Tag Archives: Iceland

Burning and Looting

What caused the financial crisis?

Was the it the models, the expectations, correlated risks, non-transparency, dangerous financial innovation, or weak regulations?

It was probably all of the above, but recently it has become clear that the banks caused it as well.

While people have long observed that mismatched incentives, poor models, and lax regulation allowed and encouraged the banks to make mistakes, it has only recently become clear that some banks (+ hedge funds, etc) helped create the crisis by stimulating investment that fed the housing bubble so they could bet on it bursting.  Specifically, those who were betting on a housing bust enhanced the bubble by creating Collateralized debt obligations (CDOs) they wanted to bet against.  By continually creating and buying these CDOs they almost certainly enhanced the bubble, causing a bigger burst and made more money on the bust.  The extent to which this actually promoted the bubble has only recently become clear.

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More on Iceland and the Financial Crisis

Michael Lewis writes vividly about Iceland, fishing, and its financial crisis in his Vanity Fair article Wall Street on the Tundra:

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.

Fishermen, in other words, are a lot like American investment bankers. Their overconfidence leads them to impoverish not just themselves but also their fishing grounds. Simply limiting the number of fish caught won’t solve the problem; it will just heighten the competition for the fish and drive down profits. The goal isn’t to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.

This insight is what led Iceland to go from being one of the poorest countries in Europe circa 1900 to being one of the richest circa 2000. Iceland’s big change began in the early 1970s, after a couple of years when the fish catch was terrible. The best fishermen returned for a second year in a row without their usual haul of cod and haddock, so the Icelandic government took radical action: they privatized the fish. Each fisherman was assigned a quota, based roughly on his historical catches. If you were a big-time Icelandic fisherman you got this piece of paper that entitled you to, say, 1 percent of the total catch allowed to be pulled from Iceland’s waters that season. Before each season the scientists at the Marine Research Institute would determine the total number of cod or haddock that could be caught without damaging the long-term health of the fish population; from year to year, the numbers of fish you could catch changed. But your percentage of the annual haul was fixed, and this piece of paper entitled you to it in perpetuity.Even better, if you didn’t want to fish you could sell your quota to someone who did. The quotas thus drifted into the hands of the people to whom they were of the greatest value, the best fishermen, who could extract the fish from the sea with maximum efficiency. You could also take your quota to the bank and borrow against it, and the bank had no trouble assigning a dollar value to your share of the cod pulled, without competition, from the richest cod-fishing grounds on earth. The fish had not only been privatized, they had been securitized.

It was horribly unfair: a public resource—all the fish in the Icelandic sea—was simply turned over to a handful of lucky Icelanders. Overnight, Iceland had its first billionaires, and they were all fishermen. But as social policy it was ingenious: in a single stroke the fish became a source of real, sustainable wealth rather than shaky sustenance. Fewer people were spending less effort catching more or less precisely the right number of fish to maximize the long-term value of Iceland’s fishing grounds. The new wealth transformed Iceland—and turned it from the backwater it had been for 1,100 years to the place that spawned Björk. If Iceland has become famous for its musicians it’s because Icelanders now have time to play music, and much else. Iceland’s youth are paid to study abroad, for instance, and encouraged to cultivate themselves in all sorts of interesting ways. Since its fishing policy transformed Iceland, the place has become, in effect, a machine for turning cod into Ph.D.’s.

Thanks to Arijit Guha for the pointer.

After Iceland’s crisis – social reorganization?

From the Guardian After the crash, Iceland’s women lead the rescue

Icelandic women are … more likely to be thinking about how to put right the mess their men have made of the banking system than about cooking them comfort food. The tiny nation, with a population of just over 300,000 people, has been overwhelmed by an economic disaster that is threatening its very survival. But for a generation of fortysomething women, the havoc is translating into an opportunity to step into the positions vacated by the men blamed for the crisis, and to play a leading role in creating a more balanced economy, which, they argue, should incorporate overtly feminine values.

The ruling male elite is scarcely in a position to argue. The krona has collapsed; interest rates and inflation have soared; companies and households which have borrowed in foreign currency are overwhelmed by their debts and unemployment is at record levels. An exodus of young people is feared from the capital only recently held up as a centre of cutting-edge cool. Walking along Laugavegur, touted until a year or so ago as the Bond Street of Reykjavik, the gloom is palpable.

The idea that Reykjavik, an attractive, low-rise provincial place, could be a financial nerve centre on a par with the gleaming skyscrapers of Canary Wharf and Wall Street now seems utterly absurd. Over the past 10 years, however, little Iceland became a test-bed for the new economic order. Led by businessmen such as Baugur boss Jón Asgeir Jóhannesson, a nation previously best known for cod and hot springs reinvented itself as an Atlantic tiger. The Icelanders bought stakes in huge tracts of the British high street, including House of Fraser, Whistles and Karen Millen. Their banks were equally buccaneering, adopting free market reforms with gusto and moving with relish into financial engineering. The upshot: they now owe at least six times the country’s income for 2008 and have been taken into state hands.

Unlike in the UK, Iceland’s women are at the forefront of the clean-up. The crisis led to the downfall of the government and the prime minister’s residence – which resembles a slightly over-sized white dormer bungalow – is now occupied by Jóhanna Sigurdardóttir, an elegant 66-year-old lesbian who is the world’s first openly gay premier. When she lost a bid to lead her party in the 1990s, she lifted her fist and declared: “My time will come.” Her hour has now arrived – and the same is true for a cadre of highly accomplished businesswomen.

Prominent among them are Halla Tómasdóttir and Kristin Petursdóttir, the founders of Audur Capital, who have teamed up with the singer Björk to set up an investment fund to boost the ravaged economy by investing in green technology. Petursdóttir, a former senior banking executive, and Tómasdóttir, the former managing director of the Iceland Chamber of Commerce, decided just before the crunch to set up a firm bringing female values into the mainly male spheres of private equity, wealth management and corporate advice.

Björk discusses Iceland’s response to financial crisis

From Pitchfork – the Icelandic musician and star Björk, on the Icelandic response to the financial crisis (which locked up Iceland’s imports as massive bank failures lead to a currency crash):

… the Náttúra Campaign, the Icelandic environmental movement co-founded by Björk. Náttúra’s original mission was to protest the construction of foreign-backed aluminum factories in Iceland, but in recent weeks, the movement has taken a dramatic turn. ….

Björk: For the last two weeks, Icelanders are getting a crash course in economics. I mean, I didn’t know about these things two weeks ago. The news is full of right-wing guys saying, “Stop the environmental value stuff! We should just build factories everywhere now, because that’s where the money is!” …

These aluminum smelters, nobody wants to build them in Europe, because there’s so much pollution. So it’s like, “Oh, just go dump them in Iceland.” We are getting them energy for so cheap that they are saving so much money by doing all this here.

Instead, what we are saying is, we’ve got three aluminum factories, let’s work with that, we cannot change that. Why not have the Icelandic people who are educated in high-tech and work already in those factories in the higher paid jobs, why not let them build little companies who are totally Icelandic with the knowledge they have? Then they get the money and it stays in the country. Then we can support the biotech companies and the food companies and all these clusters. I think that if you want to be an environmentalist in Iceland, these are the things you’ve got to be putting your energy into.

A lot of investors [are] coming, and I’m hoping they will want to invest in the high-tech cluster. There are money people here that did not lose a lot of money. For example, here is one investment company in Iceland only run by women. They are doing fine. [laughs] They aren’t risk junkies. They just made slow moves. The people who are crashing, they took a huge loan and then another huge loan, and so on. And it’s all just air. But these women didn’t build on air.

I’ve also been trying to get someone to Iceland to suggest green industries to Icelanders and introduce us to the companies that haven’t even been built yet in the world. This man Paul Hawken, who is famous in the States, he has agreed to come here in November. He’s supposed to be a green capitalist. He’s a functionalist, not just an idealist. I’m hoping he can unite these two polarized groups in Iceland. I’m setting up a meeting with him and the people in power. Because I think private money people can put money into those seed companies, but most of all, the government has to do it. It has to be a mixture of two things. It cannot just be visionary money people.