What would you do if somebody left you alone in a dark room with a big pile of someone else’s money?
American consumers, we discovered, would buy big-screen TVs and houses with subprime mortgages they could never hope to pay back, while banks from all over the world would buy bonds backed by those mortgages and end up as financial roadkill. More American banks than just Bear Stearns would have met a similar end if the American government, on behalf of its taxpayers, hadn’t assumed the risk for some $2 trillion in dodgy securities.
The American government was hardly alone in propping up its financial institutions during the crisis of 2008. In journalist Michael Lewis’s new book, Boomerang: Travels in the New Third World, he draws a deeply unsettling parallel: We avoided a global economic meltdown in 2008 only because governments in rich, developed nations bailed out their banks; if nations themselves start defaulting on their loans, who’s going to bail them out?