Vanity Fair: Michael Lewis Discusses His Prophetic 1989 Article on a Japanese Earthquake

March 18th, 2011

Vanity Fair

by Jaime Lalinde
March 18, 2011, 4:00 PM
Read Full Article Here

In the late ’80s, Michael Lewis traveled to Japan for an article that would appear in a 1989 issue of the now-defunct Manhattan, Inc magazine. The piece that resulted, “How a Tokyo Earthquake Could Devastate Wall Street and the World Economy,” was part fact, part fiction: What would the economic fallout be if a 7.9-magnitude earthquake struck Japan’s largest city? Lewis discussed whether the country’s infrastructure was capable of withstanding such a high-magnitude earthquake—pointing out that the complex systems in place then were programmed to shut off in extreme conditions, because they could not be trusted to operate effectively. However, much of the economic toll that Lewis envisioned was predicated on different, more prosperous financial times in Japan. Following the publication of the article, the country entered its “Lost Decade,” sinking into economic irrelevance. But Lewis’s article remains eerily incisive throughout: “Many of Tokyo’s citizens, like Holland’s, live on unstable land that has been reclaimed from the sea. Neon signs are everywhere. So are bulk-chemical factories. Even if the skyscrapers don’t fall, they’ve created new hazards by jamming people into perilously close quarters.” We talked to the Vanity Fair contributor about his prescience and the ongoing catastrophe in Japan.

VF Daily: When you first heard the news of the tsunami, what were your expectations regarding the economic fallout that would follow? Nearly a week later, how have those differed from the reality of the economic fallout?

Michael Lewis: The big point is that the earthquake imagined by the characters in my piece was more or less right under Tokyo, and so the damage it caused was far, far worse. My reaction to the news of this very real earthquake was: it’s not nearly as bad as the (plausible) nightmare scenario. And it isn’t. And until I remembered that I had written this very weird piece back in 1989, I didn’t think much about the economic fallout. But about 24 hours after the tsunami, I woke up to an e-mail from an old friend from my Wall Street days, who still sells bonds for a living, in which he expressed vast amusement that my piece was being passed around Wall Street trading desks and being taken seriously—and that I was being viewed as having somehow foreseen this disaster. This was, of course, absurd, but never mind: I now had a responsibility to think about the event in economic terms. And my first thought was: Japan is now in such bad financial shape that even this less-damaging earthquake might create a great deal of financial drama.

In what ways are the Japanese prepared to deal with this catastrophe compared with, say, Californians and the Irish?

Don’t know, of course. But I’d bet the big difference would be in the political fallout. The Japanese put up with an amazing lack of honesty from their politicians, and an amazing lack of attention to their personal care and comfort. The sheer level of hysteria would be much higher if this happened anyplace else, but especially if it happened in California. The shrieks from my neighborhood in Berkeley alone would drown out the sound of any tsunami. An earthquake in Ireland, if it could be arranged that it knocked down the empty buildings without harming the people, might actually be useful.

Japan’s economy was already in bad shape before this catastrophe—their public debt totaling almost 200 percent of their G.D.P. How can they recover, and who will be footing the bill?

I wouldn’t be surprised if this event calls into serious question the Japanese government’s ability to service its debt. But I would be surprised if anyone wound up footing the bill other than the Japanese people, as they are both rich and famously poorly insured. A friend in the catastrophe-insurance market points out that the last big Japanese earthquake, in Kobe, generated roughly $100 billion in losses, only $3 billion of which were insured. The nature of Japanese society is to share the burden, and so the losses, I assume, will be socialized. I wouldn’t be shocked if the Japanese government, to cover the losses, will need to sell off at least some of their 800-and-something billion dollars in U.S. treasury bonds. And I wonder: if the Japanese become big net sellers of our bonds, who will step in to buy them?