How The Financial Crisis Created A 'New Third World.'

HOW THE FINANCIAL CRISIS CREATED A 'NEW THIRD WORLD'

TERRY GROSS, host: This is FRESH AIR. I'm Terry Gross. After writing the bestseller "The Big Short," about investors who manage to make a fortune off of the U.S. subprime mortgage crisis, my guest, Michael Lewis, has written a new book that's in part about international repercussions of that crisis. The book is called "Boomerang: Travels in the New Third World." It tells the stories of how Iceland, Ireland and Greece went bust and why Germany may control the financial fate of Europe.

The book about this new third world ends with a chapter about the financial crisis in the state Lewis lives, California. That chapter is published in the current edition of Vanity Fair.

Michael Lewis was a bond trader on Wall Street in the '80s before becoming a bestselling author. His Wall Street experiences led to his first book, "Liar's Poker." Two of his books have been adapted into films, "The Blind Side" and "Moneyball," which is now in theaters. We'll talk about "Moneyball" later.

Michael Lewis, welcome back to FRESH AIR. Your book begins when you were interviewing somebody who you expected to figure into your previous book. This is Kyle Bass, who had started a hedge fund, and he successfully bet against the subprime mortgage market, but then he decided governments were going to be the next to fall. What did he see that other people missed?

MICHAEL LEWIS: Well, this was back in 2008, in the midst of the Lehman Brothers crisis. And what he saw was that the response of governments to the financial crisis was just delaying the crisis. It wasn't ending it. He saw that basically what happened, not just in the United States but also in Europe, was that the banks had gotten really levered up. They'd borrowed way, way, way too much money and had a lot of bad loans.

And the bank losses were effectively being guaranteed by governments, and the reason that the financial crisis went away, the reason that, you know, the panic in the streets ended, was that governments were credible, that people believed when the United States government or when the French government or the German government stepped in and said we're not going to let our banks fail, that they could actually accomplish that.

And what he saw was that the debts that had been accumulated in the societies, and particularly in the banking systems, were too large for some governments to handle them, in some countries.

So in Ireland, the debts in the banking system were eight times the size of government tax revenues. In Iceland, it was even worse. It was bad in Greece, it was bad - it was bad throughout Europe. So he basically said, look, what happens the next time there's doubt in the system and panic in the system? People are going to ask the question, can governments afford to bail out these banks? And the answer the next time is going to be no, and then it's really ugly, because where do you go then? I mean, there isn't a backstop.

GROSS: Okay, so what he does instead of, like, sounding the alarm is he bets against governments and probably made a fortune.

LEWIS: Well, it's a measure of how unusual his bet was, that when he and his team of people start making their bets, they bet against - they buy credit-default swaps, which are essentially insurance policies on government bonds. They get paid if the government doesn't repay its debt.

And they buy, for example, credit-default swaps on Greek government bonds, and at the time Wall Street investment banks are willing to sell them those for less than a tenth of a percentage point. The markets regard it as totally implausible that governments will not repay their debts.

We're already in a situation now where Greece is obviously not going to repay its debt. He's been proven right. So when he made these bets, he was basically alone in the marketplace doing it. And when I was working on "The Big Short," I mean you pointed out that what I did is I kind of wander around and I talk to people who had seen the subprime crisis coming and who had bet against subprime mortgage bonds.

And he was one of a handful of investors who had done it in a big way. So he had a record of prescience. But when he was telling me this story about how governments were next, I thought no way, there's no way it's going to get that bad.

And he seemed so convinced about something that seemed so apocalyptic. You know, I asked him, well, if that happens, then, you know, there's chaos on the streets, there are riots in the streets. Where do you put your money? He says: guns and gold.

And at that point I thought he was nuts. I thought there's no way that this scenario is going to come true, and clearly the market sort of agreed with me at that time. The market was willing to sell him these bets - very, very, very cheaply. So yes, he's done very well with it.

GROSS: Guns? Gold I know has skyrocketed. Guns, investing in guns?

LEWIS: To protect your gold, I think was the idea.

GROSS: Oh, oh, I see.

(SOUNDBITE OF LAUGHTER)

LEWIS: Then what you have is – what you have is, is the price of gold goes up effectively in response to the collapse in faith in governments. I mean, you see the price of gold skyrocketing now, and the reason for that is just that, it's that people are - investors are ever more wary about paper currency because they don't trust the governments as much as they used to.

And when you don't trust the governments, you're making some assumptions about what might happen to the social order, and so he was that kind of – and the vision was apocalyptic, and I wasn't prepared to go there in my mind. So I actually did not use him in "The Big Short." I left him on the cutting room floor.

But then when this situation in Europe starts to blow up, and actual countries are going bankrupt, and Iceland goes bankrupt, and Ireland needs to be bailed out, and Greece is on the verge of bankruptcy, I went back to him because obviously the man had insight that was useful.

GROSS: And did he give you any insight about the future?

LEWIS: Well, he, if you asked him, he'd say that it is inevitable that the euro will become unraveled, that Greece will default on its debt, that there'll be falling dominoes in Europe. It doesn't mean he's right, but he would tell you that it starts with - probably with Greece, then with Spain and Italy, and he thinks actually France has got unsustainable levels of debt, and the markets will turn on the French government.

And exactly how it unfolds he wasn't clear. He wasn't clear whether Greece leaves the euro first or the Germans decide they want nothing to do with it anymore. But the basic point he makes is that for the European Union to stick together, basically the German people need to be willing to take on the debts of everybody else, and they aren't.

And so there's an inevitable conclusion that we're driving to. His view is that this may not be actually the end of the world but that a lot of people are going to lost a lot of money, and he just didn't want to be one of them.

GROSS: So let's take a look at Greece, which has been on the verge of default. Moody lowered its credit rating to junk status. And you say that Greece is virtually alone among European bankers. They didn't buy U.S. subprime-backed bonds or leverage themselves to the hilt. You say in Greece it's not the banks that sunk the country, it was the country that sank the banks. How did the country sink the banks?

LEWIS: The banks had the misfortune of owning lots of Greek government bonds, the Greek banks did. So when Greece defaults, Greek banks are going to be bankrupt because they own these bonds. It's the reverse of the situation elsewhere, where the banks actually incurred the bad debts and the countries had to step in and rescue the banks.

So Greece is - each case is different, but Greece is really peculiar because left alone in a dark room with a pile of money, what the Greek people really wanted to do was blow up their state, not their banks.

GROSS: So how did the government get into such financial dire straits?

LEWIS: Well, the government of Greece was never fiscally very stable, and what they did, with the help of American investment bankers, with the help of Goldman Sachs, is they disguised the true state of their finances to get themselves admitted to the European Union, the European currency.

And when they adopted the euro in 2000, 2001, it came with sort of an implicit German guarantee. They got essentially the same interest rates as everybody in Europe, and they were able to borrow very, very cheaply, and they used that ability to borrow huge sums of money that they were not going to be able to repay.

And so what they did was they did things like double the wage bill of the public sector in 10 years in real terms. There's a national railroad that generates 100 million euros in revenues a year that pays out 400 million euros in salaries to its workers. Work for the Greek railroad and your average salary of someone who works for the Greek national railroad is 65,000 euro a year.

I mean, the Greek people treated the state as a kind of pinata filled with goodies, and everybody kind of took a whack at it.

GROSS: So did politicians legislate that the money be used that way so that they could get re-elected?

LEWIS: Yes, both parties were essentially vast patronage operations, and when a party came to power, the result of winning the election was giving away lots of goodies to people who supported it.

So yes, it was - the Greek state is essentially a corrupt enterprise in the most extraordinary ways. I mean, you talk to, for example, people whose job it is to collect taxes in Greece, the Greek tax collectors, and they will tell you that our job is to be bad at our jobs. If you're too good at trying to collect taxes from Greeks, you get fired.

You talk to people who work for the government, and people are pretty clear that they regard these jobs as basically sinecures. It's a horribly inefficient society, and the inefficiency has been encouraged by the financial markets.

GROSS: So you said that when Greece was trying to enter the European Union and change its currency to the euro, that Goldman Sachs helped Greece hide its debt because you're only allowed to be three percent of GDP, of gross domestic product, in debt to join the European Union. Do I have that right?

LEWIS: Correct.

GROSS: Yeah, so you describe what Goldman Sachs did as not illegal but definitely repellent. What did they do?

LEWIS: They did trades with the government of Greece, currency trades, where they were off-market, that enabled the Greek government to book upfront a big profit but down the road would have to repay Goldman Sachs quite a bit.

So it looked like - effectively what they did was they lent the government money without saying that's what they were doing. And if you did this in the corporate world, a bunch of people would be put in jail. They helped the Greek government rig its books so that they looked acceptable to the European Union so they'd be admitted to the euro.

And this was not kind of a one-off situation. I mean, you look at the financial crisis in Europe, and the fingerprints of American investment bankers are everywhere. The financial class encouraged the worst sort of behavior.

Just at the same time they were encouraging the making of lots of bad loans in the United States, they were encouraging the same sort of behavior at the government level in Europe. And the basic problem was, you know, historically the role of the financier is to sort of, like, vet risk to make sure that risk is properly evaluated. And that role got perverted in recent times and instead the financier helped disguise risk.

And what Goldman did with Greece was essentially help disguise the risk of Greek government finances.

GROSS: So meanwhile, one way Greece is dealing with its debt crisis and being on the verge of default is strict austerity measures, you know, laying off a lot of people, selling off things. And I read in the newspapers that the austerity measures are actually making it worse, making the crisis worse.

LEWIS: Well, the problem is they're already in basically a depression, and if you're cutting government demand in that environment, you're making the problem even worse, you're lowering economic growth, you're reducing what tax revenues you take in. They're in this trap where anything they do to satisfy the demands of their creditors is likely to make them less solvent. So there's no obvious way out of their problem.

GROSS: So what is the European Union debating in terms of how to handle Greece? What are the issues?

LEWIS: Well, the elephant in the room that nobody really wants to point out is that the only way the currency union works, the only way you can unify such disparate cultures and economies as Greece and Germany is if they have a fiscal arrangement like we do, where they're totally fiscally integrated, there is essentially a mechanism at the federal level to collect taxes and distribute funds.

So essentially the German people and the solvent people in Europe need to cover the debts of the insolvent ones. They are not, it appears, willing to do that. So everything short of that is this kind of Band-Aid, and what they're debating is - what they're trying to do right now is muddle through. They're trying to raise enough of a - essentially a rescue, a Greek bailout fund, that markets are persuaded that Greek government bonds will be paid off and markets will freely lend money to Greece.

But markets aren't persuaded. The interest rates that markets would charge Greece now are higher than ever. So what's - the attempt to sort of muddle through seems to be falling apart right now.

GROSS: If you're just joining us, my guest is Michael Lewis, and his new book is called "Boomerang: Travels in the New Third World," and a lot of it is about the European financial crisis, and the American financial crisis.

His other books include "Moneyball," "The Blind Side" and "The Big Short," all bestsellers. Michael, let's take a short break here, and then we'll talk some more. All right?

LEWIS: Yup.

GROSS: This is FRESH AIR.

(SOUNDBITE OF MUSIC)

GROSS: If you're just joining us, my guest is Michael Lewis, you may know him as the author of the bestsellers "Moneyball," "The Blind Side," "The Big Short." His new book is called "Boomerang: Travels in the New Third World," and it's about the debt crisis in Iceland, Ireland, Greece. It's about what Germany is or is not going to do about it, and it's also about the crisis, the financial crisis here in the United States, in California.

Let's take a look at Ireland, and you describe Ireland as a kind of unprecedented country in the sense that they had been a poor country for a real long time, and suddenly they were a really affluent country. How affluent, when they were affluent before the current crisis?

LEWIS: Well, at one point I think they were the second – they were per capita the second-richest country in the world. And it was miraculous what happened in Ireland. It's unprecedented in economic history. A thousand years of abject poverty suddenly ends, starting in the early '80s, and they grow this genuinely successful economy, and there had been lots of theories about why this happened.

A couple of Harvard professors proposed, maybe most persuasively, that really what changed was the birth rate, that the Catholic Church lost its influence in Irish life, and contraception was made available, and all of a sudden there are fewer young mouths to feed and there was a bulge of workers moving through, working-age people moving through the population, that relatively more people were productive.

So they had, actually, a nice little economy going until they discovered free money.

GROSS: What do you mean by that?

LEWIS: Well, like everybody else in the world, loans were made available that should never have been made available, and the question was what the Irish wanted to do with these loans. It was a little different from what other people wanted to do.

GROSS: How was it different?

LEWIS: Well, the Irish, when money was made freely available to Irish banks and individuals at shockingly low rates, the Irish wanted to buy Ireland. They created a land bubble that makes the things that happened in Arizona and in California look tame. They drove up the price of their own real estate to just incredible levels.

So a kind of upper middle-class house in Dublin changed hands at $80 million three years ago, and they - their banks, Irish banks, were behind this. The Irish banks have had money managers who invest in banks just say to me that the Irish banks were possibly the absolute worst banks in the world because they were at the heart of this bubble.

A single Irish bank, and this is in a nation of, what, seven million people, eight million people, a single Irish bank had losses of $34 billion. They got essentially nationalized by the Irish government. If you were to scale that to the United States, it's like a bank losing $3 trillion. So they went insane.

GROSS: So let me see if I understand this. The real estate went so high, the banks gave loans to people who couldn't afford the multi-million-dollar house that they were having, the people defaulted, and the banks...

LEWIS: Got stuck with the bad loans, that's right, with the losses. They lent money against this real estate - ever-inflated - at ever-inflated values, and it wasn't just houses, it was office buildings.

You wander around Ireland now, there are whole towns that are just empty that were built because someone imagined that someone might like to live there one day. They're called ghost estates, these empty, completely empty ghost towns, brand new. There was this unreality about it. I mean, who was going to move to Ireland? No one's ever moved to Ireland.

I mean, the idea that Ireland was going to be something that it's never been - there are office parks, skyscrapers where - that have never been used. They're just sitting there empty, with kind of water pooling in their lobbies. There was an unbelievable out-of-touchness with reality that happened in Ireland.

And it was - but the thing about Ireland that was so peculiar was it was completely domestic. It was a domestic phenomenon. The same sort of thing happened in Iceland, but the Icelanders wanted to go conquer the world with the money. They wanted to go buy things outside of Iceland.

The Irish turned in on themselves, and it was in some ways poetic because if you look at the history of Ireland, the Irish have always had a very uncertain relationship with their own land. For hundreds of years it was illegal for an Irish person to own land and so that they had, that they fetishized Irish soil was interesting.

GROSS: So Ireland did not invest in American subprime. That wasn't the problem. It was a problem similar to American subprime with housing sales and loans in Ireland that caused the collapse of the banks.

LEWIS: Correct. They essentially created...

GROSS: Their own version of the subprime.

LEWIS: Their own version of the subprime, but starting with a very solvent and successful society. In the case of the American subprime borrower, the typical American subprime borrower was someone who had - who was making up for diminishing expectations with loans. They were borrowing money to - their job wasn't paying as well as it used to pay. They lost their job, and so they turned to their house and borrowed money against their house.

The Irish, perfectly solvent, successful Irish people, turned themselves into subprime borrowers by creating this land boom. It was extraordinary. I mean, they took a perfectly viable operation and ruined it by just an act of excessive optimism.

GROSS: Michael Lewis will be back in the second half of the show. His new book is called "Boomerang: Travels in the New Third World." I'm Terry Gross, and this is FRESH AIR.

(SOUNDBITE OF MUSIC)

GROSS: This is FRESH AIR. I'm Terry Gross, back with Michael Lewis, the author of the bestsellers about Wall Street, "Liar's Poker" and "The Big Short." His books "The Blind Side" and "Moneyball" were adapted into films. We'll talk about the new film "Moneyball" later.

Lewis's new book, "Boomerang: Travels in the New Third World," is about how the economies of Iceland, Ireland and Greece collapsed, and why Germany is being asked to help pay the debts of their fellow Europeans. The final chapter about this new Third World is about California where Lewis lives.

You describe the Germans as now being in control of the financial fate of Europe. In what way?

LEWIS: Well, this is interesting, because the euro as originally conceived was regarded as a tool for subduing Germany. It was going to yoke Germany to the rest of Europe so it couldn't declare war on it ever again, and instead it has become this mechanism for Germans essentially running Europe. The rest of Europe or the periphery of Europe is now at the mercy of the German creditor. Right now there are Germans in the Irish treasury. There are Germans actually in Greece working with the Greek tax collectors collecting taxes from Greek people.

The Germans now have enormous leverage in Europe because without the German willingness to repay the debts of others, countries are going to be bankrupt because they're going to default.

GROSS: But why does Germany have money while so many other countries are on the verge of default?

LEWIS: It's a really great question. They're a far more competitive economy and they behaved very, very differently during the credit bubble. The German people did not borrow money they couldn't repay. They didn't inflate the value of their land. They behaved very responsibly and it's left them in the cat bird seat, although they don't think of it that way. They think - right now the German people are increasingly distressed that they may be dragged into having to paying off the debts of people who've behaved badly.

But the fact that Germany behaved so not just responsibly, but kind of efficiently in the presence of all this free money has left them as a sort of the creditor of all of Europe. And so that position gives them enormous leverage with these other countries.

GROSS: You say a lot of German people are very angry because the Germans were told by their government that if they joined the European Union they'd never be asked to pay off another country's debt, which is kind of what they're being asked to do now.

LEWIS: Yeah, the German people, when they entered the euro, they thought they had a pre-nup. You know, they thought they had a deal going in, that it wasn't a mechanism for them having to pay off the debts of others, and they would never be presented with a bill from the Greek government. That's the one thing all German people know about the euro. They gave up their deutschemark, which they loved, and entered the euro with an explicit understanding that everybody would have to behave as responsibly as they did with money. And that's why there are all these rules about fiscal behavior, what a government had to do in order to gain entry to Europe. That's why you could only have - be running a deficit that was only three percent of your GDP, etcetera, etcetera.

And it turned out the Greeks in particular lied to get into the euro and then once they got into the euro they used any excuse to break all the rules. And the German people understandably, are outraged that rule-abiding people such as themselves are in the position of having to pay for the behavior of people who broke the rules.

This to me is interesting in and of itself but it's also interesting in what it says about what's going on in this country. We have our own situation, it's just that we are federalized, it's less visible. But there is some faction of the American people who behaved very responsibly during the credit bubble, and there's some faction of the American people that behaved irresponsibly and the one is outraged that they're having to pay off the debts of the other.

GROSS: Well, that kind of leads me to the financial district in New York, where there's been this demonstration going on for a couple of weeks of, you know, hundreds and I think it might be over 1,000 now, mostly young people, just demonstrating against Wall Street and the financial practices that got us into our financial distress.

LEWIS: Yes. Wall Street in recent years seems to have become an engine of unfairness and you can see why people are outraged by what's happened there. I mean just back away from this financial crisis and the truth is we're still in it. This story I'm telling in this book is just an extension of the story I told in "The Big Short." It hasn't gone away. We haven't put to rest the problems that were created during the subprime bubble. But Wall Street, putatively private enterprises, these big Wall Street firms where people are paid more than anybody in the society because they supposedly know what they're doing with money, orchestrates the biggest misallocation of capital of money in the history of the world and pay themselves an awful lot of money while they're doing it.

The result of this is this crisis and the crisis leads to Wall Street being essentially bailed out of its own mistakes - that the government decides that the big Wall Street banks going down is unthinkable. And so once both the Bush and the Obama administrations decided that you couldn't let these firms fail and that they didn't want the mess of nationalizing them, there was really only one way forward and that way was to gift money to these banks until they're back on their feet and they can function at the center of the economy again.

But that to any normal person who is outside the system seems just ridiculously unfair. It looks like, you know, socialism for capitalists and capitalism for everybody else. So it's no wonder that people are marching in southern Manhattan.

GROSS: So getting back to Europe. You've got, you know, the European Financial Stability Fund, the IMF, the European Central Bank all trying to figure out what to do in order to rescue the countries that are nearing default. There's more and more loans being made. What if Greece defaults? What if one or two other European countries default? I mean this would be unprecedented, right?

LEWIS: Yes. This is a really good question because Greece is going to default. Greece has already defaulted in some sense. And there's already a deal on the table to repay bondholders less than 100 cents on the dollar. The question is how much are people going to lose and how messy and disorderly is this default going to be? But, so it's going to happen. It's just a question of kind of how it happens. And there are two things to think about. One is when, say Greece, defaults, the banks that Greece doesn't pay money back to are weakened. Big French banks. Big German banks. The French especially will have big losses because they own lots of Greek government debt. The Greek banks are going to be wiped out.

When that happens there's a kind of ripple effect, right - a chain reaction. The Greek government defaults, the French bank fails, people who have loans out to the French bank are all of the sudden regarded with skepticism, and there is widespread distrust of financial institutions, much like there was after Lehman Brothers went down. That's a very likely scenario.

The other thing that happens is that all of sudden the possibility of a sovereign default is real. The possibility that a country won't pay back its debts is real and people started asking questions about other countries. They asked questions about Spain, and Italy and even France. And the interest rates that people charge those countries to lend to them to go way, way up, which makes the likelihood of sovereign default even greater. So what the IMF and the European Central Bank are desperately trying to do is slow the process down.

I don't think they're actually trying to prevent it anymore. I don't think anybody inside the IMF thinks that Greece won't default - won't cause its creditors to take some losses. I think what they think is slow it down, make the losses seem manageable, manage the situation so there isn't panic in the streets.

GROSS: Do you think the European Union is going to survive this? Do you think the euro will survive the financial crisis?

LEWIS: I think the European Union is more likely to survive the more quickly all this comes to a head. That the longer that the Greek people are forced to endure this sort of hardship and the longer that the German people have to resent this growing obligation south of them, the less likely they will be to want to be together.

But if crisis comes tomorrow and Greece gets booted out of the euro and has to go back to the drachma, etcetera, etcetera, I think it's quite possible that the union will be fine. I mean I think the union actually works. It's the currency that's the problem.

GROSS: My guest is Michael Lewis. His new book is called "Boomerang: Travels in the New Third World." We'll talk about the film adaptation of his new book "Moneyball" after a – the new film adaptation of his book "Moneyball," that is, after a break. This is FRESH AIR.

(SOUNDBITE OF MUSIC)

GROSS: So if you're just joining us, my guest is Michael Lewis. We're talking about his new book "Boomerang: Travels in the New Third World," and the new Third World countries included in his book, countries in great financial crisis are Iceland, Greece and Ireland. He writes about Germany and the ways that Germany may or may not help bail out these other countries. And he also writes about California, which he says is in great financial stress and compares California to the countries that he writes about.

Now Michael, you live in California. You yourself are not poor by any means. You always have something on the bestseller list - two things now, I think. But do you feel like you live in a Third World country?

LEWIS: I feel like I live in a country that's going to be dealing with problems one associates with the Third World: radical declines in public services, the real possibility that municipalities don't repay their debts, a kind of a fraying of the civic fabric that's all the more peculiar because it's taking place in the context of great affluence. So yes, there is a real connection to Third World life now in California.

We have, just north of us in Berkeley, an actual bankrupt city in Vallejo. And you go there and wander around the streets that are not being paved and the public services aren't being rendered and the police force that can't do its job because it's been cut in half and you think oh my God, it can happen here.

GROSS: So does that make you think that slashing public services is not the answer to dealing with financial crisis? Or does it make you think it's the only answer but it causes even more problems?

LEWIS: I think that we have a basic problem in America. And the basic problem is people want things they don't want to pay for. People want services they don't want to pay for. And we've been disguising this problem by borrowing money and we're coming to a moment of reckoning. And the question is how that moment of reckoning occurs. It does not appear to me it's going to occur first and most painfully at the federal level because all sorts of people seem willing to lend the U.S. government money even when it's in a state of crisis. But at local levels I do think there's going to be a problem. People will not lend money to the city of San Jose, the city of Los Angeles at some point. And so very, very, very hard decisions are going to have to be made about what level of service we're willing to pay for and to what extent are we engaged in a common enterprise?

You know, instead of having a police force do we want to retreat behind gated communities kind of thing. And so I think that we're going to be forced to answer questions that we just basically have been putting off.

GROSS: In California do you think the crisis is in part the subprime crisis, the collapse of major American banks, as well as the fact that California really took a lead in states in just slashing taxes?

LEWIS: Yes, it's both. In a strange way California had erected this unstable financial situation and then resolved it with bubbles. You know, the problem dates back to capping the property taxes in the late 1970s. California is peculiar and revealing because it's extreme democracy. You can't argue in California that the people aren't having their say. All the important fiscal decisions are done by plebiscite – done by ballot initiatives. The people are expressing their will, and what the people seem to want is to have things and not pay for them.

The way at the state level, the state has dealt with its the problems of property tax rates being too low is - well, two ways really: one, they've been the beneficiary of two great bubbles, two of the greatest bubbles in the history of mankind - the Internet bubble and the subprime bubble. They generated all - you know, massive revenues briefly but then, of course, went away. But the other way the state deals with it is to push it down to the local level. If you talk to people in cities they'll tell you that if there is a fiscal crisis in California it's not the state who is not going to repay its debts, it's not the state that's going to go bankrupt, it's the state that's going to say we're no longer passing the money down to the lower levels. You Berkeley or you Oakland have to cope with your problems on your own. So it's sort of an every man for himself at the local level and this is what's happening now.

One of the things I did in the book was wander around and talk to political leaders who were trying to sort out the problem. The mayor of San Jose for example, he said - basically he said to me I'm looking at a future where one day we're going to have a single government employee in the city of San Jose and his job is going to be to pay the pensions of retired city workers. And that's all were going to have.

GROSS: So, I can't let you go without asking you a couple of questions about "Moneyball," the film adaptation of your best-selling book about how Billy Beane, the general manager of the Oakland A's, used statistics to create a team that was largely based on, or at least included several players that other teams didn't really want so Billy Beane could buy them cheap. And this is a team that doesn't have much money, but he knew through these statistics that each of these players had a special skill that could help really improve the team's performance.

So what kind of amazed me, you know, we rebroadcast your interview about "Moneyball" a couple of weeks ago. We thought people would be interested in hearing the story as you told it. I know after seeing the movie I really wanted to know, well, what was the story as Michael Lewis wrote it. So we replayed your interview and I notice a part where you said that a couple of the guys who came up with the statistical measurements that Billy Beane used developed their algorithms while creating derivatives.

Now, your writing this book in 2003 before you know that derivatives are going to be the cause of the downfall of the economy - that it's going to get us into this incredible mortgage crisis and financial crisis, it's going to spread around the world. And, of course, there's no mention of derivatives there's no mention of derivatives...

(SOUNDBITE OF LAUGHTER)

GROSS: ...in the movie. And I don't know how much of that is mentioned in the book. But talk about the connection of these derivatives guys to the kind of, you know, saber metrics that Billy Beane used and that other teams used.

LEWIS: Well, there's a way of thinking in the financial markets that got imposed upon the market for baseball players. And the way of thinking is: there are inefficiencies here, we're going to find them and exploit them. You know, you can buy A over here in this market and sell A over here at this market and make a riskless profit. And these guys were doing that. They were looking for essentially for mistakes that financial markets made to make profits. And they took that way of thinking into the market of baseball players and they looked for mistakes that the market for baseball players made in pricing baseball players.

It was a Wall Street way of thinking that Billy Beane imposed on the Oakland A's. It is ironic that having spawned this way of thinking Wall Street so lost track of it. I mean Billy Beane since "Moneyball" came out has been inside of every Wall Street firm giving speeches about the importance of paying attention to what you measure and the importance of evaluating things properly. And while he was giving those speeches Wall Street was spinning out of control and it was misvaluing the things that it was supposed to be valuing properly. So I think what happened in the financial markets is that they got too complicated for ordinary people to evaluate them.

So you had...

GROSS: Oh, 'cause stuff was hidden. You weren't supposed to be able to evaluate them.

LEWIS: That's correct.

GROSS: That's kind of intentional, I think.

LEWIS: It was intentional. I think it was actually intentional. And the market for baseball players hasn't gotten that way yet. You do sort of wonder if it couldn't, you know, is it possible that could also happen in the market for baseball players? But if it does, you know, it's not going to be Armageddon for all of us. It's just going to be Armageddon for a baseball team.

GROSS: So the character that Jonah Hill plays in "Moneyball" in real life, was he a financial guy who learned his stuff statistically doing derivatives?

LEWIS: In real life he is a composite character but he's basically a young man who comes out of Harvard or Yale who would have gone to Wall Street but discovered this opportunity in baseball. There are in fact now plenty of people in not just baseball but the front offices of all sorts of professional sports who have walked out of a Wall Street jobs to take those jobs. That person does exist in real life. But the person that Jonah Hill is modeled on he never went to work on Wall Street, he just went straight into sports.

GROSS: Did you ever think there would be such a dramatic connection between Billy Beane's approach to building his team and the collapse of the global economy?

(SOUNDBITE OF LAUGHTER)

LEWIS: I didn't - I thought - I did not...

GROSS: I'm just talking about these complicated algorithms that came out of derivatives.

LEWIS: They're not – I tell you...

GROSS: Yeah.

LEWIS: I mean I tell you that look, I worked on Wall Street and the Wall Street I left you could say a lot of things about it, but the people were doing the complicated stuff, they weren't stupid. If they constructed a bet, the last thing you wanted to do was be on the other side of that debt. Somehow Wall Street became the dumb money and I didn't see it coming. Wall Street became the dumb money at the table. The people constructing the bets for the big Wall Street firms constructed bets that you did want to be on the other side of, that ended up being huge losing bets for the Wall Street firms. And that shocked me. I mean I had turned to my eye away from Wall Street to sports when this whole financial crisis got going. And when I saw how much money these smart guys who traded derivatives inside the Wall Street firms had lost for their Wall Street firms it took my breath away because I realized that somehow these big firms had become dumb. And how that happened is in some ways at the center of this whole event.

GROSS: Well, Michael Lewis, it's great to talk with you again. Thank you so much.

LEWIS: Thank you.

GROSS: Michael Lewis' new book is called "Boomerang: Travels in the New Third World." You can read an excerpt on our website, freshair.npr.org.

Coming up, our linguist Geoff Nunberg considers a phrase we've been hearing a lot in political discussions and speeches - class warfare. This is FRESH AIR.

UNLIKE MOST MARXIST JARGON, 'CLASS WARFARE' PERSISTS

TERRY GROSS, host: President Obama's call for a minimum tax for millionaires was greeted by many Republicans what the charge of class warfare, which they often raise when someone says that the rich are not paying their fair share of taxes. Our linguist Geoff Nunberg thinks it's curious that the phrase is still around when the other jargon of Marxism has disappeared from public life.

GEOFF NUNBERG: Class warfare was a dodgy phrase from the outset. In one of the most famous sentences in the history of political thought, Marx and Engels wrote in their 1848 "Communist Manifesto": The history of all society up to now is the history of...

And that's where things get complicated. In the original German they wrote Klassenkampfen, which means class struggles. But some of their critics rendered it more belligerently as class warfare. That was the stock label they put on the bearded socialist agitator in political cartoons. And some socialists actually did use the phrase, while others tried to turn it around to describe the capitalist oppression of labor. But warfare more readily suggested the disorderly violence that broke out from below. It conjured up the red flags, cloth caps and barricades of "Les Mis," not the measured operations of the parliaments and law courts on the side of the bourgeoisie.

It was those violent overtones that endeared class warfare to the right and spared it the fate of Marxist jargon like proletariat, class struggle and the masses. Even the left has bailed on those expressions. They're only about a quarter as common in the pages of the "New Left Review" as they were in the 1970s. But class warfare has been on a tear in the language of the right - it's used five times as often in The Wall Street Journal now as it was 40 years ago. In fact, the phrase has actually become more frequent as the marginal tax rates went down. It's sort of a revenant, a specter that haunts the English language whenever appeals for making the rich pay more are heard in the land.

Like other dead metaphors, it has to be said just so. It's class warfare, not class war, which sounds disconcertingly European, where class isn't a forbidden subject. In a speech to a Labour Party Conference in 1999, Tony Blair famously announced: the class war is over. You wonder how people would have responded if Bill Clinton had said that. What, there was a war?

In fact, class warfare is just about the only phrase in American political discourse where class can appear without the all-forgiving prefix middle. People who level the charge of class warfare never go the logical next step to extol the virtues of class cooperation. That would imply that there actually are classes in America and would undermine the ideal of a land of opportunity. As the story goes, there are only two kinds of Americans - those who are already rich and those who expect to be. That's why Americans won't tolerate tax-the-rich proposals that pit one group against another, when we should all be in it together.

Democrats react by dismissing the charge as a tired Republican talking point, or by trying to turn it around the way the old Socialists did. During the 2000 election, Al Gore described the Bush tax program as class warfare on behalf of billionaires. But the charge does tend to put Democrats on the defensive. As President Obama said when he announced his tax program, this is not class warfare, it's math. But that approach doesn't always work in politics, where denials often are apt to raise suspicions rather than dispel them - as in I did not have sexual relations with that woman, or I am not a crook.

Yet these days, the C-word isn't quite as off-limits as it used to be, maybe because the populist genie has been let out of the bottle. In a speech the day after he announced his tax ideas, Obama said, if asking a billionaire to pay the same rate as a plumber or a teacher makes me a warrior for the middle class, I wear that charge as a badge of honor. That may be just stump speechifying, but it also makes him the first Democratic politician who has ever accepted the label and invoked the rhetoric of war against the rich.

The tone is different on the right, too. The Republican leadership still warn against divisiveness and avoid talking about class explicitly, other than saying that we shouldn't be increasing taxes on the job creators but rather broadening the base. But the conservative media and bloggers have been less circumspect about cleaving society in two. Some of them talk about an all-out war between the producer class and the moocher class. And Fox Business News ran a series of segments last spring called "Entitlement Nation: Makers vs. Takers." It isn't entirely clear who the moochers and takers are, but everybody seems to define them as including the 51 percent of American households who don't pay federal taxes, along with those who receive Pell Grants and other forms of government assistance.

This isn't just about a couple of welfare queens anymore. It actually recalls another famous sentence from the "Communist Manifesto": Society is splitting more and more into two enemy camps, into a faceoff between two huge classes. It's true that Marx and Engels would have wanted to draw the line a little differently and rearrange those maker and taker place cards. And of course they were rooting for a different team. Still, they all share the same basic theory of class conflict as the motor force of history. It puts me in mind of what an Italian friend of mine once said: America, what a country. You have everything in America. You have mechanical bulls. You have early bird specials. You can even find Marxists in America. He was right about that - and in the damnedest places, too.

GROSS: Geoff Nunberg is a linguist who teaches at the School of Information at the University of California, Berkeley. You can find links related to his commentary on our website, freshair.npr.org. I'm Terry Gross.

(SOUNDBITE OF MUSIC)

GROSS: On the next FRESH AIR, a former prosecutor who spent years interviewing Islamic extremists about their motivations. We talk with Ken Ballen, author of "Terrorists in Love." Also Howard Gordon, former executive producer of "24," talks about his new series "Homeland." It's about a POW who has just come home from Iraq and the CIA agent who suspects he's become a spy for al-Qaida. Join us.

Transcripts are created on a rush deadline, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of Fresh Air interviews and reviews are the audio recordings of each segment.