arse would do him the world of good. @Mickey Hickey ‘The Irish government was in a healthy position in 2007 with a debt to GDP ratio of 27%.’ Sigh! Now Mickey. It was not in a healthy position. Spending was rocketing as a proportion of GDP. I know they weren’t borrowing (much) of it but that is not the point. They were building up massive unfunded liabilities in salary, pension and welfare costs (by upping welfare rates). Besides they were spending it on vanity stuff (especially PS salaries – because, as you know, if you pay peanuts you get monkeys: but as you also know paying in gold doesn’t guarantee you won’t get monkeys). I’m not sure if you’ve got the point of his article. The main part of your post doesn’t say anything new and doesn’t say anything that contradicts the VF article (unless I missed something). The article is most definitely not anti-German. He is simply asking a question which I myself have asked on many occasions, and it’s this: What on earth were the Germans thinking when they got into the Euro and got their FS industry out of its depth with dodgy products – including Sovereign debt? The point of the article in my view is that the Germans are congenital Utopians. Germany is the California of Europe. It invented the modern world and America (led by California) built it. But it is prone to naive Utopianism. The Germans have a sort of steely / Mr. Spock reputation amongst those who feel less powerful. But in reality the Germans are intensely Romantic. There are wonderful contradictions within the German psyche. Michael Lewis operates like what could be termed a tourist journalist who has never lived in a particular country and prior to a short term visit sets up appointments with various public commentators. There is generally an element of truth in national stereotypes: the Irish and Russians are drunkards; Americans speak as if they are addressing a public meeting; never get caught in a round of drinks with a Swede and so on. It was the ECB rather than Merkel who insisted on no bail-in by bondholders. Is Trichet now a German after living 8 years in Frankfurt? Lewis credits the Germans with a love of rules that was not apparent when they violated the Growth and Stability Pact in the early years of this century. The Pact was duly altered and the whole matter fudged, wherein may lie some of the origins of our current problems. Scheinlegalitaet is German phrase that he might have included somewhere is his scatological asides. Fantastic little read – it was not not unlike the Robert Harris Fatherland mixed up with the Victor comics somewhere. http://www.youtube.com/watch?v=VCT43aawYOU But he was a bit hard on the Hun. My only real experience of Germans (mainly Bavarians) is in the trekking / climbing community and I observed when the shit hits the fan so to speak these guys are reliable , they are good fun also – but excessively masculine (ie drink and out compete me generally) while their women are tougher……………… To be fair to McCreevy: (ahem) 1. he did start the NPRF ( it was him wasn’t it?) so we did have some rainy day money. 2. Isn’t it the accepted narrative that he did try to reign in spending but that’s why Bertie booted him off to Brussels? 3. I think most agree that the real insanity took place post 2004 under the benign eye of Cowen… The article is an enjoyable read, as we know from being the subject of Lewis’s attentions he is more interested in an artistic truth of events rather than writing their definitive history, he still provides a useful insight. @Mickey Hickey The VF Lewis article is a piece of cheap American anti German crap I did not read the article that way at all, it seemed an extremely affectionate portrait of the country and its people. Lewis’s real distaste is kept for his countrymen, but of necessity it is kept hidden. I would like it very much if Lewis would write about the more general topic that Kevin Donoghue mentioned, how the agents of capital captured the international response to financial crises. Our own experience at the hands of the ECB is just one example of a long string of reverse bank robberies where capital inveigled its way into domestic and international structures of government to protect itself from the consequences of its poor decisions. An entertaining expose would be more socially useful than lots of outraged barking from the left. From experience of Lewis’ prior work – this is poor, shallow, tabloidish even. Some facts are useful – but are already well known ……. good to see Enderlein, an economist, who has figured out accurately the flow of funds from Irish citizens to German banks, get a mention. I tend to go with Mickey Hickey here – and suspect that this piece will be well used, if not well read, in those bankers’ loos on the top floors in Frankfurt. Perhaps Vanity Fair might bring out a ‘softer’ version for the Deutsche mark_et. He does NOT capture the German ‘character’ ….. @ Mickey Hickey The Irish GGD/GDP ratio stood at 32.4% year end 2002 and was the second lowest in the EU. Only Luxembourg with a ratio of 6% was lower. Belgium,Greece and Italy had debt ratios of over 100% at year end 2002 so there were warning signs as far back as that and before. By 2004 Bank of Ireland’s loan book had reached 100bn. However, just four years later it had ballooned to 200bn and we were told they were more responsible than Anglo or AIB. The government was borrowing hand over fist by the back door. The banks were proxies for spiraling government debt and the money swishing around the exchequer, used willy nilly to fund “benchmarking’ quango’s and other vanity projects was borrowed money. 40% of every new house and apartment was accruing to the government in taxes. This was money flooding into the country through the banking system. The government fueled the boom with a raft of tax incentives sect 23 sect 50 etc and light touch/no touch regulation. The government was deliberately blind to the risks or failed miserably to estimate them correctly even as they pushed their own salaries through the roof. The DoF and the CB and regulatory authorities with their thousands of employees failed the Irish people miserably and laid the seeds of our financial woes and later loss of sovereignty. Most of those people should resign but that is the last thing they would ever do. The government through sheer folly and I am being charitable here, then took on the banks gambling debts and Lenihan through NAMA created a fast breeder reactor which soon melted what was left of the Irish banking sector down. Other strategies, could have been adopted, but we played our cards all wrong. Then Patrick Honohan compounded the error by telling us the banks were well capitalised and that the debts were manageable, when it was obvious they were going to be in the ballpark of the Anglo fiasco. The rest is history and now as far as I can ascertain our leaders want the Eurobond solutions, want to secede any remnant of sovereignty left to Germany because they are truly frightened by their own lack of financial nous. I have worked in Germany and I am sure they will not give in to the black mail of countries that have been reckless and arrogant in the extreme and who’s salaries are multiples of their own. Ireland should start planning for how it is going to survive after the demise of the Euro. Germany was willing to finance the reunification of Germany it is not willing to finance the profligate of Europe and that is why the concept of transferunion was specifically targeted in the legislative drafting of Eurozone. @Robert The euro is not finished yet , dollar reserves are flowing into the eurozone’s balance sheet. But we need to plan for the worst. This is what I like about Germany and Germans Dalia Marin of the University of Munich, sharp as a tack, well grounded and about as far from eternal optimism as it is possible to get. Her comments on the ranking of low taxes as an incentive to foreign investment is spot on. http://www.nakedcapitalism.com/2011/08/dalia-marin-on-outsourcing-income-inequality-ceo-pay.html Robert Browne I agree with virtually everything you say. The Germans do not suffer fools gladly. I have had long and close relations with Germans. As recently as May/June this year I was in Germany and spoke to an economist from one of the Frankfurt development banks ( an FDP supporter). His opinion on Ireland, Cowen/Lenihan/Honohan was that the ECB, Die Deutsche Bundesbank, IMF and economists from most central banks and large private banks in Europe were fully convinced that if Greece, Ireland, or Portugal failed to back their failing banks that the collapse of the Euro would have an effect around the world that wold be far worse than what was triggered off by Lehman Bros. . Furthermore he did not see how German voters who have been vehemently opposed to bailing out over paid bankers would support any party that rescued German banks and by extension foreign banks. He believes that neither Ireland or the rest of the Euro Zone had a choice. It was a choice between a quick death or a period on life support during which conditions might improve. Improvement is proving to be elusive. In the circumstances amongst the Germans I know there are many people of the opinion that the feeble attempts at bailing out the PIIGS are doing more harm than good. They see no hope of averting default over the next few years. The only way out is for the ECB to increase liquidity sufficient to generate high inflation in the order of 4% to 6%, stagflation if necessary while the ECB continues to keep interest rates low. The Italians used this strategy for decades and if countries do not get addicted to the easy fix it works quite well. There are two things the Germans have anxiety about and one is creating the perception that they want to dominate and the other is losing their competitive advantage. Germans are far more sympathetic to our Gov’t and Central Bank than I am. They do recognise the lack of regulation, inappropriate gov’t stimulus, arbitrage running rampant but they also recognise that the German banks did not perform due diligence. @Sarah Carey re to be fair to McCreevy!! 1. The three Bacon reports showed that Ireland on the precipice in 2000. 2. McCreevy reluctantly withdrew interest relief for investors but ‘caved in’ without a fight less than a year later, thereby boosting the false boom. 3. McCreevy allowed an increase of approx 11,000 in PS payroll numbers in the nine months prior to the 2002 election. (Economic neccesity no doubt). 4. McCreevy, despite his ‘pro-business image’, allowed benchmarking to go through. An ATM that is still paying out today to the PS. 5. McCreevy failed to staff his department with appropriately qualified staff, a point made several times by the late Dr G FitzGerald. 6. McCreevy set up the new Financial Regulator structure and allowed it to be set up as a puppy, subservient to all of the bodies that it was supposed to regulate and fully subservient to his own department. The consequences were disasterous. McCreevy had the stature within Fianna Fail to be able to direct an independent and competent Department of Finance. He choose to direct a Department of Finance that put Fianna Fail and friends of Fianna Fail before the countries interests. His knowledge and understanding of economics is best summed up by his own words: ‘When I have it I spend it, when I don’t have it, I don’t spend it’. People have of course interpreted the above as idiotic economic philosophy, which it is. But it is the ‘I’ throughout statement that is the most dangereous part of his philosophy. It was ‘I’, not ‘we’, not ‘the government’ and most importantly not ‘the country’. It was all ‘I’. Yes, please be fair to McCreevy! @Joseph I acknowledge those truths…I’m just sayin’ – He did get the boot when he tried to rein in those excesses and Cowen’s sins were far graver……If I want a fall-guy, it’s BC not CMcC….. @ Sarah Carey The die was cast by the time Cowen took over. McCreevy’s ministerial luck-dip decentralisation plan had not worked in the local elections and Ahern had his born-again socialist experience at Inchdoney, near Clonakility, with Fr Sean Healy in attendance. There was a public clamour for subsidising child minding and Cowen delivered the goodies. I think the whole ‘dirty inside, clean on the outside’ thing is a bit labored but otherwise an enjoyable read, thanks for the link. I wouldn’t mind going on a drive with his chauffeur either 🙂 The FF years for me – two children’s allowances – two “early childcare supplement” payments – the €63 euro every month on the SSIA – lower income taxes. Every time a budget came round it was like winning a raffle. And when I said ” the government should not be giving me cash into my pocket every month” I was called right wing. Sorry – we are off-topic. I didn’t read the Michael Lewis article. His tourist articles are formulaic and by the first paragraph I am bored (The fault may be mine – this silly season nonsense with the presidency has put me in a bad mood). My bottom line: the Germans had it both ways. Nice stable core economy while putting their savings into our property bubble to enjoy the yields and then getting snippy and moralistic when it burst. We’re bailing them out as far as I’m concerned, not the other way round. and + 1 to Brendan. Says it all. Interesting article! Having spent over the last month here in Germany, I have to admit an admiration for their state. We could learn an awful lot if we were inclined to learn. One quote sums it up for me though: “Every nation, consequently, whose affairs betray a want of wisdom and stability, may calculate on every loss which can be sustained from the more systematic policy of their wiser neighbors. But the best instruction on this subject is unhappily conveyed to America by the example of her own situation. She finds that she is held in no respect by her friends; that she is the derision of her enemies; and that she is a prey to every nation which has an interest in speculating on her fluctuating councils and embarrassed affairs.” Federalist 62, James Madison @Paul McDonnell – “The article is most definitely not anti-German. He is simply asking a question which I myself have asked on many occasions, and it’s this: What on earth were the Germans thinking when they got into the Euro and got their FS industry out of its depth with dodgy products – including Sovereign debt?”. I agree and I find his discussion of that interesting following on as it does from his narrative in The Big Short – remember that line about the gullibility of ‘stupid Germans in Dusseldor’ as the US traders put it, willing to buy anything?. “[Former Bundesbank Council member Wilhelm] Nölling felt the problem had its roots in the German national character. “We entered Maastricht because they had these rules, ” he says as we move off to his kitchen and plates heaped with the white asparagus Germans take such pride in growing. “We were talked into this under false pretenses. Germans are by and large gullible people. They trust and believe. They like to trust. They like to believe.” I f the deputy finance minister has a sign on his wall reminding him to see the point of view of others, here is perhaps why. Others do not behave as Germans do: others lie. In this financial world of deceit, Germans are natives on a protected island who have not been inoculated against the virus carried by visitors. The same instincts that allowed them to trust the Wall Street bond salesmen also allowed them to trust the French when they promised there would be no bailouts, and the Greeks when they swore that their budget was balanced. That is one theory. Another is that they trusted so easily because they didn’t care enough about the cost of being wrong, as it came with certain benefits.” Sometimes the simple explanation is the right one. @Sarah, Michael is correct when he says the “die was cast by the time Cowen took over.” Cowen was put in charge of a runaway train by McCreevy and Ahearn. “…a runaway train set in motion by McCreevy and Ahearn” @john o’brien Hmm – I don’t accept that. There was plenty of time to make this less worse. Although I have argued the crucial election was the 2002 one. Tis missing the point to blame the personalities in this… The offices of our government should be built to tolerate whatever gobshite or hero occupies the ministry. @Al In which case you mean, democracy is not only pointless but a danger to the sovereign and unelected officials should have all the power. Democracy is just a form of mob rule. Enough people were blind enough to vote for cash over equality and now they reap what they sowed. The gobshites got voted in. Sooner the commentariat accepts that the sooner they can stop nominating each other for office… Please tell me the Gay Byrne nonsense is passing? Madam, we live in a Republic. The will of the people is soverign, the problem and solution to our woes… I would point to the political parties are being the root of the problem rather than the unelected.. I am not sure how to respond to the rest of your post, other than to point out that there is a concerted effort to see a person elected that isnt of the political parties. This is important on many levels but also shows the irrelevance of the post with the political system- twould be a prison sentence for most people. “I would point to the political parties are being the root of the problem rather than the unelected..” EXACTLY!! We are actually in agreement. But I won’t countenance government by the unelected. Do you? I prefer to persuade the electorate to start making the connection between *their vote* and *the government*. You are right not to respond to the rest. It has no place in the august forum. from the article: “But—and here is the strange thing—unlike their American counterparts, they are being treated by the German public as crooks. The former C.E.O. of IKB, Stefan Ortseifen, received a 10-month suspended sentence and has been asked by the bank to return his salary: eight hundred and five thousand euros.” Anglo (Saxon) Irish Justice. @ Sarah I have to disagree again. We need an fixed component of the government that focus on the delivery. Further how can expertise be developed and maintained under electoral discipline? I would love to see the connection between the vote and the government been made more explicit, but how successful can any efforts be. The political body is a reflection of the national body. That is the problem isnt it? @al Yes! I keep saying this. Politicians reflect the will of the people – very accurately. That’s why I object to objections about gobshite politicians. Your real grievance is with the voters. But most comment trees politicians as the victors in a coup. We do need a fixed component – we have it. Note the closure of the ABA schools even though Ruairi Quinn supported them. The dept hates ABA and got its way. We are not very far apart but its a balance issue. I think the focus has to be on reminding the electorate on the consequences of their selfish decisions – not on giving more power to unelected officials. (treats) damn autocorrect More civic classes in schools?? To me it isnt the ‘power to elected officials’ that is the problem, it is the unaccountability. The people that hold unelected power should be accountable for their action through termination of employment or ,,,, a personal honour code. Neither of which are in place? On the issue of Euro bonds, I am afraid it is a case of, im Moment ist mehr wohl nicht möglich! @al Agree totally! I’m hoping this sort of accountability might end up a by product of state bankruptcy…every cloud… If it doesnt then we’ll really find out who has power in the land… Comments are closed.