Reflecting on the recklessness behind the global economic crisis

Boomerang: Travels in the New Third World. By Michael Lewis. W.W. Norton & Co., Inc., New York, 2011. 213 pp.

As the world economic crisis continued to take us to ever lower depths, I picked up financial journalist Michael Lewis’ latest book, Boomerang: Travels in the New Third World, to gain a better understanding of how it all began. And I could not put it down. I was astounded by the titanic irresponsibility and recklessness Lewis recounts that led to the grave threat to our global economic system.

I heard an echo of Boomerang when I attended an oil conference in London recently. There, I listened to the opinions of representatives of banks and companies on our economies and oil markets. One symbolic figure that stuck with me cropped up in conversation with an oil futures trader who said that his firm of some 450 employees traded more than 120 million “paper” barrels of oil per day. To fully understand the significance of this figure, consider that only 86 million barrels of “real” oil are traded on markets every day, meaning that a single company trades 50 percent more futures each day than actual barrels transit through markets in the same time period. The extent and impact of this speculation is tremendous, and lines the pockets of a tiny elite at the expense of ordinary people.

This made me reflect on my experience at the Saudi oil ministry in the late 1950s, when the gross revenue Saudi Arabia accrued from one barrel of oil was counted in cents, not dollars. We finally realized the value of oil in the early 1970s, when Arab countries and OPEC saw, via the oil embargo, just how critical petroleum was to Western economies. As oil prices increased sharply, Saudi Arabia broke with other OPEC producers and decreased prices from $36 to $26 per barrel to give some relief to consumers and the global economy. Reading Boomerang, it is difficult to imagine anyone, let alone futures traders, doing such a service for the public good today—although Saudi Arabia has intervened in the markets for this reason many times.

Instead, as Boomerang illustrates, markets today, particularly the derivatives and futures markets that skew our economies while lining the pockets of a small elite through obscure financial instruments, are driven by greed. As we begin to discover the manipulations, mismanagement, and scandals behind today’s economic crisis, it becomes obvious that this self-interest and greed has become systemic in the rich, controlling few.

A story Boomerang tells is that of a Texan named Kyle Bass, who trades futures on government bonds. Bass has never been to Greece or even left the United States, but as he watched the escalating threat to the Greek economy from the global meltdown, he thought he could make some money from it. As Lewis recounts:

Greek government default insurance cost him 11 basis points for instance. That is, to insure $1 million of Greek government bonds against default, Hayman Capital paid a premium of $1,100 a year. Bass guessed that when Greece defaulted, as it inevitably would, the country would be forced to pay down its debt by roughly 70 percent—which is to say that every $1,100 bet would return $700,000. “There is a disbelief that a developing country can default because we have never seen it in our lifetime,” said Bass.

So, this is our broken financial system: one small trader in Texas can look at his computer screen, bet that a country will default and die economically, and reap a massive return on that bet. This is the disease that derivatives and futures markets have infected us with: greedy opportunists skewing world markets at the expense of ordinary people. This one trader may not be responsible for bringing down the Greek economy, but his actions and those of many others have undoubtedly played their part.

We are told that the futures market helps companies average out their future incomes and ensure safety for forward planning. But for the rest of us, it is a scary financial instrument developed and understood only by a small financial elite and one that ultimately brings great volatility and risk to essential markets. What is more, the logic behind futures markets—let’s take gold for example—seems utterly flawed. Some people are paying $1,800 for an ounce of gold, but all they own is a piece of paper; they have no actual gold in their vaults. And as with all futures markets, when things go bad all you have is a depreciated piece of paper bearing huge losses. This is the nature and danger of derivative trading. These markets have made life even more difficult for developing countries while making easy money for traders and profiteers in the West. Whether markets go up or down, it is always the poor commodity-producing developing countries that bear the full weight of any losses.

The indignity goes much further. In Boomerang, Lewis reports on the illusions and foolishness of the supposed economic booms in Iceland and Ireland. Fed by a wave of bank loans and foreign investments, Iceland’s fishermen suddenly believed themselves to be bankers, while Ireland’s poor were made to think that they lived in El Dorado. In Greece, the government’s cooking of the books—including its euro accession requirements—meant that when George Papandreou became prime minister in 2009, he learned that his country owed almost $1 trillion, with no discernible way of paying it back. The actions of those responsible are hard to comprehend: they indulged their greed while undermining the livelihoods of ordinary Greeks.

Unfortunately, this is only the tip of the iceberg. With Italy, Spain, and Portugal similarly flailing in Europe, not to mention America’s flagging economy and $14 trillion of debt (costing some $455 billion a year merely to service), there may be far worse news to come. Our economic system is not just sick; it is coming completely undone.

This is not a situation that will go ahead and work itself out or be resolved with stopgap measures, as many people still hope. Governments are complicit in everything that has happened and continue to shirk or decline any true responsibility. And they are making their citizens pay for their greed. Seeing the food, taxi, gas, and hotel prices while in London, I thought it preposterous to believe British government figures on annual inflation, which were put as low as 1.5 percent in 2008. What this shows is that governments and corporations are effectively robbing people of their money and ability to fend for their families by not allowing salaries to follow true inflationary rises.

People are already losing hope—yet most have little idea of how broken and corrupt our economic system has actually become. Lewis has done an admirable service in Boomerang in alerting us to the extent of the dangers we face.

Hassan Yassin is a foreign policy and media relations advisor to the Saudi government, and a commentator on international affairs. He served as head of the Saudi Information Office in Washington, D.C., and is a former official at the Saudi Ministry of Petroleum. His articles have appeared in the Sunday Times, Financial Times, Los Angeles Times and Arab News.