How the Servant Became a Predator: Finance’s Five Fatal Flaws
Monday, 10/12/2009 - 7:43 pm by Bill Black | 4 Comments
Roosevelt Institute Braintruster William K. Black explains how the finance economy preys on the real economy instead of serving it. He shows how both have become dysfunctional and warns that we must not neglect the real economy — the source of our jobs, our incomes, and the creator of goods and services — as we focus on financial reform.
What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.
1. The financial sector harms the real economy.
Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large. The finance sector is an intermediary — essentially a “middleman”. Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector’s parasitism.
Second, the finance sector is worse than parasitic. In the title of his recent book, The Predator State, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation. The facts are alarming:
• Corporate stock repurchases and grants of stock to officers have exceeded new capital raised by the U.S. capital markets this decade. That means that the capital markets decapitalize the real economy. Too often, they do so in order to enrich corrupt corporate insiders through accounting fraud or backdated stock options.
• The U.S. real economy suffers from critical shortages of employees with strong mathematical, engineering, and scientific backgrounds. Graduates in these three fields all too frequently choose careers in finance rather than the real economy because the financial sector provides far greater executive compensation. Individuals with these quantitative backgrounds work overwhelmingly in devising the kinds of financial models that were important contributors to the financial crisis. We take people that could be conducting the research & development work essential to the success of our real economy (including its success in becoming sustainable) and put them instead in financial sector activities where, because of that sector’s perverse incentives, they further damage both the financial sector and the real economy. Michael Moore makes this point in his latest film, Capitalism: A Love Story.
• The financial sector’s fixation on accounting earnings leads it to pressure U.S manufacturing and service firms to export jobs abroad, to deny capital to firms that are unionized, and to encourage firms to use foreign tax havens to evade paying U.S. taxes.
• It misallocates capital by creating recurrent financial bubbles. Instead of flowing to the places where it will be most useful to the real economy, capital gets directed to the investments that create the greatest fraudulent accounting gains. The financial sector is particularly prone to providing exceptional amounts of funds to what I call accounting “control frauds“. Control frauds are seemingly-legitimate entities used by the people that control them as a fraud “weapons.” In the financial sector, accounting frauds are the weapons of choice. Accounting control frauds are so attractive to lenders and investors because they produce record, guaranteed short-term accounting “profits.” They optimize by growing rapidly like other Ponzi schemes, making loans to borrowers unlikely to be able to repay them (once the bubble bursts), and engaging in extreme leverage. Unless there is effective regulation and prosecution, this misallocation creates an epidemic of accounting control fraud that hyper-inflates financial bubbles. The FBI began warning of an “epidemic” of mortgage fraud in its congressional testimony in September 2004. It also reports that 80% of mortgage fraud losses come when lender personnel are involved in the fraud. (The other 20% of the fraud would have been impossible had these fraudulent lenders not suborned their underwriting systems and their internal and external controls in order to maximize their growth of bad loans.)
• Because the financial sector cares almost exclusively about high accounting yields and “profits”, it misallocates capital away from firms and entrepreneurs that could best improve the real economy (e.g., by reducing short-term profits through funding the expensive research & development that can produce innovative goods and superior sustainability) and could best reduce poverty and inequality (e.g., through microcredit finance that would put the “Payday lenders” and predatory mortgage lenders out of business).
• It misallocates capital by securing enormous governmental subsidies for financial firms, particularly those that have the greatest political power and would otherwise fail due to incompetence and fraud.
2. The financial sector produces recurrent, intensifying economic crises here and abroad.
The current crisis is only the latest in a long list of economic crises caused by the financial sector. When it is not regulated and policed effectively, the financial sector produces and hyper-inflates bubbles that cause severe economic crises. The current crisis, absent massive, global governmental bailouts, would have caused the catastrophic failure of the global economy. The financial sector has become far more unstable since this crisis began and its members used their lobbying power to convince Congress to gimmick the accounting rules to hide their massive losses. Secretary Geithner has exacerbated the problem by declaring that the largest financial institutions are exempt from receivership regardless of their insolvency. These factors greatly increase the likelihood that these systemically dangerous institutions (SDIs) will cause a global financial crisis.
3. The financial sector’s predation is so extraordinary that it now drives the upper one percent of our nation’s income distribution and has driven much of the increase in our grotesque income inequality.
4. The financial sector’s predation and its leading role in committing and aiding and abetting accounting control fraud combine to:
• Corrupt financial elites and professionals, and
• Spur a rise in Social Darwinism in an attempt to justify the elites’ power and wealth. Accounting control frauds suborn accountants, attorneys, and appraisers and create what is known as a “Gresham’s dynamic” — a system in which bad money drives out good. When this dynamic occurs, honest professionals are pushed out and cheaters are allowed to prosper. Executive compensation has become so massive, so divorced from performance, and so perverse that it, too, creates a Gresham’s dynamic that encourages widespread accounting fraud by both financial firms and firms in the real economy.
As financial sector elites became obscenely wealthy through predation and fraud, their psychological incentives to embrace unhealthy, anti-democratic Social Darwinism surged. While they were, by any objective measure, the worst elements of the public, their sycophants in the media and the recipients of their political and charitable contributions worshiped them as heroic. Finance CEOs adopted and spread the myth that they were smarter, harder working, and more innovative than the rest of us. They repeated the story of how they rose to the top entirely through their own brilliance and willingness to embrace risk. All of their employees weren’t simply above average, they told us, but exceptional. They hated collectivism and adored Ayn Rand.
5. The CEO’s of the largest financial firms are so powerful that they pose a critical risk to the financial sector, the real economy, and our democracy.
The CEOs can directly, through the firm, and by “bundling” contributions of its officers and employees, easily make enormous political contributions and use their PR firms and lobbyists to manipulate the media and public officials. The ability of the financial sector to block meaningful reform after bringing the world to the brink of a second great depression proves how exceptional its powers are to corrupt nearly every critical sector of American public and economic life. The five largest U.S. banks control roughly half of all bank assets. They use their political and financial power to provide themselves with competitive advantages that allow them to dominate smaller banks.
This excessive power was a major contributor to the ongoing crisis. Effective financial and securities regulation was anathema to the CEOs’ ideology (and the greatest danger to their frauds, wealth, and power) and they successfully set out to destroy it. That produced what criminologists refer to as a “criminogenic environment” (an atmosphere that breeds criminal activity) that prompted the epidemic of accounting control fraud that hyper-inflated the housing bubble.
The financial industry’s power and progressive corruption combined to produce the perfect white-collar crimes. They successfully lobbied politicians, for example, to legalize the obscenity of “dead peasants’ insurance“(in which an employer secretly takes out insurance on an employee and receives a windfall in the event of that person’s untimely death) that Michael Moore exposes in chilling detail. State legislatures changed the law to allow a pure tax scam to subsidize large corporations at the expense of their taxpayers.
Caution: Never Forget the Need to Fix the Real Economy
Economic reform efforts are focused almost entirely on fixing finance because the finance sector is so badly broken that it produces recurrent, intensifying crises. The latest crisis brought us to the point of global catastrophe, so the focus on finance is obviously rational. But the focus on finance carries a grave risk. Remember, the sole purpose of finance is to aid the real economy. Our ultimate focus needs to be on the real economy, which creates goods and services, our jobs, and our incomes. The real economy came off the rails at least three decades ago for the great majority of Americans.
We need to commit to fixing the real economy by guaranteeing that everyone willing to work can work and making the real economy sustainable rather than recurrently causing global environmental crises. We must not spend virtually all of our reform efforts on the finance sector and assume that if we solve its defects we will have solved the other fundamental reasons why the real economy has remained so dysfunctional for decades. We need to be work simultaneously to fix finance and the real economy.
Roosevelt Institute Braintruster William K. Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City.
http://www.newdeal20.org/?p=5330
Showing posts with label best post. Show all posts
Showing posts with label best post. Show all posts
29 September 2009
Into the Fourth Turning
Into the Fourth Turning
A Casey Research interview with Neil Howe, co-author of The Fourth Turning
The Fourth Turning is an amazingly prescient book Neil Howe wrote with the late William Strauss in 1997. The work, which describes generational archetypes and the cyclical patterns created by these archetypes, has been an eye-opener to anyone able to entertain the notion that history may repeat itself. At the time the book was published, the Boston Globe stated, "If Howe and Strauss are right, they will take their place among the great American prophets." Read this visionary interview published in The Casey Report, and see for yourself.
DAVID GALLAND: Could you provide us a quick introduction to generational research?
NEIL HOWE: We think that generations move history along and prevent society from suffering too long under the excesses of any particular generation. People often assume that every new generation will be a linear extension of the last one. You know, that after Generation X comes Generation Y. They might further expect Generation Y to be like Gen X on steroids – even more willing to take risk and with even more edginess in the culture. Yet the Millennial Generation that followed Gen X is not like that at all. In fact, no generation is like the generation that immediately precedes it.
Instead, every generation turns the corner and to some extent compensates for the excesses and mistakes of the midlife generation that is in charge when they come of age. This is necessary, because if generations kept on going in the same direction as their predecessors, civilization would have gone off a cliff thousands of years ago.
So this is a necessary process, a process that is particularly important in modern nontraditional societies, where generations are free to transform institutions according to their own styles and proclivities.
In our research we have found that, in modern societies, four basic types of generations tend to recur in the same order.
DAVID: The four generational archetypes. Can you provide a sketch of each for those of our readers unfamiliar with your work?
HOWE: Absolutely.
The first is what we call the Hero archetype. Hero generations are usually protectively raised as kids. They come of age at a time of emergency or Crisis and become known as young adults for helping society resolve the Crisis, hopefully successfully. Once the Crisis is resolved, they become institutionally powerful in midlife and remain focused on outer-world challenges and solutions. In their old age, they are greeted by a spiritual Awakening, a cultural upheaval fired by the young. This is the typical life story of a Hero generation.
One example of the Hero archetype is the G.I. Generation, the soldiers of World War II, who became an institutional powerhouse after the war and then in old age confronted the young hippies and protesters of the 1960s. Going back in American history, we have seen many other Hero archetypes, for example the generation of Thomas Jefferson, and James Madison, and President Monroe. These were the heroes of the American Revolution, who in old age were greeted by the second Great Awakening and a new youth generation of fiery Prophets.
After the Hero archetype comes the Artist archetype. Artist generations have a very different location in history -- they are the children of the Crisis. For Hero generations, child protection rises from first cohort to last. By the time Artists come along, child protection reaches suffocating levels. Artists come of age as young adults during the post-Crisis era, when conformity seems like the best path to success, and they tend to be collectively risk averse. Artists see themselves as providing the expertise and refinement that can both improve and adorn the enormous new institutional innovations that have been forged during the Crisis. They typically experience a cultural Awakening in midlife, and their lives speed up as the culture transforms.
A great example of the Artist archetype is the so-called "Silent" Generation, the post World War II young adults who married early and moved into gleaming new suburbs in the 1950s, went through their midlife crises in the '70s and '80s, and are today the very affluent, active seniors retiring into gated lifestyle communities.
The third archetype is what we call a Prophet archetype. The most recent example of this archetype is the Baby Boom Generation. Prophet generations grow up as children during a period of post-Crisis affluence and come of age during a period of cultural upheaval. They become moralistic and values-obsessed midlife leaders and parents, and as they enter old age, they steer the country into the next great outer-world social or political Crisis. Boomers, for example, grew up during the Postwar American High, came of age during the Consciousness Revolution of the 1960s and '70s, and are now entering old age.
Finally there is what we call a Nomad archetype. Nomads are typically raised as children during Awakenings, the great cultural upheavals of our history. Whereas the Prophet archetype is indulgently raised as children, the Nomad archetype is underprotected and completely exposed as children. They learn early that they can't trust basic institutions to look out for their best interests and come of age as free agents whose watchword is individualism. They are the great realists and pragmatists in our nation's history.
The most recent example of the Nomad archetype is Generation X. This generation grew up during the social turmoil of the 1960s and '70s and are now beginning to enter midlife. They are the ones that know how to get things done on the ground. They are the stay-at-home dads and security moms trying to give their kids more of a childhood than they themselves had. Their burden is that they tend not to trust large institutions and do not have a strong connection to public life. They forge their identity and value system by "going it alone" and staying off the radar screen of government. It could be very interesting to see the rest of the life story of this generation, particularly as they take over leadership positions.
DAVID: Could you tell us the general age ranges of these archetypes now?
HOWE: One Hero generation that is alive today is the G.I. Generation, born between 1901 and 1924. They came of age with the New Deal, World War II, and the Great Depression. They are today in their mid-80s and beyond, and their influence is waning.
Today's other example of a Hero archetype is the Millennial Generation, born from 1982 to about 2003 or 2004. These are today's young people, who are just beginning to be well known to most Americans. They fill K-12 schools, colleges, graduate schools, and have recently begun entering the workplace. We associate them with dramatic improvements in youth behaviors, which are often underreported by the media. Since Millennials have come along, we've seen huge declines in violent crime, teen pregnancy, and the most damaging forms of drug abuse, as well as higher rates of community service and volunteering. This is a generation that reminds us in many respects of the young G.I.s nearly a century ago, back when they were the first boy scouts and girl scouts between 1910 and 1920.
DAVID: Then following the Hero, we have the Artist, right?
HOWE: Yes. As I mentioned earlier, one example of that archetype is the Silent Generation, born between 1925 and 1942. This generation was too young to remember anything about America before the Great Crash of 1929, and too young to be of fighting age during World War II.
That 1925 birth year is filled with people like William F. Buckley and Bobby Kennedy, first-wave Silent who just missed World War II. Many of them were actually in the camps in California waiting for the invasion of Japan when they heard that the war was over. Part of their generational experience is that sense of just barely missing something big. Surveys show that this generation does not like to call themselves "senior citizens." They did not fight in World War II. They did not build the A bomb. They are more like "senior partners." Unlike G.I.s, they are flexible elders, focused on the needs of others. Many of them are highly engaged in the family activities of their children and grandchildren. In politics, they are today's elder advisors, not powerhouse leaders.
There is a new generation of the Artist archetype just now beginning to arrive. They started being born, we think, around 2004 or 2005. We did a contest on our website to choose a name for this new generation, and the winner was Homeland Generation, reflecting the fact that they are being incredibly well protected. So we are tentatively calling them the Homelanders.
This generation will have no memory of anything before the financial meltdown of 2008 and the events that are about to unfold in America. If our research is correct, this generation's childhood will be a time of urgency and rapid historical change. Unlike the Millennials, who will remember childhood during the good times of 1980s and '90s, the Homelanders will recall their childhood as a time of national crisis.
So, those are the two examples today of the Hero archetype, and two examples of the Artist archetype.
DAVID: What about the Prophet and the Nomad generations?
HOWE: There is only one Prophet archetype generation alive today: the Boomer Generation. We define them as being born between 1943 and 1960. Those born in 1943 would have been part of the free-speech movement at Berkeley in 1964, the first fiery class whose peers include Bill Bradley, Newt Gingrich, and Oliver North. The last cohorts of this generation came of age with President Carter in the Iran Hostage Crisis.
For the Nomad archetype, we again have only one example alive today, and that is Generation X. We define Gen Xers as being born between 1961 and 1981. Actually, there may be a few members of the earlier Nomad generation still around – those of the Lost Generation born from 1883 to 1900, but today they would be around 110. This was the generation that grew up during the third Great Awakening, the doughboys who went through World War I. They were the generation that put the "roar" into the "Roaring '20s" – the rum runners, barnstormers, and entrepreneurs of that period. They were big risk-takers.
DAVID: Is the Millennial Generation the next group up in terms of controlling or being a powerful force in society?
HOWE: It depends what you mean by a powerful force in society.
DAVID: Who is going to be in the driver's seat?
HOWE: Let me put it this way. The generation that is about to be in the driver's seat in terms of leadership is Generation X, the group born 1961 to 1981. In fact, we now have our first Gen-X President, Barack Obama, who was born in 1961 and who is in every way a Gen Xer, despite being born at the very early edge of his generation. His fragmented family upbringing, with his father leaving while he was young and his mother moving all over the world, is typical of the Gen X life story. A telling anecdote from his biography is that, when he arrived at Columbia University, he spent his first night in New York sleeping in an alley because no one had arranged to have an apartment open for him.
His life story has a "dazed and confused" aspect. He made his own way against a background of adult neglect and lack of structure. It's interesting that he is the first leader in America to call himself "post-Boomer." As a matter of fact, he talks regularly about how he intends to put an end to everything dysfunctional about Boomer politics: the polarization, the culture wars, the scorched-earth rhetoric, the identity politics, all of that. I understand a lot of people do not believe he can actually do this, but it's interesting that this is the rhetoric he chooses. That rhetoric is one reason why the vast majority of Millennials voted for him.
A Casey Research interview with Neil Howe, co-author of The Fourth Turning
The Fourth Turning is an amazingly prescient book Neil Howe wrote with the late William Strauss in 1997. The work, which describes generational archetypes and the cyclical patterns created by these archetypes, has been an eye-opener to anyone able to entertain the notion that history may repeat itself. At the time the book was published, the Boston Globe stated, "If Howe and Strauss are right, they will take their place among the great American prophets." Read this visionary interview published in The Casey Report, and see for yourself.
DAVID GALLAND: Could you provide us a quick introduction to generational research?
NEIL HOWE: We think that generations move history along and prevent society from suffering too long under the excesses of any particular generation. People often assume that every new generation will be a linear extension of the last one. You know, that after Generation X comes Generation Y. They might further expect Generation Y to be like Gen X on steroids – even more willing to take risk and with even more edginess in the culture. Yet the Millennial Generation that followed Gen X is not like that at all. In fact, no generation is like the generation that immediately precedes it.
Instead, every generation turns the corner and to some extent compensates for the excesses and mistakes of the midlife generation that is in charge when they come of age. This is necessary, because if generations kept on going in the same direction as their predecessors, civilization would have gone off a cliff thousands of years ago.
So this is a necessary process, a process that is particularly important in modern nontraditional societies, where generations are free to transform institutions according to their own styles and proclivities.
In our research we have found that, in modern societies, four basic types of generations tend to recur in the same order.
DAVID: The four generational archetypes. Can you provide a sketch of each for those of our readers unfamiliar with your work?
HOWE: Absolutely.
The first is what we call the Hero archetype. Hero generations are usually protectively raised as kids. They come of age at a time of emergency or Crisis and become known as young adults for helping society resolve the Crisis, hopefully successfully. Once the Crisis is resolved, they become institutionally powerful in midlife and remain focused on outer-world challenges and solutions. In their old age, they are greeted by a spiritual Awakening, a cultural upheaval fired by the young. This is the typical life story of a Hero generation.
One example of the Hero archetype is the G.I. Generation, the soldiers of World War II, who became an institutional powerhouse after the war and then in old age confronted the young hippies and protesters of the 1960s. Going back in American history, we have seen many other Hero archetypes, for example the generation of Thomas Jefferson, and James Madison, and President Monroe. These were the heroes of the American Revolution, who in old age were greeted by the second Great Awakening and a new youth generation of fiery Prophets.
After the Hero archetype comes the Artist archetype. Artist generations have a very different location in history -- they are the children of the Crisis. For Hero generations, child protection rises from first cohort to last. By the time Artists come along, child protection reaches suffocating levels. Artists come of age as young adults during the post-Crisis era, when conformity seems like the best path to success, and they tend to be collectively risk averse. Artists see themselves as providing the expertise and refinement that can both improve and adorn the enormous new institutional innovations that have been forged during the Crisis. They typically experience a cultural Awakening in midlife, and their lives speed up as the culture transforms.
A great example of the Artist archetype is the so-called "Silent" Generation, the post World War II young adults who married early and moved into gleaming new suburbs in the 1950s, went through their midlife crises in the '70s and '80s, and are today the very affluent, active seniors retiring into gated lifestyle communities.
The third archetype is what we call a Prophet archetype. The most recent example of this archetype is the Baby Boom Generation. Prophet generations grow up as children during a period of post-Crisis affluence and come of age during a period of cultural upheaval. They become moralistic and values-obsessed midlife leaders and parents, and as they enter old age, they steer the country into the next great outer-world social or political Crisis. Boomers, for example, grew up during the Postwar American High, came of age during the Consciousness Revolution of the 1960s and '70s, and are now entering old age.
Finally there is what we call a Nomad archetype. Nomads are typically raised as children during Awakenings, the great cultural upheavals of our history. Whereas the Prophet archetype is indulgently raised as children, the Nomad archetype is underprotected and completely exposed as children. They learn early that they can't trust basic institutions to look out for their best interests and come of age as free agents whose watchword is individualism. They are the great realists and pragmatists in our nation's history.
The most recent example of the Nomad archetype is Generation X. This generation grew up during the social turmoil of the 1960s and '70s and are now beginning to enter midlife. They are the ones that know how to get things done on the ground. They are the stay-at-home dads and security moms trying to give their kids more of a childhood than they themselves had. Their burden is that they tend not to trust large institutions and do not have a strong connection to public life. They forge their identity and value system by "going it alone" and staying off the radar screen of government. It could be very interesting to see the rest of the life story of this generation, particularly as they take over leadership positions.
DAVID: Could you tell us the general age ranges of these archetypes now?
HOWE: One Hero generation that is alive today is the G.I. Generation, born between 1901 and 1924. They came of age with the New Deal, World War II, and the Great Depression. They are today in their mid-80s and beyond, and their influence is waning.
Today's other example of a Hero archetype is the Millennial Generation, born from 1982 to about 2003 or 2004. These are today's young people, who are just beginning to be well known to most Americans. They fill K-12 schools, colleges, graduate schools, and have recently begun entering the workplace. We associate them with dramatic improvements in youth behaviors, which are often underreported by the media. Since Millennials have come along, we've seen huge declines in violent crime, teen pregnancy, and the most damaging forms of drug abuse, as well as higher rates of community service and volunteering. This is a generation that reminds us in many respects of the young G.I.s nearly a century ago, back when they were the first boy scouts and girl scouts between 1910 and 1920.
DAVID: Then following the Hero, we have the Artist, right?
HOWE: Yes. As I mentioned earlier, one example of that archetype is the Silent Generation, born between 1925 and 1942. This generation was too young to remember anything about America before the Great Crash of 1929, and too young to be of fighting age during World War II.
That 1925 birth year is filled with people like William F. Buckley and Bobby Kennedy, first-wave Silent who just missed World War II. Many of them were actually in the camps in California waiting for the invasion of Japan when they heard that the war was over. Part of their generational experience is that sense of just barely missing something big. Surveys show that this generation does not like to call themselves "senior citizens." They did not fight in World War II. They did not build the A bomb. They are more like "senior partners." Unlike G.I.s, they are flexible elders, focused on the needs of others. Many of them are highly engaged in the family activities of their children and grandchildren. In politics, they are today's elder advisors, not powerhouse leaders.
There is a new generation of the Artist archetype just now beginning to arrive. They started being born, we think, around 2004 or 2005. We did a contest on our website to choose a name for this new generation, and the winner was Homeland Generation, reflecting the fact that they are being incredibly well protected. So we are tentatively calling them the Homelanders.
This generation will have no memory of anything before the financial meltdown of 2008 and the events that are about to unfold in America. If our research is correct, this generation's childhood will be a time of urgency and rapid historical change. Unlike the Millennials, who will remember childhood during the good times of 1980s and '90s, the Homelanders will recall their childhood as a time of national crisis.
So, those are the two examples today of the Hero archetype, and two examples of the Artist archetype.
DAVID: What about the Prophet and the Nomad generations?
HOWE: There is only one Prophet archetype generation alive today: the Boomer Generation. We define them as being born between 1943 and 1960. Those born in 1943 would have been part of the free-speech movement at Berkeley in 1964, the first fiery class whose peers include Bill Bradley, Newt Gingrich, and Oliver North. The last cohorts of this generation came of age with President Carter in the Iran Hostage Crisis.
For the Nomad archetype, we again have only one example alive today, and that is Generation X. We define Gen Xers as being born between 1961 and 1981. Actually, there may be a few members of the earlier Nomad generation still around – those of the Lost Generation born from 1883 to 1900, but today they would be around 110. This was the generation that grew up during the third Great Awakening, the doughboys who went through World War I. They were the generation that put the "roar" into the "Roaring '20s" – the rum runners, barnstormers, and entrepreneurs of that period. They were big risk-takers.
DAVID: Is the Millennial Generation the next group up in terms of controlling or being a powerful force in society?
HOWE: It depends what you mean by a powerful force in society.
DAVID: Who is going to be in the driver's seat?
HOWE: Let me put it this way. The generation that is about to be in the driver's seat in terms of leadership is Generation X, the group born 1961 to 1981. In fact, we now have our first Gen-X President, Barack Obama, who was born in 1961 and who is in every way a Gen Xer, despite being born at the very early edge of his generation. His fragmented family upbringing, with his father leaving while he was young and his mother moving all over the world, is typical of the Gen X life story. A telling anecdote from his biography is that, when he arrived at Columbia University, he spent his first night in New York sleeping in an alley because no one had arranged to have an apartment open for him.
His life story has a "dazed and confused" aspect. He made his own way against a background of adult neglect and lack of structure. It's interesting that he is the first leader in America to call himself "post-Boomer." As a matter of fact, he talks regularly about how he intends to put an end to everything dysfunctional about Boomer politics: the polarization, the culture wars, the scorched-earth rhetoric, the identity politics, all of that. I understand a lot of people do not believe he can actually do this, but it's interesting that this is the rhetoric he chooses. That rhetoric is one reason why the vast majority of Millennials voted for him.
Obama is the opening wedge of Gen Xers who will assume very high leadership posts. They are not yet the senior generals in control of the military, but they are taking over the reins of government and, of course, the top spots in American businesses.
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6 September 2009
A tale of Two Depressions ~ Update
World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.
See the Charts
World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.
See the Charts
24 August 2009
Taleb ~ a real actual hyper-conservative
I'm reading Taleb now. He is a philosopher and a big thinker. Being a Popperian sceptical empiracist myself, the idea of the man signing off on the the bullshit that passes from the nexus between banking and politics, not to mention climate change denial, is absurd. Hat tip to Duncan.
LETTER TO THE GUARDIAN ---
Dear sirs,
I am extremely honored to see my conversation with MP David Cameron at the RSA so repeatedly covered in your paper. However I was astonished by the representations that you made as they were in complete reverse to my positions on three subjects: the environment, market crashes, and taxation of the rich.
1) Climate Change. I am hyper-conservative ecologically (meaning super-Green). My position on the climate is to avoid releasing pollutants in the atmosphere, regardless of current expert opinion (climate experts, like banking risk managers, have failed us in the past in foreseeing long term damages and I cannot accept certainty in a certain class of nonlinear models). This is an extension of my general idea that one does not need rationalization with the use of complicated models (by fallible experts) to the edict: "do not disturb a complex system" since we do not know the consequences of our actions owing to complicated causal webs. (Incidentally, this ideas also makes me anti-war). I explicitly explained the need to “leave the planet the way we got it” .
Instead, I, a super -Green was presented as a “climate-change denier” (Lucy Mangan), and my environmental views summarized by “Climate change is not man-made” (Nicholas Watts).
2) Crashes. By some coincidence I spoke at the same venue, the RSA, some 30 months earlier, way before the current crash, as part of my crusade against the risk of financial collapse and the need to robustify society. I find it depressing that the British public could have saved several trillion pounds and hundreds of thousands of jobs had they minded these hidden risks in the system. My position is that a robust system needs to produce frequent crashes, with citizens immune to them, rather than infrequent total collapse, for which we have no robustness. By constraining cycles and assuming “no more boom and bust” (as your current government did) you end up with a very large bust –and I am sure that I do not need more events like the most recent crisis to prove the point.
Instead, the anti-Black Swan crusader was portrayed as someone who “loves crashes” (Nicholas Watts and Lucy Mangan). Go figure.
3) Social Fairness. I spent 13 years fighting bankers bonuses (when nobody else did) and am currently crusading for bankers clawbacks as I have shown how regular taxpayers have been financing bonuses of millionaire bankers (“socialism for the losses, capitalism for the profits”). I said explicitly during the meeting that we are financing today those who got us here, with tax hikes on those who do the right thing, and larger tax break for those who blew us up. Companies who made mistakes and fragilized the system are being financed by the countercyclical ones who make it more robust.
Instead, I was quite shocked to see the headline “David Cameron's guru Nassim Nicholas Taleb says rich should not pay more tax to help the poor”. This transformation of my ideas by Nicholas Watts is extremely wicked.
The depressing part is that nowhere does your paper discuss my central idea, that the risks that were there 30 months ago are still there now, and that unless we lower debt to “definancialize” the economy (instead of increasing deficits through stimulus) we face more risks of blowups.
As someone trying to be systematic thinker with a body of work around these risk management ideas --not a politician with ad hoc opinions -- the game of selective (and aggressively biased) quoting does not work very well. With the same game one could easily make Karl Marx an apologist of capitalism and Adam Smith a promoter of communism.
Nassim Nicholas Taleb, PhD.
Distinguished Professor of Risk Engineering, New York University, principal, Universa LP, and author, The Black Swan
PREVIOUS COMMENTS
Culprits (journalists I despise): Guardian (Nicholas Watt), Scotsman (Gerri Peev). How can I ever believe what they write about some other thinker I have never read? How? How?
Perhaps the worst of this story is the fan mail I’ve been getting from right-wing anti-environmentalists.
LETTER TO THE GUARDIAN ---
Dear sirs,
I am extremely honored to see my conversation with MP David Cameron at the RSA so repeatedly covered in your paper. However I was astonished by the representations that you made as they were in complete reverse to my positions on three subjects: the environment, market crashes, and taxation of the rich.
1) Climate Change. I am hyper-conservative ecologically (meaning super-Green). My position on the climate is to avoid releasing pollutants in the atmosphere, regardless of current expert opinion (climate experts, like banking risk managers, have failed us in the past in foreseeing long term damages and I cannot accept certainty in a certain class of nonlinear models). This is an extension of my general idea that one does not need rationalization with the use of complicated models (by fallible experts) to the edict: "do not disturb a complex system" since we do not know the consequences of our actions owing to complicated causal webs. (Incidentally, this ideas also makes me anti-war). I explicitly explained the need to “leave the planet the way we got it” .
Instead, I, a super -Green was presented as a “climate-change denier” (Lucy Mangan), and my environmental views summarized by “Climate change is not man-made” (Nicholas Watts).
2) Crashes. By some coincidence I spoke at the same venue, the RSA, some 30 months earlier, way before the current crash, as part of my crusade against the risk of financial collapse and the need to robustify society. I find it depressing that the British public could have saved several trillion pounds and hundreds of thousands of jobs had they minded these hidden risks in the system. My position is that a robust system needs to produce frequent crashes, with citizens immune to them, rather than infrequent total collapse, for which we have no robustness. By constraining cycles and assuming “no more boom and bust” (as your current government did) you end up with a very large bust –and I am sure that I do not need more events like the most recent crisis to prove the point.
Instead, the anti-Black Swan crusader was portrayed as someone who “loves crashes” (Nicholas Watts and Lucy Mangan). Go figure.
3) Social Fairness. I spent 13 years fighting bankers bonuses (when nobody else did) and am currently crusading for bankers clawbacks as I have shown how regular taxpayers have been financing bonuses of millionaire bankers (“socialism for the losses, capitalism for the profits”). I said explicitly during the meeting that we are financing today those who got us here, with tax hikes on those who do the right thing, and larger tax break for those who blew us up. Companies who made mistakes and fragilized the system are being financed by the countercyclical ones who make it more robust.
Instead, I was quite shocked to see the headline “David Cameron's guru Nassim Nicholas Taleb says rich should not pay more tax to help the poor”. This transformation of my ideas by Nicholas Watts is extremely wicked.
The depressing part is that nowhere does your paper discuss my central idea, that the risks that were there 30 months ago are still there now, and that unless we lower debt to “definancialize” the economy (instead of increasing deficits through stimulus) we face more risks of blowups.
As someone trying to be systematic thinker with a body of work around these risk management ideas --not a politician with ad hoc opinions -- the game of selective (and aggressively biased) quoting does not work very well. With the same game one could easily make Karl Marx an apologist of capitalism and Adam Smith a promoter of communism.
Nassim Nicholas Taleb, PhD.
Distinguished Professor of Risk Engineering, New York University, principal, Universa LP, and author, The Black Swan
PREVIOUS COMMENTS
Culprits (journalists I despise): Guardian (Nicholas Watt), Scotsman (Gerri Peev). How can I ever believe what they write about some other thinker I have never read? How? How?
Perhaps the worst of this story is the fan mail I’ve been getting from right-wing anti-environmentalists.
19 August 2009
Rant or Revelation: My Money's on Revelation
Rant or Revelation: My Money's on Revelation
August 18, 2009
Correspondent Michael Goodfellow's rant reaches revelation.
Frequent contributor Michael Goodfellow and I correspond on a great number of issues. Having worked in technology and software his entire career, he brings an engineer's sensibility and rigor to many issues. Recently he wrote a commentary which he titled "A Charles Smith Moment" which leaves rant and enters revelation in my view.
He suggested I introduce it with the phrase "this is what I get when he's in a bad mood..." but I think you'll find a succinct indictment here:
A "Charles Smith" Moment
Unfair to you to call it that, but when reading this item about Iraq off Cato,
Time to Leave Iraq
(and these links on Social Security/Medicare and the Federal budget SSA Trustees Report and Tax Policy Center)
I had that feeling that the whole country is just a Ship of Fools headed into the rapids and there's nothing I can do about it.
It's not just that I disagree with the neocons -- their values, their goals, their plans and their politics. It's that they don't even seem to care. They don't clarify their goals or strategy, they don't learn from their mistakes and they don't even want to look at whether Iraq is a success or failure. It's as if they don't even believe what they say.
They just want to act out some WWII-inspired fantasy of turning countries into democracies and being the world's policeman. But now Iraq is just "so 2005", so ignore it, wrap it up, and off to Afghanistan! And both wars have so much momentum that even the President can't seem to slow them down or divert them, let alone call them off. He'd rather let both wars be huge failures than take any short-term political heat. Again, it's as if no one, even the other party, cares what we accomplish. Thousands of American soldiers die, tens of thousands of Iraqis die, trillions are spent, and for the politicians, pundits and public, it's just "whatever!"
And it isn't limited to the wars. On health care, the Republicans are patting themselves on the back for derailing ObamaCare, but neither side is facing reality. We can't afford existing Medicare. The baby boomers start hitting 65 in a couple of years. Time is up for dealing with that crisis. Even if the Republicans stop health care legislation, they still have that to deal with. And not in some "future generation", but during their term of office. What can they possibly be thinking?
But what can the Democrats be thinking? It's not as if there's any cost control in the ObamaCare plan. They seem surprised that CBO keeps scoring the plan as expensive. Can't any of them do arithmetic? 45 million uninsured times $2000 a year (a very cheap insurance policy) is $90 billion a year, or about a trillion dollars in ten years. CBO is only scoring the first five years of the plan, since it phases in. Still, any back-of-the-envelope calculation would have told them the tab was going to be in that ballpark. And this is on top of the Medicare problem, Social Security, Cap and Trade, and the financial crisis. How does anyone think we can afford all of that?
In fact, the one thing that does seem to unite both parties is a complete disinterest in what the legislation will actually do. They just want to let the usual special interest groups fight it out, write a thousand pages of incomprehensible regulatory gibberish, and call it done. Just don't ask us to read it!
The same was true during the financial crisis. The whole attitude of Congress was "Keep this away from me! I don't understand any of it! You, Federal Reserve, here's a blank check. Just solve this problem and don't even tell us what you are doing."
Again, this isn't a matter of values or priorities. It's beyond incompetence. It's a complete disinterest in the results of their actions. I would call it panic, but that requires a certain alertness. This is some kind of psychosis.
So I look at the entire political system and I think how unreal it all is, and how tired. Republicans are running on intellectual fumes -- neocons and old warhorses like McCain; anti-gay, anti-immigrant, anti-trade sentiment and populist know-nothings like Palin. No awareness of where the country is right now, and no willingness to stick to any principles at all.
I still like the libertarian arguments on Reason and Cato, but they have their problems as well. First, they are a tiny minority. Second, they mostly criticize the system without offering practical, politically possible steps in the right direction. And third, they are hopeless nerds. I watch those guys on video and I think "This guy couldn't sell me ice cream on a hot summer day! And I'm someone who agrees with him!"
I could never take the Democrats seriously either. From the various bailouts to all their plans for the economy, health care, environment, it has the same feel of unreality as the Republicans. As if they just don't want to know whether any of these plans can possibly succeed, or whether we can afford to even try. They just want to act out their fantasies, where they save the Earth, bring healing to the poor and end racism.
I wrote to one guy on global warming that the only thing that matters is what gets invented in a lab somewhere. If we can build better batteries or solar panels, do carbon capture or geoengineering, then we can make a difference. But the hair-shirt conservation measures have no real effect. And you can prove that with statistics about efficiency and the savings they could possibly get.
If you actually cared about global warming, you'd want to know what works. (and build nuke plants, which is apparently being shot down by the Obama administration.) But he doesn't even want to talk about that. It's just "if we don't pass cap and trade, the oceans will rise and the Earth is doomed." And if you don't agree with him, you are an evil "denier." It's not even a reasoned argument. Where am I supposed to go with that?
http://www.oftwominds.com/blog.html
Like you, I expect a train wreck at some point. Unlike you, I don't expect chaos. Instead, it will just be a hunker-down, "do something, anything!" government-orchestrated mess. More of the same, with increasing instability and poverty. I don't think that knowing how to grow veggies or collect rainwater will make any difference at all.
The thing to remember is that most of the third world has worse governance than we do, worse financial problems, fewer natural resources and a less educated population. Still, from Argentina to Poland to India, they just limp along. Anarchy does not break out. I see no reason for it to do so here either. It will just suck.
Thank you, Michael. Such clarity is a rarity these days.
Those of you who have slogged through my free eBook (shameless plug) Survival+: Structuring Prosperity for Yourself and the Nation will recall parallel descriptions of fantasy, disinterest and psychosis.
The entire structure of response and policy is what I term simulacrum, facsimiles of solutions, pseudo-solutions which as Michael points out, are being "sold" with the sort of half-heartedness of those who know full well they are props and facades and thus utterly illusory.
No nation can borrow 13% of its GDP without consequences, but rather than face our situation with what I term an adult understanding of triage and trade-offs--that you can't get everything you want right now, that priorities must be assessed and difficult trade-offs made--we as a nation have entered the delusion that we can just borrow the money to put off any hard choices.
Wars going badly? Borrow another trillion to "stay the course"--whatever that means. As Michael notes, the policy has always been incomprehensible, switching from finding WMDs to fostering democracy to stopping terrorism in Mosel before it gets to Miami to the ideological-flavor-of-the-month.
Sick-care unsustainable and broken? Borrow another trillion, write a 1,000 pages of gobblydigook to placate and pander to the special interests involved, solving nothing and doing nothing to actually cut costs, and then "declare victory": Mission accomplished!
It rings hollow because it is hollow: nothing of substance has been accomplished because as I put it, those with asymmetric stakes in the game are pouring every dime and every ounce of energy into the game to protect their share of the swag, while we citizens and "consumers" are expiring from death by a thousand cuts--none deep enough to spark concerted action.
While the government and corporate Elites protect their fiefdoms, the citizenry are distracted by trash-talk radio and TV, courtesy of a mass media owned lock, stock and barrel by six corporations.
Complacency and fatalism reign supreme, and the Elites are loving it because a confused, doped out, distracted, apathetic, complacent, fatalistic populace is easily duped and manipulated.
What Michael foresees as our future is what I term devolution. We differ on two points, which Michael already knows from our voluminous correspondence. So I want to be sure to note that I am not reading this into Michael's commentary--these are my thoughts.
I think we will devolve to "tipping points" or phase shifts where systems will break down. This won't necessarily lead to chaos but it will lead to something beyond complacency and fatalism. It could be negative or it could be positive; that choice is ours.
I believe that the loss of wealth, the extremes of income inequality and the credit/debt implosion are all phase shifts which have already occurred, but the status quo Power Elites and citizenry alike are in denial, hoping that some miracle of additional borrowing will re-set the clock back to the era of bogus "prosperity."
Those hopes will be proven futile because simulacrum is not reality and delusion is not a practical substitute for actual solutions.
I differ somewhat with Michael on solutions, as I think all solutions come from the margins. While I hope for technological solutions, I am skeptical because our consumerist mindset is fixated on the notion that "buying something new" will somehow solve all our problems.
Mo offense to Prius owners, but I suspect we've all been sold a bill of goods on its benefits. The entire cost of a vehicle, or any manufactured object, is called its lifecycle costs. This means calculating the cost in money, energy and resources of everything required to manufacture the vehicle--not just the steel, but the cost of pumping water to make the steel, mine the ore, etc.
Now a Prius has two components which simply do not exist in a stripped down ICE (internal combustion engine) vehicle: a large battery pack and extremely complex electronics for switching between electric and ICE drive.
Batteries require a stupendous amount of costly resources to manufacture. Until batteries are made of sand (silicon) or equivalent materials and do not require highly complex processes, they will remain costly. They are also toxic and therefore costly to recycle/ dismantle properly.
Thus I suspect that if you include the full lifecycle costs of manufacturing a Prius, the cost of maintenance and the fuel it burns (or the electricity used to recharge its batteries) and the disposal/recycling of its components, and weigh them against a high-mileage cheaper vehicle like a Honda Civic or subcompact Ford/GM, the Prius is probably less efficient and less environmentally sound than the cheap ICE vehicle.
"Buying something new" might not be the answer at all except at the margins--transformers that lose less energy, electronic power converters which are suddenly mandated to be efficient rather than energy hogs, etc. etc. Perhaps the Consumerist Gods will fail to be the "solution."
Just as technology changes at the margin, so too does behavior. I have to disagree with Michael about growing veggies, because as I have said before, "a garden and a homecooked meal are revolutionary acts." These simple acts are revolutionary because they upend the oppressive regime of agribusiness, packaged/fast food and the sick-care system--all parts in a seamless system of ill-health, derangement, torpor and chronic disease which can be treated with enormously expensive and mostly needless medications and procedures.
This is what I term an integrated understanding of the entire system of growing and consuming food and health. Agribusiness, fast food, high salt, high fat and high sugar processed "foods" (poisons is a more accurate term), chronic illness and various derangements, and an immensely profitable sick-care system are all one. There can be no "solutions" without an integrated understanding that simple behaviors are the heart of any and all real solutions. Buying something "new" is a simulacrum "solution" marketed to reap profits.
The solution to sick-care starts not with 1,000 pages of legislation, paid for with trillons of dollars of borrowed money but with an understanding of the causal connections between gardening, vegetables/food, cooking rather than consuming, self-reliance, goal-directed activity and responsibility for one's health.
The market will create the proper incentives to conservation and wise choices if it is given a chance. When gasoline is $10 a gallon (and it will be), then people will change their behaviors as common sense dictates. When peaches cost $10 a pound, then all the fruit that drops to the ground to rot now will be collected before it rots.
I read somewhere about a town in Alaska (I forget the source) which lost its electrical service and had to rely on costly generators for some time. The cost was passed onto consumers. As if by magic, electrical consumption dropped 40% overnight. No new devices were required; the Consumerist Gods were shedding tears and wailing mightily, for the "solution" was behavioral.
Yes, technology promises many innovations, but how we live offers much cheaper, easier and more environmentally sound solutions without waiting around for mechanical/electronic saviors promoted by the Consumerist Gods.
I would like to end with a mindful haiku from resident haiku poet Jed H.:
End of an Era
A Culture of Corruption
End of the Empire.
Here it is with Jed's notes:
END of an Era ( i.e., the Boom-times: 2000- 2007 a la 1920s )
A Culture of Corruption
END of the EMPIRE ! ( i.e., US of A is on its Downhill Slide, like Romans ! )
Thank you, Jed, for a poetic summation of "the end of an era."
August 18, 2009
Correspondent Michael Goodfellow's rant reaches revelation.
Frequent contributor Michael Goodfellow and I correspond on a great number of issues. Having worked in technology and software his entire career, he brings an engineer's sensibility and rigor to many issues. Recently he wrote a commentary which he titled "A Charles Smith Moment" which leaves rant and enters revelation in my view.
He suggested I introduce it with the phrase "this is what I get when he's in a bad mood..." but I think you'll find a succinct indictment here:
A "Charles Smith" Moment
Unfair to you to call it that, but when reading this item about Iraq off Cato,
Time to Leave Iraq
(and these links on Social Security/Medicare and the Federal budget SSA Trustees Report and Tax Policy Center)
I had that feeling that the whole country is just a Ship of Fools headed into the rapids and there's nothing I can do about it.
It's not just that I disagree with the neocons -- their values, their goals, their plans and their politics. It's that they don't even seem to care. They don't clarify their goals or strategy, they don't learn from their mistakes and they don't even want to look at whether Iraq is a success or failure. It's as if they don't even believe what they say.
They just want to act out some WWII-inspired fantasy of turning countries into democracies and being the world's policeman. But now Iraq is just "so 2005", so ignore it, wrap it up, and off to Afghanistan! And both wars have so much momentum that even the President can't seem to slow them down or divert them, let alone call them off. He'd rather let both wars be huge failures than take any short-term political heat. Again, it's as if no one, even the other party, cares what we accomplish. Thousands of American soldiers die, tens of thousands of Iraqis die, trillions are spent, and for the politicians, pundits and public, it's just "whatever!"
And it isn't limited to the wars. On health care, the Republicans are patting themselves on the back for derailing ObamaCare, but neither side is facing reality. We can't afford existing Medicare. The baby boomers start hitting 65 in a couple of years. Time is up for dealing with that crisis. Even if the Republicans stop health care legislation, they still have that to deal with. And not in some "future generation", but during their term of office. What can they possibly be thinking?
But what can the Democrats be thinking? It's not as if there's any cost control in the ObamaCare plan. They seem surprised that CBO keeps scoring the plan as expensive. Can't any of them do arithmetic? 45 million uninsured times $2000 a year (a very cheap insurance policy) is $90 billion a year, or about a trillion dollars in ten years. CBO is only scoring the first five years of the plan, since it phases in. Still, any back-of-the-envelope calculation would have told them the tab was going to be in that ballpark. And this is on top of the Medicare problem, Social Security, Cap and Trade, and the financial crisis. How does anyone think we can afford all of that?
In fact, the one thing that does seem to unite both parties is a complete disinterest in what the legislation will actually do. They just want to let the usual special interest groups fight it out, write a thousand pages of incomprehensible regulatory gibberish, and call it done. Just don't ask us to read it!
The same was true during the financial crisis. The whole attitude of Congress was "Keep this away from me! I don't understand any of it! You, Federal Reserve, here's a blank check. Just solve this problem and don't even tell us what you are doing."
Again, this isn't a matter of values or priorities. It's beyond incompetence. It's a complete disinterest in the results of their actions. I would call it panic, but that requires a certain alertness. This is some kind of psychosis.
So I look at the entire political system and I think how unreal it all is, and how tired. Republicans are running on intellectual fumes -- neocons and old warhorses like McCain; anti-gay, anti-immigrant, anti-trade sentiment and populist know-nothings like Palin. No awareness of where the country is right now, and no willingness to stick to any principles at all.
I still like the libertarian arguments on Reason and Cato, but they have their problems as well. First, they are a tiny minority. Second, they mostly criticize the system without offering practical, politically possible steps in the right direction. And third, they are hopeless nerds. I watch those guys on video and I think "This guy couldn't sell me ice cream on a hot summer day! And I'm someone who agrees with him!"
I could never take the Democrats seriously either. From the various bailouts to all their plans for the economy, health care, environment, it has the same feel of unreality as the Republicans. As if they just don't want to know whether any of these plans can possibly succeed, or whether we can afford to even try. They just want to act out their fantasies, where they save the Earth, bring healing to the poor and end racism.
I wrote to one guy on global warming that the only thing that matters is what gets invented in a lab somewhere. If we can build better batteries or solar panels, do carbon capture or geoengineering, then we can make a difference. But the hair-shirt conservation measures have no real effect. And you can prove that with statistics about efficiency and the savings they could possibly get.
If you actually cared about global warming, you'd want to know what works. (and build nuke plants, which is apparently being shot down by the Obama administration.) But he doesn't even want to talk about that. It's just "if we don't pass cap and trade, the oceans will rise and the Earth is doomed." And if you don't agree with him, you are an evil "denier." It's not even a reasoned argument. Where am I supposed to go with that?
http://www.oftwominds.com/blog.html
Like you, I expect a train wreck at some point. Unlike you, I don't expect chaos. Instead, it will just be a hunker-down, "do something, anything!" government-orchestrated mess. More of the same, with increasing instability and poverty. I don't think that knowing how to grow veggies or collect rainwater will make any difference at all.
The thing to remember is that most of the third world has worse governance than we do, worse financial problems, fewer natural resources and a less educated population. Still, from Argentina to Poland to India, they just limp along. Anarchy does not break out. I see no reason for it to do so here either. It will just suck.
Thank you, Michael. Such clarity is a rarity these days.
Those of you who have slogged through my free eBook (shameless plug) Survival+: Structuring Prosperity for Yourself and the Nation will recall parallel descriptions of fantasy, disinterest and psychosis.
The entire structure of response and policy is what I term simulacrum, facsimiles of solutions, pseudo-solutions which as Michael points out, are being "sold" with the sort of half-heartedness of those who know full well they are props and facades and thus utterly illusory.
No nation can borrow 13% of its GDP without consequences, but rather than face our situation with what I term an adult understanding of triage and trade-offs--that you can't get everything you want right now, that priorities must be assessed and difficult trade-offs made--we as a nation have entered the delusion that we can just borrow the money to put off any hard choices.
Wars going badly? Borrow another trillion to "stay the course"--whatever that means. As Michael notes, the policy has always been incomprehensible, switching from finding WMDs to fostering democracy to stopping terrorism in Mosel before it gets to Miami to the ideological-flavor-of-the-month.
Sick-care unsustainable and broken? Borrow another trillion, write a 1,000 pages of gobblydigook to placate and pander to the special interests involved, solving nothing and doing nothing to actually cut costs, and then "declare victory": Mission accomplished!
It rings hollow because it is hollow: nothing of substance has been accomplished because as I put it, those with asymmetric stakes in the game are pouring every dime and every ounce of energy into the game to protect their share of the swag, while we citizens and "consumers" are expiring from death by a thousand cuts--none deep enough to spark concerted action.
While the government and corporate Elites protect their fiefdoms, the citizenry are distracted by trash-talk radio and TV, courtesy of a mass media owned lock, stock and barrel by six corporations.
Complacency and fatalism reign supreme, and the Elites are loving it because a confused, doped out, distracted, apathetic, complacent, fatalistic populace is easily duped and manipulated.
What Michael foresees as our future is what I term devolution. We differ on two points, which Michael already knows from our voluminous correspondence. So I want to be sure to note that I am not reading this into Michael's commentary--these are my thoughts.
I think we will devolve to "tipping points" or phase shifts where systems will break down. This won't necessarily lead to chaos but it will lead to something beyond complacency and fatalism. It could be negative or it could be positive; that choice is ours.
I believe that the loss of wealth, the extremes of income inequality and the credit/debt implosion are all phase shifts which have already occurred, but the status quo Power Elites and citizenry alike are in denial, hoping that some miracle of additional borrowing will re-set the clock back to the era of bogus "prosperity."
Those hopes will be proven futile because simulacrum is not reality and delusion is not a practical substitute for actual solutions.
I differ somewhat with Michael on solutions, as I think all solutions come from the margins. While I hope for technological solutions, I am skeptical because our consumerist mindset is fixated on the notion that "buying something new" will somehow solve all our problems.
Mo offense to Prius owners, but I suspect we've all been sold a bill of goods on its benefits. The entire cost of a vehicle, or any manufactured object, is called its lifecycle costs. This means calculating the cost in money, energy and resources of everything required to manufacture the vehicle--not just the steel, but the cost of pumping water to make the steel, mine the ore, etc.
Now a Prius has two components which simply do not exist in a stripped down ICE (internal combustion engine) vehicle: a large battery pack and extremely complex electronics for switching between electric and ICE drive.
Batteries require a stupendous amount of costly resources to manufacture. Until batteries are made of sand (silicon) or equivalent materials and do not require highly complex processes, they will remain costly. They are also toxic and therefore costly to recycle/ dismantle properly.
Thus I suspect that if you include the full lifecycle costs of manufacturing a Prius, the cost of maintenance and the fuel it burns (or the electricity used to recharge its batteries) and the disposal/recycling of its components, and weigh them against a high-mileage cheaper vehicle like a Honda Civic or subcompact Ford/GM, the Prius is probably less efficient and less environmentally sound than the cheap ICE vehicle.
"Buying something new" might not be the answer at all except at the margins--transformers that lose less energy, electronic power converters which are suddenly mandated to be efficient rather than energy hogs, etc. etc. Perhaps the Consumerist Gods will fail to be the "solution."
Just as technology changes at the margin, so too does behavior. I have to disagree with Michael about growing veggies, because as I have said before, "a garden and a homecooked meal are revolutionary acts." These simple acts are revolutionary because they upend the oppressive regime of agribusiness, packaged/fast food and the sick-care system--all parts in a seamless system of ill-health, derangement, torpor and chronic disease which can be treated with enormously expensive and mostly needless medications and procedures.
This is what I term an integrated understanding of the entire system of growing and consuming food and health. Agribusiness, fast food, high salt, high fat and high sugar processed "foods" (poisons is a more accurate term), chronic illness and various derangements, and an immensely profitable sick-care system are all one. There can be no "solutions" without an integrated understanding that simple behaviors are the heart of any and all real solutions. Buying something "new" is a simulacrum "solution" marketed to reap profits.
The solution to sick-care starts not with 1,000 pages of legislation, paid for with trillons of dollars of borrowed money but with an understanding of the causal connections between gardening, vegetables/food, cooking rather than consuming, self-reliance, goal-directed activity and responsibility for one's health.
The market will create the proper incentives to conservation and wise choices if it is given a chance. When gasoline is $10 a gallon (and it will be), then people will change their behaviors as common sense dictates. When peaches cost $10 a pound, then all the fruit that drops to the ground to rot now will be collected before it rots.
I read somewhere about a town in Alaska (I forget the source) which lost its electrical service and had to rely on costly generators for some time. The cost was passed onto consumers. As if by magic, electrical consumption dropped 40% overnight. No new devices were required; the Consumerist Gods were shedding tears and wailing mightily, for the "solution" was behavioral.
Yes, technology promises many innovations, but how we live offers much cheaper, easier and more environmentally sound solutions without waiting around for mechanical/electronic saviors promoted by the Consumerist Gods.
I would like to end with a mindful haiku from resident haiku poet Jed H.:
End of an Era
A Culture of Corruption
End of the Empire.
Here it is with Jed's notes:
END of an Era ( i.e., the Boom-times: 2000- 2007 a la 1920s )
A Culture of Corruption
END of the EMPIRE ! ( i.e., US of A is on its Downhill Slide, like Romans ! )
Thank you, Jed, for a poetic summation of "the end of an era."
12 June 2009
He who has the gold, makes the rules..
The central reality of the dollar credibility crisis is that a trade deficit the size of the one possessed by the United States would have provoked the collapse of any other currency ages ago.
Without a doubt the US reserve currency status is maintained only on the basis of habit, the lack of alternatives and geopolitical keystones: the OPEC nations peg their currencies to the dollar.
The ability to buy oil in dollars independant and regardless of the actual state of the US trade deficit and domestic macro conditions is the last finger in a dike with lots of new leaks emerging. The other support for the dollar is a premium that might be considered "protection money" that is paid by Taiwan, Japan, Korea and others for protection from china and access to US markets.
None of this can last for much longer and is likely to founder on the geopolitical realignment of energy exporters in terms of immediate causes. Little wonder, therefore, on the real motives that support large and active western military deployments.
A new universal currency requires a credible supra-national issuer, true, but recent history suggests that like all magical power, it slowly subverts..
Much more likely, imo is that we move, in fits and starts ( wars and crashes) to a money system designed for the accumulation and rationing of economic resources for redeployment for the manufacture of capital goods based on both carefull prudential assessments and the price signals in local markets, one using a form of money that isn't a claim on a institution one without counterparty risk.
This seems to have been the role of gold in the past and will be in the future. It has always been the put option on monetary credibility and placing a coin in that fuse box can only result in its eventual promotion to the core role.
The aggressive policy adopted by the Fed in order to avoid the collapse of its financial system makes the current instability worse. An aggressive monetary policy might seem reasonable, but it comes at the price of the credibility of the US as an issuer of a reserve-currency. A status that required total victory in war, the accumulation of most of the worlds gold and a massive trade surplus based on both domestically produced technology and oil.
These heroic will have to be funded, in the final analysis, by the destruction of the real value of the future claims of dollar holders who accumulated them to avoid attack on their currencies in FX markets whenever dollar reserves were low.
This double standard offends those who after decades of recurring balance of payments crisis are lean and mean because in self defence they built economies well aligned to current realities and constitues an unstoppable force for dollar flight in all its forms.
Inflation and devaluation of the dollar are not an immediate threat but its potentially disrupting impact, on commercial and financial, as well as political relations is now baked in da cake. Hyperinflation is everywhere a currency phenomenon, even when the central bank sterilises the impact of expanding claims domestically, an attack on the currency by speculators because of the crisis in confidence it engenders cannot be avoided.
Over a period of twenty years or so a complete inversion in the current pattern of economic relationships between the developed and developing world seems to be a real possibility; sooner or later the truth of the golden rule will emerge; "he who has the gold makes the rules".
I like silver, myself.
Without a doubt the US reserve currency status is maintained only on the basis of habit, the lack of alternatives and geopolitical keystones: the OPEC nations peg their currencies to the dollar.
The ability to buy oil in dollars independant and regardless of the actual state of the US trade deficit and domestic macro conditions is the last finger in a dike with lots of new leaks emerging. The other support for the dollar is a premium that might be considered "protection money" that is paid by Taiwan, Japan, Korea and others for protection from china and access to US markets.
None of this can last for much longer and is likely to founder on the geopolitical realignment of energy exporters in terms of immediate causes. Little wonder, therefore, on the real motives that support large and active western military deployments.
A new universal currency requires a credible supra-national issuer, true, but recent history suggests that like all magical power, it slowly subverts..
Much more likely, imo is that we move, in fits and starts ( wars and crashes) to a money system designed for the accumulation and rationing of economic resources for redeployment for the manufacture of capital goods based on both carefull prudential assessments and the price signals in local markets, one using a form of money that isn't a claim on a institution one without counterparty risk.
This seems to have been the role of gold in the past and will be in the future. It has always been the put option on monetary credibility and placing a coin in that fuse box can only result in its eventual promotion to the core role.
The aggressive policy adopted by the Fed in order to avoid the collapse of its financial system makes the current instability worse. An aggressive monetary policy might seem reasonable, but it comes at the price of the credibility of the US as an issuer of a reserve-currency. A status that required total victory in war, the accumulation of most of the worlds gold and a massive trade surplus based on both domestically produced technology and oil.
These heroic will have to be funded, in the final analysis, by the destruction of the real value of the future claims of dollar holders who accumulated them to avoid attack on their currencies in FX markets whenever dollar reserves were low.
This double standard offends those who after decades of recurring balance of payments crisis are lean and mean because in self defence they built economies well aligned to current realities and constitues an unstoppable force for dollar flight in all its forms.
Inflation and devaluation of the dollar are not an immediate threat but its potentially disrupting impact, on commercial and financial, as well as political relations is now baked in da cake. Hyperinflation is everywhere a currency phenomenon, even when the central bank sterilises the impact of expanding claims domestically, an attack on the currency by speculators because of the crisis in confidence it engenders cannot be avoided.
Over a period of twenty years or so a complete inversion in the current pattern of economic relationships between the developed and developing world seems to be a real possibility; sooner or later the truth of the golden rule will emerge; "he who has the gold makes the rules".
I like silver, myself.
10 June 2009
Never lose sight of the Big Picture ~ Gapminder
See the emerging economies rise....
200 years ago, United Kingdom was a leading nation of the world - both in regard to health and economy. In this video, Hans Rosling details UK's 200-year journey, to present time, and also shows that China, in the coming five years, will catch up with UK faster than ever.
200 years ago, United Kingdom was a leading nation of the world - both in regard to health and economy. In this video, Hans Rosling details UK's 200-year journey, to present time, and also shows that China, in the coming five years, will catch up with UK faster than ever.
6 May 2009
A Tale of Two Depressions
This masterpeice by Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, formerly a Senior Policy Advisor at the International Monetary Fund and Kevin H. O’Rourke,Professor of Economics at Trinity College Dublin and CEPR Research Fellow is worthy of the widest dissemination, catching as it does the epic nature of the contraction and both the significant differences as well as the apallingly similiar if not, frankly scary economic aggregrates.....
A Tale of Two Depressions
The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.
Comparing the Great Depression to now for the world, not just the US
This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.
Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.
In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.
Figure 1. World Industrial Output, Now vs Then
Source: Eichengreen and O’Rourke (2009) and IMF.
Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.
Figure 2. World Stock Markets, Now vs Then
Source: Global Financial Database.
Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.
Figure 3. The Volume of World Trade, Now vs Then
Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html
It’s a Depression alright
To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.
That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.
Policy responses: Then and now
Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.
Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)
Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.
Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.
Figure 5. Money Supplies, 19 Countries, Now vs Then
http://www.voxeu.org/index.php?q=node/3421
Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.
Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.
Figure 6. Government Budget Surpluses, Now vs Then
http://www.voxeu.org/index.php?q=node/3421
Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.
Conclusion
To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.
The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.
References
Eichengreen, B. and K.H. O’Rourke. 2009. “A Tale of Two Depressions.” In progress.
Bernanke, B.S. 2000. Bernanke, B.S. and I. Mihov. 2000. “Deflation and Monetary Contraction in the Great Depression: An Analysis by Simple Ratios.” In B.S. Bernanke, Essays on the Great Depression. Princeton: Princeton University Press.
Bordo, M.D., B. Eichengreen, D. Klingebiel and M.S. Martinez-Peria. 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy32: 51-82.
Paul Krugman, “The Great Recession versus the Great Depression,” Conscience of a Liberal (20 March 2009).
Doug Short, “Four Bad Bears,” DShort: Financial Lifecycle Planning” (20 March 2009).
This article may be reproduced with appropriate attribution. See Copyright
A Tale of Two Depressions
The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.
Comparing the Great Depression to now for the world, not just the US
This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.
Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.
In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.
Figure 1. World Industrial Output, Now vs Then
Source: Eichengreen and O’Rourke (2009) and IMF.
Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.
Figure 2. World Stock Markets, Now vs Then
Source: Global Financial Database.
Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.
Figure 3. The Volume of World Trade, Now vs Then
Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html
It’s a Depression alright
To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.
That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.
Policy responses: Then and now
Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.
Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)
Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.
Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.
Figure 5. Money Supplies, 19 Countries, Now vs Then
http://www.voxeu.org/index.php?q=node/3421
Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.
Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.
Figure 6. Government Budget Surpluses, Now vs Then
http://www.voxeu.org/index.php?q=node/3421
Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.
Conclusion
To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.
The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.
References
Eichengreen, B. and K.H. O’Rourke. 2009. “A Tale of Two Depressions.” In progress.
Bernanke, B.S. 2000. Bernanke, B.S. and I. Mihov. 2000. “Deflation and Monetary Contraction in the Great Depression: An Analysis by Simple Ratios.” In B.S. Bernanke, Essays on the Great Depression. Princeton: Princeton University Press.
Bordo, M.D., B. Eichengreen, D. Klingebiel and M.S. Martinez-Peria. 2001. “Is the Crisis Problem Growing More Severe?” Economic Policy32: 51-82.
Paul Krugman, “The Great Recession versus the Great Depression,” Conscience of a Liberal (20 March 2009).
Doug Short, “Four Bad Bears,” DShort: Financial Lifecycle Planning” (20 March 2009).
This article may be reproduced with appropriate attribution. See Copyright
4 May 2009
Micro lending at Equity Bank ~ third world wisdom exists
It's dawn, and Philip Ndungu has already been to market. It's only the start of what will be a long day. Every morning Phillip prepares hard-boiled eggs, salsa and fried sausages. It's his micro-business - taking and selling a hot breakfast to his entire neighbourhood.
PHILLIP NDUNGU (Translation): Often I start my day at 6am. I sell to about 700 people a day before I go to school.
Phillip's patch is the suburb of Kawangware, one of the poorest in Nairobi. His small business has earned him respect in what can be a tough place. Paul Gando is one of his loyal customers.
PAUL GANDO (Translation): What do you have? Let me see.
PHILLIP NDUNGU (Translation): I have things for 15 shillings, some for ten… and sausages.
PAUL GANDO (Translation): You have smokies, I think this is a very good idea because many boys like that guy would not do such a job. They are scared the girls would look down on them or things like that. But I am impressed by that guy because he is really committed to the job he does instead of getting involved in drugs.
A year ago, Phillip had dropped out of school - he had no money to pay the fees and no way to get a loan.
PHILLIP NDUNGU (Translation): Yes, I had a problem paying my school fees because my job was bringing in less and less money.
Then a micro-lender called Equity Bank opened up in his neighbourhood.
PHILLIP NDUNGU (Translation): I went and spoke to the bank and they were able to help me out with money for my fees.
Phillip was granted a $100 loan to start his business. That was enough for Phillip to nurture his microenterprise, take on an assistant and return to finish his last year of school - paying his own way.
PHILLIP NDUNGU (Translation): My life is going well because I’m not having to argue with anyone about taking time off to go to school. Things are going well because I am self – reliant.
Micro-loans, sometimes for as little as $10, are Equity Bank's mainstay. Today, Dr James Mwangi, the bank's founder and CEO, is opening a new branch in a rural, low-income area that all the major banks have avoided.
DR JAMES MWANGI, EQUITY BANK CEO: We are happy to declare this branch of Equity Bank officially open.
Equity's business is booming, while the major international banks are being battered. Mwangi has a very clear view of what created the current financial crisis.
DR JAMES MWANGI: That was driven by greed as opposed to a need to serve. So it was not the basic tenets of banking, it was more about satisfying human greed.
Bringing Kenya's poorest entrepreneurs, people like Phillip, out from the underground economy and into the mainstream has been the secret of Equity's micro-banking success.
DR JAMES MWANGI: Equity has developed a model that has incorporated them, made banking inclusive. And also done very well in terms of performance. For the last 10 years, Equity has posted growth of 100%, year in and year out. Last year, despite the financial turmoil, Equity was still able to register 110% growth in profitability.
Equity's success has also been due to its efforts to bring women into Kenya's banking culture. Monica Weaver was working as an underpaid seamstress when an Equity employee came by to talk.
MONICA WEAVER: They were just marketing Equity, telling us how it can empower women. I got a chance to be one of the women who were empowered by the Equity Bank.
Monica opened her own account with Equity, and started saving for her own business. The bank charges nothing to open an account and encourages its clients to deposit as little as AU$1.
MONICA WEAVER: Even to open an account with another bank other than Equity was difficult
REPORTER: You tried?
MONICA WEAVER: I tried but it was difficult for me. Because maybe I had 2 shillings with me or 100 and to take them to that big bank, it was a shame. But with Equity, even if I only have 50, I’m very comfortable to go and save my 50 shillings.
Monica had very little to use as collateral but Equity accepted her small table and television as security. James Mwangi says the bank accepts all kinds of interesting items as loan guarantees.
DR JAMES MWANGI: I think that a common but strange collateral is the matrimonial bed. We see with married women just a commitment that they will sign off their matrimonial bed. If you look at the level, the volume, in terms of the size of the loans, you can’t go beyond what they have, that is the assets that they have, and that is what they value most.
Till now, the majority of micro-businesses in Kenya have stayed out of the banking system, using cash instead. For years, the major banks believed that these people were not to be trusted to repay even small loans. James Mwangi has proved that the truth is exactly the opposite - the most poor are, in fact, the most reliable. The default rate on Equity's micro-loans are the lowest in the banking industry - less than 6%. David Mataen is an investment adviser and he's been following Equity Bank's micro-finance initiatives.
DAVID MATAEN, INVESTMENT ADVISOR: If you get to look at the books of those that have micro-lendings, their rates of delinquencies is so minimal, is so unbelievable, and that's because of the financial and fiscal responsibility of the individuals who are running these organisations. Some of them have nothing else to turn to, that is the be-all and end-all of their economic wellbeing, they depend on it. They are so emotionally invested in it that they could not let it die.
Lilian Macharia built this small hotel and pub with Equity money but a large part of it burned down recently. Never having been able to afford insurance, Lilian went back to the bank, and without even additional collateral, they gave her a second loan to help rebuild.
LILLIAN MACHARIA (Translation): I have noticed that Equity Bank, help people who can’t help themselves. You just have to make an effort to pay them back. When you pay it back they will give you another loan…I’ve seen how Equity Bank has helped me and I thank God because, if not for them, someone like me would not be able to do anything else.
Mwangi says that this isn't charity, it's good business. He claims that clients like Lilian are the safest bet in banking.
DR JAMES MWANGI: They are very responsible people who have been responsible for their lives. It is only that they have never been understood. They have been measured through others’ lenses and standards. That’s why they fall short. It is a very parochial perception that is upheld. But if you have to do a lot of groundwork on those types of people, you realise they are very reliable, trustworthy and committed.
James Mwangi still criss-crosses all of Kenya, pushing his Equity Bank into remote areas. When he arrives in the rural town of Thala, he's greeted by a crowd of thousands.
DR JAMES MWANGI: This bank is a product of the sweat of the Kenyan people, owned by Kenyans, managed by Kenyans and committed through financial services to transform the lives of our people.
Equity has shown that, without a doubt, the farmers, the weavers, and the hawkers in this rural crowd have something to teach the bigger players.
REPORTER: What do you think that a small businessman in Kenya has to teach a Wall Street banker?
DAVID MATAEN: If nothing else, honesty.
PHILLIP NDUNGU (Translation): In the next five years I would like to continue doing business and hopefully to study business. Study business so that my business can grow so that I can help the rest of my family.
GEORGE NEGUS: Wonderful stuff, but offering the matrimonial bed as collateral, does that include the person in it? Just wondering. Aaron Lewis reporting from Nairobi. And if you thought those Grameen Bank-type micro-loans are just small business, think again. One market analyst told Aaron that micro-credit businesses had the potential to add 2% to Kenya's GDP. In the current climate - definitely not to be sniffed at.
eporter/Camera
AARON LEWIS
Fixer
VICTOR MUNIAFU
Editor
WAYNE LOVE
Producer
ASHLEY SMITH
Translations / Subtitling
JUDY NYAMATO
MICHELLE ROGER
http://www.sbs.com.au/dateline/story/transcript/id/600038/n/The-Mini-Moguls-Begorra
PHILLIP NDUNGU (Translation): Often I start my day at 6am. I sell to about 700 people a day before I go to school.
Phillip's patch is the suburb of Kawangware, one of the poorest in Nairobi. His small business has earned him respect in what can be a tough place. Paul Gando is one of his loyal customers.
PAUL GANDO (Translation): What do you have? Let me see.
PHILLIP NDUNGU (Translation): I have things for 15 shillings, some for ten… and sausages.
PAUL GANDO (Translation): You have smokies, I think this is a very good idea because many boys like that guy would not do such a job. They are scared the girls would look down on them or things like that. But I am impressed by that guy because he is really committed to the job he does instead of getting involved in drugs.
A year ago, Phillip had dropped out of school - he had no money to pay the fees and no way to get a loan.
PHILLIP NDUNGU (Translation): Yes, I had a problem paying my school fees because my job was bringing in less and less money.
Then a micro-lender called Equity Bank opened up in his neighbourhood.
PHILLIP NDUNGU (Translation): I went and spoke to the bank and they were able to help me out with money for my fees.
Phillip was granted a $100 loan to start his business. That was enough for Phillip to nurture his microenterprise, take on an assistant and return to finish his last year of school - paying his own way.
PHILLIP NDUNGU (Translation): My life is going well because I’m not having to argue with anyone about taking time off to go to school. Things are going well because I am self – reliant.
Micro-loans, sometimes for as little as $10, are Equity Bank's mainstay. Today, Dr James Mwangi, the bank's founder and CEO, is opening a new branch in a rural, low-income area that all the major banks have avoided.
DR JAMES MWANGI, EQUITY BANK CEO: We are happy to declare this branch of Equity Bank officially open.
Equity's business is booming, while the major international banks are being battered. Mwangi has a very clear view of what created the current financial crisis.
DR JAMES MWANGI: That was driven by greed as opposed to a need to serve. So it was not the basic tenets of banking, it was more about satisfying human greed.
Bringing Kenya's poorest entrepreneurs, people like Phillip, out from the underground economy and into the mainstream has been the secret of Equity's micro-banking success.
DR JAMES MWANGI: Equity has developed a model that has incorporated them, made banking inclusive. And also done very well in terms of performance. For the last 10 years, Equity has posted growth of 100%, year in and year out. Last year, despite the financial turmoil, Equity was still able to register 110% growth in profitability.
Equity's success has also been due to its efforts to bring women into Kenya's banking culture. Monica Weaver was working as an underpaid seamstress when an Equity employee came by to talk.
MONICA WEAVER: They were just marketing Equity, telling us how it can empower women. I got a chance to be one of the women who were empowered by the Equity Bank.
Monica opened her own account with Equity, and started saving for her own business. The bank charges nothing to open an account and encourages its clients to deposit as little as AU$1.
MONICA WEAVER: Even to open an account with another bank other than Equity was difficult
REPORTER: You tried?
MONICA WEAVER: I tried but it was difficult for me. Because maybe I had 2 shillings with me or 100 and to take them to that big bank, it was a shame. But with Equity, even if I only have 50, I’m very comfortable to go and save my 50 shillings.
Monica had very little to use as collateral but Equity accepted her small table and television as security. James Mwangi says the bank accepts all kinds of interesting items as loan guarantees.
DR JAMES MWANGI: I think that a common but strange collateral is the matrimonial bed. We see with married women just a commitment that they will sign off their matrimonial bed. If you look at the level, the volume, in terms of the size of the loans, you can’t go beyond what they have, that is the assets that they have, and that is what they value most.
Till now, the majority of micro-businesses in Kenya have stayed out of the banking system, using cash instead. For years, the major banks believed that these people were not to be trusted to repay even small loans. James Mwangi has proved that the truth is exactly the opposite - the most poor are, in fact, the most reliable. The default rate on Equity's micro-loans are the lowest in the banking industry - less than 6%. David Mataen is an investment adviser and he's been following Equity Bank's micro-finance initiatives.
DAVID MATAEN, INVESTMENT ADVISOR: If you get to look at the books of those that have micro-lendings, their rates of delinquencies is so minimal, is so unbelievable, and that's because of the financial and fiscal responsibility of the individuals who are running these organisations. Some of them have nothing else to turn to, that is the be-all and end-all of their economic wellbeing, they depend on it. They are so emotionally invested in it that they could not let it die.
Lilian Macharia built this small hotel and pub with Equity money but a large part of it burned down recently. Never having been able to afford insurance, Lilian went back to the bank, and without even additional collateral, they gave her a second loan to help rebuild.
LILLIAN MACHARIA (Translation): I have noticed that Equity Bank, help people who can’t help themselves. You just have to make an effort to pay them back. When you pay it back they will give you another loan…I’ve seen how Equity Bank has helped me and I thank God because, if not for them, someone like me would not be able to do anything else.
Mwangi says that this isn't charity, it's good business. He claims that clients like Lilian are the safest bet in banking.
DR JAMES MWANGI: They are very responsible people who have been responsible for their lives. It is only that they have never been understood. They have been measured through others’ lenses and standards. That’s why they fall short. It is a very parochial perception that is upheld. But if you have to do a lot of groundwork on those types of people, you realise they are very reliable, trustworthy and committed.
James Mwangi still criss-crosses all of Kenya, pushing his Equity Bank into remote areas. When he arrives in the rural town of Thala, he's greeted by a crowd of thousands.
DR JAMES MWANGI: This bank is a product of the sweat of the Kenyan people, owned by Kenyans, managed by Kenyans and committed through financial services to transform the lives of our people.
Equity has shown that, without a doubt, the farmers, the weavers, and the hawkers in this rural crowd have something to teach the bigger players.
REPORTER: What do you think that a small businessman in Kenya has to teach a Wall Street banker?
DAVID MATAEN: If nothing else, honesty.
PHILLIP NDUNGU (Translation): In the next five years I would like to continue doing business and hopefully to study business. Study business so that my business can grow so that I can help the rest of my family.
GEORGE NEGUS: Wonderful stuff, but offering the matrimonial bed as collateral, does that include the person in it? Just wondering. Aaron Lewis reporting from Nairobi. And if you thought those Grameen Bank-type micro-loans are just small business, think again. One market analyst told Aaron that micro-credit businesses had the potential to add 2% to Kenya's GDP. In the current climate - definitely not to be sniffed at.
eporter/Camera
AARON LEWIS
Fixer
VICTOR MUNIAFU
Editor
WAYNE LOVE
Producer
ASHLEY SMITH
Translations / Subtitling
JUDY NYAMATO
MICHELLE ROGER
http://www.sbs.com.au/dateline/story/transcript/id/600038/n/The-Mini-Moguls-Begorra
24 April 2009
Banking Euphoria Is Premature ~ Once off profits
Good news from six US banks has raised hopes that an end to the financial crisis might be in sight. But German experts think the euphoria is wishful thinking. As they see it, things are going to get worse soon -- and banks will be forced to make billions more in write-downs.
The news spreads like wildfire and hope starts to bloom. One after the other, six US banks -- including the largest, Bank of America -- have submitted performance figures for the first quarter of 2009 that are far better than experts had predicted.
Banks like Wells Fargo and JPMorgan Chase have posted profits reaching into the billions. Goldman Sachs has even announced that it plans to pay back the billions in emergency bailout funds it received from the US government. And analysts are also expecting to see positive first-quarter earnings from German banks.
The results have fuelled hope that the financial sector has started its climb out of the economic abyss, and the first batch of optimists are already announcing that the financial crisis, which has already lasted almost two years, will soon come to an end. "We expect that the banks' reporting season will bring more positive results like the ones JPMorgan has submitted," says Robert Halver, for example, an expert on capital markets at Baader Bank.
But some experts think such conclusions are dangerously misguided. "We're far from being out of the woods," says Dirk Schiereck, a professor of banking at Darmstadt Technical University. "The banks are still extremely vulnerable." And Hans-Peter Burghof, an expert on finance at Hohenheim University, even goes so far as to speak of an "expansion of the crisis, which might soon even get new banks into serious trouble."
Just a Brief Burst
Analysts are also looking at the rest of the year with extreme skepticism. "To a very significant degree, the bank profits from the first quarter can be attributed to a very special constellation of fortunate factors that are very atypical for banks," says Guido Hoymann, an analyst at Bankhaus Metzler. In fact, in the first three months of the year, major corporations like Siemens and Porsche have taken advantage of rock-bottom prices in the banking sector to refinance expiring bonds.
Hoymann estimates that in the first quarter alone, the volume of debt refinancing amounted to 45 percent of the usual annual volume. As he sees it, this boom has boosted commission income and investment banking profits for many US banks. German banks are likely to have enjoyed a similar interim boost in the first quarter, he adds.
"But it's not going to last," Hoymann says. "Current forecasts already indicate that the lending business will normalize." And when that happens, the banks will once again lose a major source of profits.
An additional factor is that many US-based financial institutions are taking full advantage of relaxed accounting rules. Such rules make it possible, for example, for companies to postpone write-downs. Goldman Sachs has also benefited from the fact that the government pressured it into transforming itself from an investment bank into a completely normal bank. As such, it has become subject to different accounting rules, which has meant that the company did not have to report results for the month of December.
Bleaker Prospects
The prospects for the coming months are worrying. "It might be that the recession doesn't get any worse," Burghof says. "But there is no doubt that it will expand -- and affect the banks once again."
In fact, the economic situation is anything but secure. Experts argue over whether the economy in 2009 will decline by 4, 5 or 6 percent and whether the turnaround will take place in the summer, fall or winter. But there is one point on which the majority of experts agree. "The economy is unlikely to grow as quickly as it shrank," says Jörg Hinze, an economic analyst at the Hamburg Institute of International Economics (HWWI). "It might stagnate for a long time at a very low level or only gradually start climbing again."
But a slow rebound will not stop the crisis. If the economy improves too slowly, the pressure on companies will mount, and hundreds of thousands of workers in Germany currently on short time might find themselves out of a job in the fall.
And that would present the banks with even more risks. Many banking establishments anticipate an explosion of loan defaults from private and business clients. Bank of America and JPMorgan, for example, have built up reserves reaching into the tens of billions to respond to possible new write-downs.
The New Risks of Market Deregulation
At present, the banks are hardly feeling the recession yet. "Currently, the attitude among politicians is that you should bail out anything that could cause any pain," says Hoymann. But doing so does not correct the structural problems of markets and businesses. As Hoymann puts it, it's "like avoiding going to the dentist" -- in the short term, you save yourself some pain, but in the long term everything gets rotten.
"The government can't keep following its current line forever," Hoymann adds. As soon as politicians start leaving the market to its own devices again, the restructuring that had been deferred will hit companies and people all the harder. And that would mean new strains on the banks as well.
Burghof fears that lingering weakness in the economy will soon pull even more financial institutions into the crisis. "The longer the recession lasts, the more job losses and serious financial difficulties there will be for small- and mid-sized companies," he says. "A number of savings banks are currently worried that they will have to make some major write-downs soon as well."
http://www.spiegel.de/international/business/0,1518,620590,00.html
The news spreads like wildfire and hope starts to bloom. One after the other, six US banks -- including the largest, Bank of America -- have submitted performance figures for the first quarter of 2009 that are far better than experts had predicted.
Banks like Wells Fargo and JPMorgan Chase have posted profits reaching into the billions. Goldman Sachs has even announced that it plans to pay back the billions in emergency bailout funds it received from the US government. And analysts are also expecting to see positive first-quarter earnings from German banks.
The results have fuelled hope that the financial sector has started its climb out of the economic abyss, and the first batch of optimists are already announcing that the financial crisis, which has already lasted almost two years, will soon come to an end. "We expect that the banks' reporting season will bring more positive results like the ones JPMorgan has submitted," says Robert Halver, for example, an expert on capital markets at Baader Bank.
But some experts think such conclusions are dangerously misguided. "We're far from being out of the woods," says Dirk Schiereck, a professor of banking at Darmstadt Technical University. "The banks are still extremely vulnerable." And Hans-Peter Burghof, an expert on finance at Hohenheim University, even goes so far as to speak of an "expansion of the crisis, which might soon even get new banks into serious trouble."
Just a Brief Burst
Analysts are also looking at the rest of the year with extreme skepticism. "To a very significant degree, the bank profits from the first quarter can be attributed to a very special constellation of fortunate factors that are very atypical for banks," says Guido Hoymann, an analyst at Bankhaus Metzler. In fact, in the first three months of the year, major corporations like Siemens and Porsche have taken advantage of rock-bottom prices in the banking sector to refinance expiring bonds.
Hoymann estimates that in the first quarter alone, the volume of debt refinancing amounted to 45 percent of the usual annual volume. As he sees it, this boom has boosted commission income and investment banking profits for many US banks. German banks are likely to have enjoyed a similar interim boost in the first quarter, he adds.
"But it's not going to last," Hoymann says. "Current forecasts already indicate that the lending business will normalize." And when that happens, the banks will once again lose a major source of profits.
An additional factor is that many US-based financial institutions are taking full advantage of relaxed accounting rules. Such rules make it possible, for example, for companies to postpone write-downs. Goldman Sachs has also benefited from the fact that the government pressured it into transforming itself from an investment bank into a completely normal bank. As such, it has become subject to different accounting rules, which has meant that the company did not have to report results for the month of December.
Bleaker Prospects
The prospects for the coming months are worrying. "It might be that the recession doesn't get any worse," Burghof says. "But there is no doubt that it will expand -- and affect the banks once again."
In fact, the economic situation is anything but secure. Experts argue over whether the economy in 2009 will decline by 4, 5 or 6 percent and whether the turnaround will take place in the summer, fall or winter. But there is one point on which the majority of experts agree. "The economy is unlikely to grow as quickly as it shrank," says Jörg Hinze, an economic analyst at the Hamburg Institute of International Economics (HWWI). "It might stagnate for a long time at a very low level or only gradually start climbing again."
But a slow rebound will not stop the crisis. If the economy improves too slowly, the pressure on companies will mount, and hundreds of thousands of workers in Germany currently on short time might find themselves out of a job in the fall.
And that would present the banks with even more risks. Many banking establishments anticipate an explosion of loan defaults from private and business clients. Bank of America and JPMorgan, for example, have built up reserves reaching into the tens of billions to respond to possible new write-downs.
The New Risks of Market Deregulation
At present, the banks are hardly feeling the recession yet. "Currently, the attitude among politicians is that you should bail out anything that could cause any pain," says Hoymann. But doing so does not correct the structural problems of markets and businesses. As Hoymann puts it, it's "like avoiding going to the dentist" -- in the short term, you save yourself some pain, but in the long term everything gets rotten.
"The government can't keep following its current line forever," Hoymann adds. As soon as politicians start leaving the market to its own devices again, the restructuring that had been deferred will hit companies and people all the harder. And that would mean new strains on the banks as well.
Burghof fears that lingering weakness in the economy will soon pull even more financial institutions into the crisis. "The longer the recession lasts, the more job losses and serious financial difficulties there will be for small- and mid-sized companies," he says. "A number of savings banks are currently worried that they will have to make some major write-downs soon as well."
http://www.spiegel.de/international/business/0,1518,620590,00.html
23 April 2009
KNOW YOUR ENEMY ` James Quinn
Welcome to a new kind of tension.
All across the alien nation.
Where everything isn't meant to be okay.
American Idiot - Green Day
Strauss & Howe described the Prophet/Idealist generation as being born during a High, spending its rising adult years during an Awakening, spending midlife during an Unraveling, and spending old age in a Crisis. Prophetic leaders have been cerebral and principled, summoners of human sacrifice, wagers of righteous wars. Early in life, few saw combat in uniform. Late in life, most prophets come to be revered as much for their words as for their deeds. The three previous crisis periods in U.S. history were dominated by the prophetic leadership of George Washington, Abraham Lincoln, and Franklin Roosevelt. George Bush has led us through the 1st half of this crisis. It is likely that Barack Obama will lead us through the 2nd half of the crisis. I don’t think George Bush will be revered for being cerebral or making inspiring speeches. He did wage a righteous war against terrorism. Barack Obama is cerebral and principled. He is waging a righteous war in Afghanistan, though he has never seen combat. He is already known for his inspiring speeches. Will he rise to the level of Lincoln?
George Bush and Barack Obama are both Baby Boomers. The oldest boomer is 63, the youngest 45. Boomers occupy the leadership positions in government, corporations, military, and educational institutions. Boomer leaders are cocky, aggressive, and quoting Doug Casey,
“quite willing to burn down the barn in order to destroy whatever rats they see.” George Bush was sure there was WMD in Iraq. He was sure that cutting taxes, sending out rebate checks, and letting banks regulate themselves was the path to prosperity. Hank Paulson and Ben Bernanke were sure that TARP would save our financial system from collapse. Barack Obama was sure that if we didn’t pass his bloated stimulus bill, catastrophe awaited the country. Baby Boom leaders are always sure and often wrong. The masses are drawn to leaders who are sure of themselves. They want to believe that a wise man will lead them to the Promised Land. They won’t realize that he is leading them to hell, until it is too late.
Civil Unrest – The Great Unraveling
Overthrow the effigy
The vast majority
Burning down the foreman of control
Silence is the enemy
Against your urgency
So rally up the demons of your soul
Know Your Enemy – Green Day
Strauss & Howe explained their view of how America was feeling in 1997. They were dead on. We are a country that has been rotting from within for decades.
America feels like it’s unraveling. Though we live in an era of relative peace and comfort, we have settled into a mood of pessimism about the long-term future, fearful that our superpower nation is somehow rotting from within. The America of today feels worse, in its fundamentals, than the one many of us remember from youth, a society presided over by those of supposedly lesser consciousness. We yearn for civic character but satisfy ourselves with symbolic gestures and celebrity circuses. We perceive no greatness in our leaders, a new meanness in ourselves. Each new election brings a new jolt, its aftermath a new disappointment.
Many Americans know we are on the wrong track but are so distracted by the circus like distractions of every day life, they choose not to think about it. It is likely that the 123 million eligible voters who chose not to vote in the 2008 Presidential election don’t even realize the country is on the wrong track. The sedated masses were easy to manipulate when unemployment was 4%. There are now 6 million more people unemployed today than just 16 months ago in November 2007. Another 2 to 3 million will lose their jobs in 2009. The government doesn’t count another 5 to 10 million people who are classified as out of the workforce, but would like to work. This means there will be 20 to 25 million people out of work by the end of this year. Unemployed people have a propensity to be angry. In the last few months there have been several mass murders committed by angry unemployed men. As the economic “solutions” rolled out by politicians and Federal Reserve bureaucrats lead to an inflationary depression similar to the Weimer Republic of the early 1930’s, civil unrest will rear its ugly head.
Doug Casey describes the likely scenario:
People believe they have little to lose, they’re eager to hang those they believe responsible for their problems, and they’ll listen to radical or violent proposals. We’re now just entering what will likely be the worst economic trough since the Industrial Revolution. A rioter is typically an angry person looking for vengeance because he blames someone else for his problem. So far, rioters seem to be directing their attention at governments. Correct target, of course, but they don’t have the rationale quite right. They’re not angry because governments inflated the currency, promoted fractional reserve banking, and nurtured all the cockamamie socialist programs that caused this crisis. Not at all; they rather liked all that. They’re angry only because their governments haven’t adequately protected them from the consequences of what they did. So as conditions worsen, we can expect governments worldwide to pull out absolutely all the stops to show they’re “doing something.” And round up scapegoats to satisfy the mob and divert anger from themselves. I fully expect civil unrest to spread everywhere, simply because the depression will spread everywhere. It will be worst in places that have been most overextended, most debt leveraged, most urban, and have the largest numbers of unemployed workers -- the U.S., Europe, and China.
The civil unrest is most likely to erupt among Hispanics and African Americans. The unemployment rate of Hispanics is 11.4% versus 5.0% in November 2007. It is doubtless far worse, as many Hispanics worked “under the table” in the housing industry. The unemployment rate of African Americans is 13.3%, the highest since 1993, and up from an all-time low of 7.0% in 2000. The urban areas of the United States are a powder keg, with automatic weapons available to anyone. Policemen are being slaughtered at a record pace. Mexico is on the verge of becoming a failed state. Drug lords are running the country. Its oil fields are in rapid decline and it will no longer be an exporter of oil within 5 years. The Mexican government depends on oil for 40% of its tax revenues. The collapse of Mexico’s government, extreme power of murderous drug lords, and worldwide depression will drive millions of poor towards the U.S. border. The anti-immigrant feelings in the U.S. continue to grow as more white Americans lose their jobs. This is an explosive combination that will eventually require military and National Guard intervention.
There are two other hot button issues which will increase the anxiety in this country. Guns and ammo are selling like hotcakes. The combination of apprehension that Obama and his Democratic majority will put restrictions on gun ownership and the severe economic downturn has led to an exorbitant increase in gun sales. Ruger has a $48 million backlog of guns on order. Many citizens in the Western states live by the motto: You can have my gun when you pry it from my cold, dead fingers. Any effort by the Obama administration to restrict gun ownership will be met with major resistance. The Tax Day Tea Parties revealed the other hot button issue for many Americans. When the Bush tax cuts expire in 2010 and Obama institutes his Cap & Trade energy tax, the economy will receive a double whammy. At that point the failed economic policies and higher taxes will lead to consternation and resentment throughout the land. The unending economic turmoil throughout the world will result in protests and anger in many countries. The more disturbing issue is how politicians will try to divert the attention of the masses through the use of an external threat.
War – Fingers of Instability
The insurgency will rise
When the bloods been sacrificed
Don't be blinded by the lies
In your eyes
Violence is an energy
From here to eternity
Violence is an energy
Silence is the enemy
So gimme gimme revolution
Know Your Enemy – Green Day
Back in 2006 John Mauldin wrote an article titled Fingers of Instability. It was based on a book written by Mark Buchanan called Ubiquity, Why Catastrophes Happen. It examines chaos theory, complexity theory, and critical states. Physicists, using a computer model examined what takes place when sand is continuously piled up grain by grain. They were endeavoring to understand what makes the pile ultimately collapse. Buchanan described the experiment:
"Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, 'ready to go,' color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sand pile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever."
"In this simplified setting of the sand pile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size."
You may be wondering what sand has to do with war. The relevance is that a small seemingly minor incident could lead to a large world war.....
read the rest
All across the alien nation.
Where everything isn't meant to be okay.
American Idiot - Green Day
Strauss & Howe described the Prophet/Idealist generation as being born during a High, spending its rising adult years during an Awakening, spending midlife during an Unraveling, and spending old age in a Crisis. Prophetic leaders have been cerebral and principled, summoners of human sacrifice, wagers of righteous wars. Early in life, few saw combat in uniform. Late in life, most prophets come to be revered as much for their words as for their deeds. The three previous crisis periods in U.S. history were dominated by the prophetic leadership of George Washington, Abraham Lincoln, and Franklin Roosevelt. George Bush has led us through the 1st half of this crisis. It is likely that Barack Obama will lead us through the 2nd half of the crisis. I don’t think George Bush will be revered for being cerebral or making inspiring speeches. He did wage a righteous war against terrorism. Barack Obama is cerebral and principled. He is waging a righteous war in Afghanistan, though he has never seen combat. He is already known for his inspiring speeches. Will he rise to the level of Lincoln?
George Bush and Barack Obama are both Baby Boomers. The oldest boomer is 63, the youngest 45. Boomers occupy the leadership positions in government, corporations, military, and educational institutions. Boomer leaders are cocky, aggressive, and quoting Doug Casey,
“quite willing to burn down the barn in order to destroy whatever rats they see.” George Bush was sure there was WMD in Iraq. He was sure that cutting taxes, sending out rebate checks, and letting banks regulate themselves was the path to prosperity. Hank Paulson and Ben Bernanke were sure that TARP would save our financial system from collapse. Barack Obama was sure that if we didn’t pass his bloated stimulus bill, catastrophe awaited the country. Baby Boom leaders are always sure and often wrong. The masses are drawn to leaders who are sure of themselves. They want to believe that a wise man will lead them to the Promised Land. They won’t realize that he is leading them to hell, until it is too late.
Civil Unrest – The Great Unraveling
Overthrow the effigy
The vast majority
Burning down the foreman of control
Silence is the enemy
Against your urgency
So rally up the demons of your soul
Know Your Enemy – Green Day
Strauss & Howe explained their view of how America was feeling in 1997. They were dead on. We are a country that has been rotting from within for decades.
America feels like it’s unraveling. Though we live in an era of relative peace and comfort, we have settled into a mood of pessimism about the long-term future, fearful that our superpower nation is somehow rotting from within. The America of today feels worse, in its fundamentals, than the one many of us remember from youth, a society presided over by those of supposedly lesser consciousness. We yearn for civic character but satisfy ourselves with symbolic gestures and celebrity circuses. We perceive no greatness in our leaders, a new meanness in ourselves. Each new election brings a new jolt, its aftermath a new disappointment.
Many Americans know we are on the wrong track but are so distracted by the circus like distractions of every day life, they choose not to think about it. It is likely that the 123 million eligible voters who chose not to vote in the 2008 Presidential election don’t even realize the country is on the wrong track. The sedated masses were easy to manipulate when unemployment was 4%. There are now 6 million more people unemployed today than just 16 months ago in November 2007. Another 2 to 3 million will lose their jobs in 2009. The government doesn’t count another 5 to 10 million people who are classified as out of the workforce, but would like to work. This means there will be 20 to 25 million people out of work by the end of this year. Unemployed people have a propensity to be angry. In the last few months there have been several mass murders committed by angry unemployed men. As the economic “solutions” rolled out by politicians and Federal Reserve bureaucrats lead to an inflationary depression similar to the Weimer Republic of the early 1930’s, civil unrest will rear its ugly head.
Doug Casey describes the likely scenario:
People believe they have little to lose, they’re eager to hang those they believe responsible for their problems, and they’ll listen to radical or violent proposals. We’re now just entering what will likely be the worst economic trough since the Industrial Revolution. A rioter is typically an angry person looking for vengeance because he blames someone else for his problem. So far, rioters seem to be directing their attention at governments. Correct target, of course, but they don’t have the rationale quite right. They’re not angry because governments inflated the currency, promoted fractional reserve banking, and nurtured all the cockamamie socialist programs that caused this crisis. Not at all; they rather liked all that. They’re angry only because their governments haven’t adequately protected them from the consequences of what they did. So as conditions worsen, we can expect governments worldwide to pull out absolutely all the stops to show they’re “doing something.” And round up scapegoats to satisfy the mob and divert anger from themselves. I fully expect civil unrest to spread everywhere, simply because the depression will spread everywhere. It will be worst in places that have been most overextended, most debt leveraged, most urban, and have the largest numbers of unemployed workers -- the U.S., Europe, and China.
The civil unrest is most likely to erupt among Hispanics and African Americans. The unemployment rate of Hispanics is 11.4% versus 5.0% in November 2007. It is doubtless far worse, as many Hispanics worked “under the table” in the housing industry. The unemployment rate of African Americans is 13.3%, the highest since 1993, and up from an all-time low of 7.0% in 2000. The urban areas of the United States are a powder keg, with automatic weapons available to anyone. Policemen are being slaughtered at a record pace. Mexico is on the verge of becoming a failed state. Drug lords are running the country. Its oil fields are in rapid decline and it will no longer be an exporter of oil within 5 years. The Mexican government depends on oil for 40% of its tax revenues. The collapse of Mexico’s government, extreme power of murderous drug lords, and worldwide depression will drive millions of poor towards the U.S. border. The anti-immigrant feelings in the U.S. continue to grow as more white Americans lose their jobs. This is an explosive combination that will eventually require military and National Guard intervention.
There are two other hot button issues which will increase the anxiety in this country. Guns and ammo are selling like hotcakes. The combination of apprehension that Obama and his Democratic majority will put restrictions on gun ownership and the severe economic downturn has led to an exorbitant increase in gun sales. Ruger has a $48 million backlog of guns on order. Many citizens in the Western states live by the motto: You can have my gun when you pry it from my cold, dead fingers. Any effort by the Obama administration to restrict gun ownership will be met with major resistance. The Tax Day Tea Parties revealed the other hot button issue for many Americans. When the Bush tax cuts expire in 2010 and Obama institutes his Cap & Trade energy tax, the economy will receive a double whammy. At that point the failed economic policies and higher taxes will lead to consternation and resentment throughout the land. The unending economic turmoil throughout the world will result in protests and anger in many countries. The more disturbing issue is how politicians will try to divert the attention of the masses through the use of an external threat.
War – Fingers of Instability
The insurgency will rise
When the bloods been sacrificed
Don't be blinded by the lies
In your eyes
Violence is an energy
From here to eternity
Violence is an energy
Silence is the enemy
So gimme gimme revolution
Know Your Enemy – Green Day
Back in 2006 John Mauldin wrote an article titled Fingers of Instability. It was based on a book written by Mark Buchanan called Ubiquity, Why Catastrophes Happen. It examines chaos theory, complexity theory, and critical states. Physicists, using a computer model examined what takes place when sand is continuously piled up grain by grain. They were endeavoring to understand what makes the pile ultimately collapse. Buchanan described the experiment:
"Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, 'ready to go,' color it red. What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sand pile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever."
"In this simplified setting of the sand pile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size."
You may be wondering what sand has to do with war. The relevance is that a small seemingly minor incident could lead to a large world war.....
read the rest
1 April 2009
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 ReykjavÃk, 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.
by
Michael Lewis
April 2009
Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to ReykjavÃk to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”
How did the economy get into this mess? Visit our archive “Charting the Road to Ruin.” Plus: A Q&A with Michael Lewis. Illustration by Brad Holland.
An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”
At the same time, in part because the banks were also lending Icelanders money to buy stocks and real estate, the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. ReykjavÃk real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry. “Everyone was learning Black-Scholes” (the option-pricing model), says Ragnar Arnason, a professor of fishing economics at the University of Iceland, who watched students flee the economics of fishing for the economics of money. “The schools of engineering and math were offering courses on financial engineering. We had hundreds and hundreds of people studying finance.” This in a country the size of Kentucky, but with fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t have global financial institutions, or a university devoting itself to training many hundreds of financiers, or its own currency. And yet the world was taking Iceland seriously. (March 2006 Bloomberg News headline: iceland’s billionaire tycoon “thor” braves u.s. with hedge fund.)
Global financial ambition turned out to have a downside. When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market. The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the value of the generally stable Icelandic krona, which had also crashed and was removed from the market by the Icelandic government. But it was a lot.
Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.” In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debt-drowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration.
In just three or four years an entirely new way of economic life had been grafted onto the side of this stable, collectivist society, and the graft had overwhelmed the host. “It was just a group of young kids,” said the man from the I.M.F. “In this egalitarian society, they came in, dressed in black, and started doing business.”
F
ive hundred miles northwest of Scotland the Icelandair flight lands and taxis to a terminal still painted with Landsbanki logos—Landsbanki being one of Iceland’s three bankrupt banks, along with Kaupthing and Glitnir. I try to think up a metaphor for the world’s expanding reservoir of defunct financial corporate sponsorships—water left in the garden hose after you’ve switched off the pressure?—but before I can finish, the man in the seat behind me reaches for his bag in the overhead bin and knocks the crap out of me. I will soon learn that Icelandic males, like moose, rams, and other horned mammals, see these collisions as necessary in their struggle for survival. I will also learn that this particular Icelandic male is a senior official at the Icelandic stock exchange. At this moment, however, all I know is that a middle-aged man in an expensive suit has gone out of his way to bash bodies without apology or explanation. I stew on this apparently wanton act of hostility all the way to passport control.
You can tell a lot about a country by how much better they treat themselves than foreigners at the point of entry. Let it be known that Icelanders make no distinction at all. Over the control booth they’ve hung a charming sign that reads simply, all citizens, and what they mean by that is not “All Icelandic Citizens” but “All Citizens of Anywhere.” Everyone is from somewhere, and so we all wind up in the same line, leading to the guy behind the glass. Before you can say, “Land of contradictions,” he has pretended to examine your passport and waved you on through.
Next, through a dark landscape of snow-spackled black volcanic rock that may or may not be lunar, but that looks so much as you would expect the moon to look that nasa scientists used it to acclimate the astronauts before the first moon mission. An hour later we arrive at the 101 Hotel, owned by the wife of one of Iceland’s most famous failed bankers. It’s cryptically named (101 is the city’s richest postal code), but instantly recognizable: hip Manhattan hotel. Staff dressed in black, incomprehensible art on the walls, unread books about fashion on unused coffee tables—everything to heighten the social anxiety of a rube from the sticks but the latest edition of The New York Observer. It’s the sort of place bankers stay because they think it’s where the artists stay. Bear Stearns convened a meeting of British and American hedge-fund managers here, in January 2008, to figure out how much money there was to be made betting on Iceland’s collapse. (A lot.) The hotel, once jammed, is now empty, with only 6 of its 38 rooms occupied. The restaurant is empty, too, and so are the small tables and little nooks that once led the people who weren’t in them to marvel at those who were. A bankrupt Holiday Inn is just depressing; a bankrupt Ian Schrager hotel is tragic.
With the financiers who once paid a lot to stay here gone for good, I’m given a big room on the top floor with a view of the old city for half-price. I curl up in silky white sheets and reach for a book about the Icelandic economy—written in 1995, before the banking craze, when the country had little to sell to the outside world but fresh fish—and read this remarkable sentence: “Icelanders are rather suspicious of the market system as a cornerstone of economic organization, especially its distributive implications.”
That’s when the strange noises commence.
Stefan Alfsson: A fisherman turned banker, who was laid off from his trading job in October and now might return to fishing.
First comes a screeching from the far side of the room. I leave the bed to examine the situation. It’s the heat, sounding like a teakettle left on the stove for too long, straining to control itself. Iceland’s heat isn’t heat as we know it, but heat drawn directly from the earth. The default temperature of the water is scalding. Every year workers engaged in street repairs shut down the cold-water intake used to temper the hot water and some poor Icelander is essentially boiled alive in his shower. So powerful is the heat being released from the earth into my room that some great grinding, wheezing engine must be employed to prevent it from cooking me.
Then, from outside, comes an explosion.
Boom!
Then another.
Boom!
A
s it is mid-December, the sun rises, barely, at 10:50 a.m. and sets with enthusiasm at 3:44 p.m. This is obviously better than no sun at all, but subtly worse, as it tempts you to believe you can simulate a normal life. And whatever else this place is, it isn’t normal. The point is reinforced by a 26-year-old Icelander I’ll call Magnus Olafsson, who, just a few weeks earlier, had been earning close to a million dollars a year trading currencies for one of the banks. Tall, white-blond, and handsome, Olafsson looks exactly as you’d expect an Icelander to look—which is to say that he looks not at all like most Icelanders, who are mousy-haired and lumpy. “My mother has enough food hoarded to open a grocery store,” he says, then adds that ever since the crash ReykjavÃk has felt tense and uneasy.
Two months earlier, in early October, as the market for Icelandic kronur dried up, he’d sneaked away from his trading desk and gone down to the teller, where he’d extracted as much foreign cash as they’d give him and stuffed it into a sack. “All over downtown that day you saw people walking around with bags,” he says. “No one ever carries bags around downtown.” After work he’d gone home with his sack of cash and hidden roughly 30 grand in yen, dollars, euros, and pounds sterling inside a board game.
Before October the big-name bankers were heroes; now they are abroad, or laying low. Before October Magnus thought of Iceland as essentially free of danger; now he imagines hordes of muggers en route from foreign nations to pillage his board-game safe—and thus refuses to allow me to use his real name. “You’d figure New York would hear about this and send over planeloads of muggers,” he theorizes. “Most everyone has their savings at home.” As he is already unsettled, I tell him about the unsettling explosions outside my hotel room. “Yes,” he says with a smile, “there’s been a lot of Range Rovers catching fire lately.” Then he explains.
For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. “The fishing guys pretty much discovered the trade and made it huge,” says Magnus. “But they made so much money on it that the financial stuff eventually overwhelmed the fish.” They made so much money on it that the trade spread from the fishing guys to their friends.
It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!
The rocks beneath ReykjavÃk may be igneous, but the city feels sedimentary: on top of several thick strata of architecture that should be called Nordic Pragmatic lies a thin layer that will almost certainly one day be known as Asshole Capitalist. The hobbit-size buildings that house the Icelandic government are charming and scaled to the city. The half-built oceanfront glass towers meant to house newly rich financiers and, in the bargain, block everyone else’s view of the white bluffs across the harbor are not.
T
he best way to see any city is to walk it, but everywhere I walk Icelandic men plow into me without so much as a by-your-leave. Just for fun I march up and down the main shopping drag, playing chicken, to see if any Icelandic male would rather divert his stride than bang shoulders. Nope. On party nights—Thursday, Friday, and Saturday—when half the country appears to take it as a professional obligation to drink themselves into oblivion and wander the streets until what should be sunrise, the problem is especially acute. The bars stay open until five a.m., and the frantic energy with which the people hit them seems more like work than work. Within minutes of entering a nightclub called Boston I get walloped, first by a bearded troll who, I’m told, ran an Icelandic hedge fund. Just as I’m recovering I get plowed over by a drunken senior staffer at the Central Bank. Perhaps because he is drunk, or perhaps because we had actually met a few hours earlier, he stops to tell me, “Vee try to tell them dat our problem was not a solfency problem but a likvitity problem, but they did not agree,” then stumbles off. It’s exactly what Lehman Brothers and Citigroup said: If only you’d give us the money to tide us over, we’ll survive this little hiccup.
A nation so tiny and homogeneous that everyone in it knows pretty much everyone else is so fundamentally different from what one thinks of when one hears the word “nation” that it almost requires a new classification. Really, it’s less a nation than one big extended family. For instance, most Icelanders are by default members of the Lutheran Church. If they want to stop being Lutherans they must write to the government and quit; on the other hand, if they fill out a form, they can start their own cult and receive a subsidy. Another example: the ReykjavÃk phone book lists everyone by his first name, as there are only about nine surnames in Iceland, and they are derived by prefixing the father’s name to “son” or “dottir.” It’s hard to see how this clarifies matters, as there seem to be only about nine first names in Iceland, too. But if you wish to reveal how little you know about Iceland, you need merely refer to someone named Siggor Sigfusson as “Mr. Sigfusson,” or Kristin Petursdottir as “Ms. Petursdottir.” At any rate, everyone in a conversation is just meant to know whomever you’re talking about, so you never hear anyone ask, “Which Siggor do you mean?”
Because Iceland is really just one big family, it’s simply annoying to go around asking Icelanders if they’ve met Björk. Of course they’ve met Björk; who hasn’t met Björk? Who, for that matter, didn’t know Björk when she was two? “Yes, I know Björk,” a professor of finance at the University of Iceland says in reply to my question, in a weary tone. “She can’t sing, and I know her mother from childhood, and they were both crazy. That she is so well known outside of Iceland tells me more about the world than it does about Björk.”
One benefit of life inside a nation masking an extended family is that nothing needs to be explained; everyone already knows everything that needs to be known. I quickly find that it is an even greater than usual waste of time to ask directions, for instance. Just as you are meant to know which Bjornjolfer is being spoken of at any particular moment, you are meant to know where you are on the map. Two grown-ups—one a banker whose office is three blocks away—cannot tell me where to find the prime minister’s office. Three more grown-ups, all within three blocks of the National Gallery of Iceland, have no idea where to find the place. When I tell the sweet middle-aged lady behind the counter at the National Museum that no Icelander seems to know how to find it, she says, “No one actually knows anything about our country. Last week we had Icelandic high-school students here and their teacher asked them to name an Icelandic 19th-century painter. None of them could. Not a single one! One said, ‘Halldor Laxness?’!” (Laxness won the 1955 Nobel Prize in Literature, the greatest global honor for an Icelander until the 1980s, when two Icelandic women captured Miss World titles in rapid succession.)
T
he world is now pocked with cities that feel as if they are perched on top of bombs. The bombs have yet to explode, but the fuses have been lit, and there’s nothing anyone can do to extinguish them. Walk around Manhattan and you see empty stores, empty streets, and, even when it’s raining, empty taxis: people have fled before the bomb explodes. When I was there ReykjavÃk had the same feel of incipient doom, but the fuse burned strangely. The government mandates three months’ severance pay, and so the many laid-off bankers were paid until early February, when the government promptly fell. Against a basket of foreign currencies the krona is worth less than a third of its boom-time value. As Iceland imports everything but heat and fish, the price of just about everything is, in mid-December, about to skyrocket. A new friend who works for the government tells me that she went into a store to buy a lamp. The clerk told her he had sold the last of the lamps she was after, but offered to order it for her, from Sweden—at nearly three times the old price.
Bjarni Brynjolfsson: A fishing guide, who is back to hosting fly-fishermen instead of bankers.
Still, a society that has been ruined overnight doesn’t look much different from how it did the day before, when it believed itself to be richer than ever. The Central Bank of Iceland is a case in point. Almost certainly Iceland will adopt the euro as its currency, and the krona will cease to exist. Without it there is no need for a central bank to maintain the stability of the local currency and control interest rates. Inside the place stews David Oddsson, the architect of Iceland’s rise and fall. Back in the 1980s, Oddsson had fallen under the spell of Milton Friedman, the brilliant economist who was able to persuade even those who spent their lives working for the government that government was a waste of life. So Oddsson went on a quest to give Icelandic people their freedom—by which he meant freedom from government controls of any sort. As prime minister he lowered taxes, privatized industry, freed up trade, and, finally, in 2002, privatized the banks. At length, weary of prime-ministering, he got himself appointed governor of the Central Bank—even though he was a poet without banking experience.
After the collapse he holed up in his office inside the bank, declining all requests for interviews. Senior government officials tell me, seriously, that they assume he spends most of his time writing poetry. (In February he would be asked by a new government to leave.) On the outside, however, the Central Bank of Iceland is still an elegant black temple set against the snowy bluffs across the harbor. Sober-looking men still enter and exit. Small boys on sleds rocket down the slope beside it, giving not a rat’s ass that they are playing at ground zero of the global calamity. It all looks the same as it did before the crash, even though it couldn’t be more different. The fuse is burning its way toward the bomb.
When Neil Armstrong took his small step from Apollo 11 and looked around, he probably thought, Wow, sort of like Iceland—even though the moon was nothing like Iceland. But then, he was a tourist, and a tourist can’t help but have a distorted opinion of a place: he meets unrepresentative people, has unrepresentative experiences, and runs around imposing upon the place the fantastic mental pictures he had in his head when he got there. When Iceland became a tourist in global high finance it had the same problem as Neil Armstrong. Icelanders are among the most inbred human beings on earth—geneticists often use them for research. They inhabited their remote island for 1,100 years without so much as dabbling in leveraged buyouts, hostile takeovers, derivatives trading, or even small-scale financial fraud. When, in 2003, they sat down at the same table with Goldman Sachs and Morgan Stanley, they had only the roughest idea of what an investment banker did and how he behaved—most of it gleaned from young Icelanders’ experiences at various American business schools. And so what they did with money probably says as much about the American soul, circa 2003, as it does about Icelanders. They understood instantly, for instance, that finance had less to do with productive enterprise than trading bits of paper among themselves. And when they lent money they didn’t simply facilitate enterprise but bankrolled friends and family, so that they might buy and own things, like real investment bankers: Beverly Hills condos, British soccer teams and department stores, Danish airlines and media companies, Norwegian banks, Indian power plants.
That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. “A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs,” the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. “And apparently not very well.” They bought stakes in businesses they knew nothing about and told the people running them what to do—just like real American investment bankers! For instance, an investment company called FL Group—a major shareholder in Glitnir bank—bought an 8.25 percent stake in American Airlines’ parent corporation. No one inside FL Group had ever actually run an airline; no one in FL Group even had meaningful work experience at an airline. That didn’t stop FL Group from telling American Airlines how to run an airline. “After taking a close look at the company over an extended period of time,” FL Group C.E.O. Hannes Smarason, graduate of M.I.T.’s Sloan School, got himself quoted saying, in his press release, not long after he bought his shares, “our suggestions include monetizing assets … that can be used to reduce debt or return capital to shareholders.”
Nor were the Icelanders particularly choosy about what they bought. I spoke with a hedge fund in New York that, in late 2006, spotted what it took to be an easy mark: a weak Scandinavian bank getting weaker. It established a short position, and then, out of nowhere, came Kaupthing to take a 10 percent stake in this soon-to-be defunct enterprise—driving up the share price to absurd levels. I spoke to another hedge fund in London so perplexed by the many bad LBOs Icelandic banks were financing that it hired private investigators to figure out what was going on in the Icelandic financial system. The investigators produced a chart detailing a byzantine web of interlinked entities that boiled down to this: A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.”
O
n February 3, Tony Shearer, the former C.E.O. of a British merchant bank called Singer and Friedlander, offered a glimpse of the inside, when he appeared before a House of Commons committee to describe his bizarre experience of being acquired by an Icelandic bank.
Singer and Friedlander had been around since 1907 and was famous for, among other things, giving George Soros his start. In November 2003, Shearer learned that Kaupthing, of whose existence he was totally unaware, had just taken a 9.5 percent stake in his bank. Normally, when a bank tries to buy another bank, it seeks to learn something about it. Shearer offered to meet with Kaupthing’s chairman, Sigurdur Einarsson; Einarsson had no interest. (Einarsson declined to be interviewed by Vanity Fair.) When Kaupthing raised its stake to 19.5 percent, Shearer finally flew to ReykjavÃk to see who on earth these Icelanders were. “They were very different,” he told the House of Commons committee. “They ran their business in a very strange way. Everyone there was incredibly young. They were all from the same community in ReykjavÃk. And they had no idea what they were doing.”
Hordur Torfason: An activist and a protest organizer.
He examined Kaupthing’s annual reports and discovered some amazing facts: This giant international bank had only one board member who was not Icelandic, for instance. Its directors all had four-year contracts, and the bank had lent them £19 million to buy shares in Kaupthing, along with options to sell those shares back to the bank at a guaranteed profit. Virtually the entire bank’s stated profits were caused by its marking up assets it had bought at inflated prices. “The actual amount of profits that were coming from what I’d call banking was less than 10 percent,” said Shearer.
In a sane world the British regulators would have stopped the new Icelandic financiers from devouring the ancient British merchant bank. Instead, the regulators ignored a letter Shearer wrote to them. A year later, in January 2005, he received a phone call from the British takeover panel. “They wanted to know,” says Shearer, “why our share price had risen so rapidly over the past couple of days. So I laughed and said, ‘I think you’ll find the reason is that Mr. Einarsson, the chairman of Kaupthing, said two days ago, like an idiot, that he was going to make a bid for Singer and Friedlander.’” In August 2005, Singer and Friedlander became Kaupthing Singer and Friedlander, and Shearer quit, he said, out of fear of what might happen to his reputation if he stayed. In October 2008, Kaupthing Singer and Friedlander went bust.
In spite of all this, when Tony Shearer was pressed by the House of Commons to characterize the Icelanders as mere street hustlers, he refused. “They were all highly educated people,” he said in a tone of amazement.
H
ere is yet another way in which Iceland echoed the American model: all sorts of people, none of them Icelandic, tried to tell them they had a problem. In early 2006, for instance, an analyst named Lars Christensen and three of his colleagues at Denmark’s biggest bank, Danske Bank, wrote a report that said Iceland’s financial system was growing at a mad pace, and was on a collision course with disaster. “We actually wrote the report because we were worried our clients were getting too interested in Iceland,” he tells me. “Iceland was the most extreme of everything.” Christensen then flew to Iceland and gave a speech to reinforce his point, only to be greeted with anger. “The Icelandic banks took it personally,” he says. “We were being threatened with lawsuits. I was told, ‘You’re Danish, and you are angry with Iceland because Iceland is doing so well.’ Basically it all had to do with what happened in 1944,” when Iceland declared its independence from Denmark. “The reaction wasn’t ‘These guys might be right.’ It was ‘No! It’s a conspiracy. They have bad motives.’” The Danish were just jealous!
The Danske Bank report alerted hedge funds in London to an opportunity: shorting Iceland. They investigated and found this incredible web of cronyism: bankers buying stuff from one another at inflated prices, borrowing tens of billions of dollars and re-lending it to the members of their little Icelandic tribe, who then used it to buy up a messy pile of foreign assets. “Like any new kid on the block,” says Theo Phanos of Trafalgar Funds in London, “they were picked off by various people who sold them the lowest-quality assets—second-tier airlines, sub-scale retailers. They were in all the worst LBOs.”
But from the prime minister on down, Iceland’s leaders attacked the messenger. “The attacks … give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,” said Central Bank chairman Oddsson in March of last year. The chairman of Kaupthing publicly fingered four hedge funds that he said were deliberately seeking to undermine Iceland’s financial miracle. “I don’t know where the Icelanders get this notion,” says Paul Ruddock, of Lansdowne Partners, one of those fingered. “We only once traded in an Icelandic stock and it was a very short-term trade. We started to take legal action against the chairman of Kaupthing after he made public accusations against us that had no truth, and then he withdrew them.”
One of the hidden causes of the current global financial crisis is that the people who saw it coming had more to gain from it by taking short positions than they did by trying to publicize the problem. Plus, most of the people who could credibly charge Iceland—or, for that matter, Lehman Brothers—with financial crimes could be dismissed as crass profiteers, talking their own book. Back in April 2006, however, an emeritus professor of economics at the University of Chicago named Bob Aliber took an interest in Iceland. Aliber found himself at the London Business School, listening to a talk on Iceland, about which he knew nothing. He recognized instantly the signs. Digging into the data, he found in Iceland the outlines of what was so clearly a historic act of financial madness that it belonged in a textbook. “The Perfect Bubble,” Aliber calls Iceland’s financial rise, and he has the textbook in the works: an updated version of Charles Kindleberger’s 1978 classic, Manias, Panics, and Crashes, a new edition of which he’s currently editing. In it, Iceland, he decided back in 2006, would now have its own little box, along with the South Sea Bubble and the Tulip Craze—even though Iceland had yet to crash. For him the actual crash was a mere formality.
W
ord spread in Icelandic economic circles that this distinguished professor at Chicago had taken a special interest in Iceland. In May 2008, Aliber was invited by the University of Iceland’s economics department to give a speech. To an audience of students, bankers, and journalists, he explained that Iceland, far from having an innate talent for high finance, had all the markings of a giant bubble, but he spoke the technical language of academic economists. (“Monetary Turbulence and the Icelandic Economy,” he called his speech.) In the following Q&A session someone asked him to predict the future, and he lapsed into plain English. As an audience member recalls, Aliber said, “I give you nine months. Your banks are dead. Your bankers are either stupid or greedy. And I’ll bet they are on planes trying to sell their assets right now.”
The Icelandic bankers in the audience sought to prevent newspapers from reporting the speech. Several academics suggested that Aliber deliver his alarming analysis to Iceland’s Central Bank. Somehow that never happened. “The Central Bank said they were too busy to see him,” says one of the professors who tried to arrange the meeting, “because they were preparing the Report on Financial Stability.” For his part Aliber left Iceland thinking that he’d caused such a stir he might not be allowed back into the country. “I got the feeling,” he told me, “that the only reason they brought me in was that they needed an outsider to say these things—that an insider wouldn’t say these things, because he’d be afraid of getting into trouble.” And yet he remains extremely fond of his hosts. “They are a very curious people,” he says, laughing. “I guess that’s the point, isn’t it?”
Icelanders—or at any rate Icelandic men—had their own explanations for why, when they leapt into global finance, they broke world records: the natural superiority of Icelanders. Because they were small and isolated it had taken 1,100 years for them—and the world—to understand and exploit their natural gifts, but now that the world was flat and money flowed freely, unfair disadvantages had vanished. Iceland’s president, Olafur Ragnar Grimsson, gave speeches abroad in which he explained why Icelanders were banking prodigies. “Our heritage and training, our culture and home market, have provided a valuable advantage,” he said, then went on to list nine of these advantages, ending with how unthreatening to others Icelanders are. (“Some people even see us as fascinating eccentrics who can do no harm.”) There were many, many expressions of this same sentiment, most of them in Icelandic. “There were research projects at the university to explain why the Icelandic business model was superior,” says Gylfi Zoega, chairman of the economics department. “It was all about our informal channels of communication and ability to make quick decisions and so forth.”
“We were always told that the Icelandic businessmen were so clever,” says university finance professor and former banker Vilhjalmur Bjarnason. “They were very quick. And when they bought something they did it very quickly. Why was that? That is usually because the seller is very satisfied with the price.”
You didn’t need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. U.K. investors, lured by the eye-popping 14 percent annual returns, forked over $30 billion—$28 billion from companies and individuals and the rest from pension funds, hospitals, universities, and other public institutions. Oxford University alone lost $50 million.
Geir Haarde: The former prime minister, on January 28, one of his last days in office.
Maybe because there are so few Icelanders in the world, we know next to nothing about them. We assume they are more or less Scandinavian—a gentle people who just want everyone to have the same amount of everything. They are not. They have a feral streak in them, like a horse that’s just pretending to be broken.
A
fter three days in ReykjavÃk, I receive, more or less out of the blue, two phone calls. The first is from a producer of a leading current-events TV show. All of Iceland watches her show, she says, then asks if I’d come on and be interviewed. “About what?” I ask. “We’d like you to explain our financial crisis,” she says. “I’ve only been here three days!” I say. It doesn’t matter, she says, as no one in Iceland understands what’s happened. They’d enjoy hearing someone try to explain it, even if that person didn’t have any idea what he was talking about—which goes to show, I suppose, that not everything in Iceland is different from other places. As I demur, another call comes, from the prime minister’s office.
Iceland’s then prime minister, Geir Haarde, is also the head of the Independence Party, which has governed the country since 1991. It ruled in loose coalition with the Social Democrats and the Progressive Party. (Iceland’s fourth major party is the Left-Green Movement.) That a nation of 300,000 people, all of whom are related by blood, needs four major political parties suggests either a talent for disagreement or an unwillingness to listen to one another. In any case, of the four parties, the Independents express the greatest faith in free markets. The Independence Party is the party of the fishermen. It is also, as an old schoolmate of the prime minister’s puts it to me, “all men, men, men. Not a woman in it.”
Walking into the P.M.’s minute headquarters, I expect to be stopped and searched, or at least asked for photo identification. Instead I find a single policeman sitting behind a reception desk, feet up on the table, reading a newspaper. He glances up, bored. “I’m here to see the prime minister,” I say for the first time in my life. He’s unimpressed. Anyone here can see the prime minister. Half a dozen people will tell me that one of the reasons Icelanders thought they would be taken seriously as global financiers is that all Icelanders feel important. One reason they all feel important is that they all can go see the prime minister anytime they like.
What he might say to them about their collapse is an open question. There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart central bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.
“Why is Vanity Fair interested in Iceland?” he asks as he strides into the room, with the force and authority of the leader of a much larger nation. And it’s a good question.
As it turns out, he’s not actually stupid, but political leaders seldom are, no matter how much the people who elected them insist that it must be so. He does indeed say things that could not possibly be true, but they are only the sorts of fibs that prime ministers are hired to tell. He claims that the krona is once again an essentially stable currency, for instance, when the truth is it doesn’t currently trade in international markets—it is assigned an arbitrary value by the government for select purposes. Icelanders abroad have already figured out not to use their Visa cards, for fear of being charged the real exchange rate, whatever that might be.
The prime minister would like me to believe that he saw Iceland’s financial crisis taking shape but could do little about it. (“We could not say publicly our fears about the banks, because you create the very thing you are seeking to avoid: a panic.”) By implication it was not politicians like him but financiers who were to blame. On some level the people agree: the guy who ran the Baugur investment group had snowballs chucked at him as he dashed from the 101 Hotel, which his wife owns, to his limo; the guy who ran Kaupthing Bank turned up at the National Theater and, as he took his seat, was booed. But, for the most part, the big shots have fled Iceland for London, or are lying low, leaving the poor prime minister to shoulder the blame and face the angry demonstrators, led by folksinging activist Hordur Torfason, who assemble every weekend outside Parliament. Haarde has his story, and he’s sticking to it: foreigners entrusted their capital to Iceland, and Iceland put it to good use, but then, last September 15, Lehman Brothers failed and foreigners panicked and demanded their capital back. Iceland was ruined not by its own recklessness but by a global tsunami. The problem with this story is that it fails to explain why the tsunami struck Iceland, as opposed to, say, Tonga.
But I didn’t come to Iceland to argue. I came to understand. “There’s something I really want to ask you,” I say.
“Yes?”
“Is it true that you’ve been telling people that it’s time to stop banking and go fishing?”
A great line, I thought. Succinct, true, and to the point. But I’d heard about it thirdhand, from a New York hedge-fund manager. The prime minister fixes me with a self-consciously stern gaze. “That’s a gross exaggeration,” he says.
“I thought it made sense,” I say uneasily.
“I never said that!”
Obviously, I’ve hit some kind of nerve, but which kind I cannot tell. Is he worried that to have said such a thing would make him seem a fool? Or does he still think that fishing, as a profession, is somehow less dignified than banking?
A
t length, I return to the hotel to find, for the first time in four nights, no empty champagne bottles outside my neighbors’ door. The Icelandic couple whom I had envisioned as being on one last blowout have packed and gone home. For four nights I have endured their Orc shrieks from the other side of the hotel wall; now all is silent. It’s now possible to curl up in bed with “The Economic Theory of a Common-Property Resource: The Fishery.” One way or another, the wealth in Iceland comes from the fish, and if you want to understand what Icelanders did with their money you had better understand how they came into it in the first place.
The brilliant paper was written back in 1954 by H. Scott Gordon, a University of Indiana economist. It describes the plight of the fisherman—and seeks to explain “why fishermen are not wealthy, despite the fact that fishery resources of the sea are the richest and most indestructible available to man.” The problem is that, because the fish are everybody’s property, they are nobody’s property. Anyone can catch as many fish as they like, so they fish right up to the point where fishing becomes unprofitable—for everybody. “There is in the spirit of every fisherman the hope of the ‘lucky catch,’” wrote Gordon. “As those who know fishermen well have often testified, they are gamblers and incurably optimistic.”
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.
Johanna Sigurdardottir: The new prime minister, the modern world’s first openly gay head of state.
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.
I
t 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.
But this, of course, creates a new problem: people with Ph.D.’s don’t want to fish for a living. They need something else to do.
And that something is probably not working in the industry that exploits Iceland’s other main natural resource: energy. The waterfalls and boiling lava generate vast amounts of cheap power, but, unlike oil, it cannot be profitably exported. Iceland’s power is trapped in Iceland, and if there is something poetic about the idea of trapped power, there is also something prosaic in how the Icelanders have come to terms with the problem. They asked themselves: What can we do that other people will pay money for that requires huge amounts of power? The answer was: smelt aluminum.
Notice that no one asked, What might Icelanders want to do? Or even: What might Icelanders be especially suited to do? No one thought that Icelanders might have some natural gift for smelting aluminum, and, if anything, the opposite proved true. Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called “hidden people”—or, to put it more plainly, elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people.” The other, more serious problem was the Icelandic male: he took more safety risks than aluminum workers in other nations did. “In manufacturing,” says the spokesman, “you want people who follow the rules and fall in line. You don’t want them to be heroes. You don’t want them to try to fix something it’s not their job to fix, because they might blow up the place.” The Icelandic male had a propensity to try to fix something it wasn’t his job to fix.
Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. There are, of course, a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of elves, for instance. (“This will take at least six months—it can be very tricky.”) But not nearly so many as the place needs, given its talent for turning cod into Ph.D.’s. At the dawn of the 21st century, Icelanders were still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might do it.
Enter investment banking.
F
or the fifth time in as many days I note a slight tension at any table where Icelandic men and Icelandic women are both present. The male exhibits the global male tendency not to talk to the females—or, rather, not to include them in the conversation—unless there is some obvious sexual motive. But that’s not the problem, exactly. Watching Icelandic men and women together is like watching toddlers. They don’t play together but in parallel; they overlap even less organically than men and women in other developed countries, which is really saying something. It isn’t that the women are oppressed, exactly. On paper, by historical global standards, they have it about as good as women anywhere: good public health care, high participation in the workforce, equal rights. What Icelandic women appear to lack—at least to a tourist who has watched them for all of 10 days—is a genuine connection to Icelandic men. The Independence Party is mostly male; the Social Democrats, mostly female. (On February 1, when the reviled Geir Haarde finally stepped aside, he was replaced by Johanna Sigurdardottir, a Social Democrat, and Iceland got not just a lady prime minister but the modern world’s first openly gay head of state—she lives with another woman.) Everyone knows everyone else, but when I ask Icelanders for leads, the men always refer me to other men, and the women to other women. It was a man, for instance, who suggested I speak to Stefan Alfsson.
Lean and hungry-looking, wearing genuine rather than designer stubble, Alfsson still looks more like a trawler captain than a financier. He went to sea at 16, and, in the off-season, to school to study fishing. He was made captain of an Icelandic fishing trawler at the shockingly young age of 23 and was regarded, I learned from other men, as something of a fishing prodigy—which is to say he had a gift for catching his quota of cod and haddock in the least amount of time. And yet, in January 2005, at 30, he up and quit fishing to join the currency-trading department of Landsbanki. He speculated in the financial markets for nearly two years, until the great bloodbath of October 2008, when he was sacked, along with every other Icelander who called himself a “trader.” His job, he says, was to sell people, mainly his fellow fishermen, on what he took to be a can’t-miss speculation: borrow yen at 3 percent, use them to buy Icelandic kronur, and then invest those kronur at 16 percent. “I think it is easier to take someone in the fishing industry and teach him about currency trading,” he says, “than to take someone from the banking industry and teach them how to fish.”
He then explained why fishing wasn’t as simple as I thought. It’s risky, for a start, especially as practiced by the Icelandic male. “You don’t want to have some sissy boys on your crew,” he says, especially as Icelandic captains are famously manic in their fishing styles. “I had a crew of Russians once,” he says, “and it wasn’t that they were lazy, but the Russians are always at the same pace.” When a storm struck, the Russians would stop fishing, because it was too dangerous. “The Icelanders would fish in all conditions,” says Stefan, “fish until it is impossible to fish. They like to take the risks. If you go overboard, the probabilities are not in your favor. I’m 33, and I already have two friends who have died at sea.”
It took years of training for him to become a captain, and even then it happened only by a stroke of luck. When he was 23 and a first mate, the captain of his fishing boat up and quit. The boat owner went looking for a replacement and found an older fellow, retired, who was something of an Icelandic fishing legend, the wonderfully named Snorri Snorrasson. “I took two trips with this guy,” Stefan says. “I have never in my life slept so little, because I was so eager to learn. I slept two or three hours a night because I was sitting beside him, talking to him. I gave him all the respect in the world—it’s difficult to describe all he taught me. The reach of the trawler. The most efficient angle of the net. How do you act on the sea. If you have a bad day, what do you do? If you’re fishing at this depth, what do you do? If it’s not working, do you move in depth or space? In the end it’s just so much feel. In this time I learned infinitely more than I learned in school. Because how do you learn to fish in school?”
This marvelous training was as fresh in his mind as if he’d received it yesterday, and the thought of it makes his eyes mist.
“You spent seven years learning every little nuance of the fishing trade before you were granted the gift of learning from this great captain?” I ask.
“Yes.”
“And even then you had to sit at the feet of this great master for many months before you felt as if you knew what you were doing?”
“Yes.”
“Then why did you think you could become a banker and speculate in financial markets, without a day of training?”
“That’s a very good question,” he says. He thinks for a minute. “For the first time this evening I lack a word.” As I often think I know exactly what I am doing even when I don’t, I find myself oddly sympathetic.
“What, exactly, was your job?” I ask, to let him off the hook, catch and release being the current humane policy in Iceland.
“I started as a … “—now he begins to laugh—“an adviser to companies on currency risk hedging. But given my aggressive nature I went more and more into plain speculative trading.” Many of his clients were other fishermen, and fishing companies, and they, like him, had learned that if you don’t take risks you don’t catch the fish. “The clients were only interested in ‘hedging’ if it meant making money,” he says.
I
n retrospect, there are some obvious questions an Icelander living through the past five years might have asked himself. For example: Why should Iceland suddenly be so seemingly essential to global finance? Or: Why do giant countries that invented modern banking suddenly need Icelandic banks to stand between their depositors and their borrowers—to decide who gets capital and who does not? And: If Icelanders have this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years? At the very least, in a place where everyone knows everyone else, or his sister, you might have thought that the moment Stefan Alfsson walked into Landsbanki 10 people would have said, “Stefan, you’re a fisherman!” But they didn’t. To a shocking degree, they still don’t. “If I went back to banking,” he says, with an entirely straight face, “I would be a private-banking guy.”
B
ack in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics published an intriguing paper called “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in over 35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is that men not only trade more often than women but do so from a false faith in their own financial judgment. Single men traded less sensibly than married men, and married men traded less sensibly than single women: the less the female presence, the less rational the approach to trading in the markets.
One of the distinctive traits about Iceland’s disaster, and Wall Street’s, is how little women had to do with it. Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there was just one woman in a senior position inside an Icelandic bank. Her name is Kristin Petursdottir, and by 2005 she had risen to become deputy C.E.O. for Kaupthing in London. “The financial culture is very male-dominated,” she says. “The culture is quite extreme. It is a pool of sharks. Women just despise the culture.” Petursdottir still enjoyed finance. She just didn’t like the way Icelandic men did it, and so, in 2006, she quit her job. “People said I was crazy,” she says, but she wanted to create a financial-services business run entirely by women. To bring, as she puts it, “more feminine values to the world of finance.”
Today her firm is, among other things, one of the very few profitable financial businesses left in Iceland. After the stock exchange collapsed, the money flooded in. A few days before we met, for instance, she heard banging on the front door early one morning and opened it to discover a little old man. “I’m so fed up with this whole system,” he said. “I just want some women to take care of my money.”
It was with that in mind that I walked, on my last afternoon in Iceland, into the Saga Museum. Its goal is to glorify the Sagas, the great 12th- and 13th-century Icelandic prose epics, but the effect of its life-size dioramas is more like modern reality TV. Not statues carved from silicon but actual ancient Icelanders, or actors posing as ancient Icelanders, as shrieks and bloodcurdling screams issue from the P.A. system: a Catholic bishop named Jon Arason having his head chopped off; a heretic named Sister Katrin being burned at the stake; a battle scene in which a blood-drenched Viking plunges his sword toward the heart of a prone enemy. The goal was verisimilitude, and to achieve it no expense was spared. Passing one tableau of blood and guts and moving on to the next, I caught myself glancing over my shoulder to make sure some Viking wasn’t following me with a battle-ax. The effect was so disorienting that when I reached the end and found a Japanese woman immobile and reading on a bench, I had to poke her on the shoulder to make sure she was real. This is the past Icelanders supposedly cherish: a history of conflict and heroism. Of seeing who is willing to bump into whom with the most force. There are plenty of women, but this is a men’s history.
When you borrow a lot of money to create a false prosperity, you import the future into the present. It isn’t the actual future so much as some grotesque silicon version of it. Leverage buys you a glimpse of a prosperity you haven’t really earned. The striking thing about the future the Icelandic male briefly imported was how much it resembled the past that he celebrates. I’m betting now they’ve seen their false future the Icelandic female will have a great deal more to say about the actual one.
Author Michael Lewis is a contributor to The New York Times Magazine.
by
Michael Lewis
April 2009
Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to ReykjavÃk to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”
How did the economy get into this mess? Visit our archive “Charting the Road to Ruin.” Plus: A Q&A with Michael Lewis. Illustration by Brad Holland.
An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”
At the same time, in part because the banks were also lending Icelanders money to buy stocks and real estate, the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. ReykjavÃk real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry. “Everyone was learning Black-Scholes” (the option-pricing model), says Ragnar Arnason, a professor of fishing economics at the University of Iceland, who watched students flee the economics of fishing for the economics of money. “The schools of engineering and math were offering courses on financial engineering. We had hundreds and hundreds of people studying finance.” This in a country the size of Kentucky, but with fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t have global financial institutions, or a university devoting itself to training many hundreds of financiers, or its own currency. And yet the world was taking Iceland seriously. (March 2006 Bloomberg News headline: iceland’s billionaire tycoon “thor” braves u.s. with hedge fund.)
Global financial ambition turned out to have a downside. When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market. The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the value of the generally stable Icelandic krona, which had also crashed and was removed from the market by the Icelandic government. But it was a lot.
Iceland instantly became the only nation on earth that Americans could point to and say, “Well, at least we didn’t do that.” In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debt-drowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration.
In just three or four years an entirely new way of economic life had been grafted onto the side of this stable, collectivist society, and the graft had overwhelmed the host. “It was just a group of young kids,” said the man from the I.M.F. “In this egalitarian society, they came in, dressed in black, and started doing business.”
F
ive hundred miles northwest of Scotland the Icelandair flight lands and taxis to a terminal still painted with Landsbanki logos—Landsbanki being one of Iceland’s three bankrupt banks, along with Kaupthing and Glitnir. I try to think up a metaphor for the world’s expanding reservoir of defunct financial corporate sponsorships—water left in the garden hose after you’ve switched off the pressure?—but before I can finish, the man in the seat behind me reaches for his bag in the overhead bin and knocks the crap out of me. I will soon learn that Icelandic males, like moose, rams, and other horned mammals, see these collisions as necessary in their struggle for survival. I will also learn that this particular Icelandic male is a senior official at the Icelandic stock exchange. At this moment, however, all I know is that a middle-aged man in an expensive suit has gone out of his way to bash bodies without apology or explanation. I stew on this apparently wanton act of hostility all the way to passport control.
You can tell a lot about a country by how much better they treat themselves than foreigners at the point of entry. Let it be known that Icelanders make no distinction at all. Over the control booth they’ve hung a charming sign that reads simply, all citizens, and what they mean by that is not “All Icelandic Citizens” but “All Citizens of Anywhere.” Everyone is from somewhere, and so we all wind up in the same line, leading to the guy behind the glass. Before you can say, “Land of contradictions,” he has pretended to examine your passport and waved you on through.
Next, through a dark landscape of snow-spackled black volcanic rock that may or may not be lunar, but that looks so much as you would expect the moon to look that nasa scientists used it to acclimate the astronauts before the first moon mission. An hour later we arrive at the 101 Hotel, owned by the wife of one of Iceland’s most famous failed bankers. It’s cryptically named (101 is the city’s richest postal code), but instantly recognizable: hip Manhattan hotel. Staff dressed in black, incomprehensible art on the walls, unread books about fashion on unused coffee tables—everything to heighten the social anxiety of a rube from the sticks but the latest edition of The New York Observer. It’s the sort of place bankers stay because they think it’s where the artists stay. Bear Stearns convened a meeting of British and American hedge-fund managers here, in January 2008, to figure out how much money there was to be made betting on Iceland’s collapse. (A lot.) The hotel, once jammed, is now empty, with only 6 of its 38 rooms occupied. The restaurant is empty, too, and so are the small tables and little nooks that once led the people who weren’t in them to marvel at those who were. A bankrupt Holiday Inn is just depressing; a bankrupt Ian Schrager hotel is tragic.
With the financiers who once paid a lot to stay here gone for good, I’m given a big room on the top floor with a view of the old city for half-price. I curl up in silky white sheets and reach for a book about the Icelandic economy—written in 1995, before the banking craze, when the country had little to sell to the outside world but fresh fish—and read this remarkable sentence: “Icelanders are rather suspicious of the market system as a cornerstone of economic organization, especially its distributive implications.”
That’s when the strange noises commence.
Stefan Alfsson: A fisherman turned banker, who was laid off from his trading job in October and now might return to fishing.
First comes a screeching from the far side of the room. I leave the bed to examine the situation. It’s the heat, sounding like a teakettle left on the stove for too long, straining to control itself. Iceland’s heat isn’t heat as we know it, but heat drawn directly from the earth. The default temperature of the water is scalding. Every year workers engaged in street repairs shut down the cold-water intake used to temper the hot water and some poor Icelander is essentially boiled alive in his shower. So powerful is the heat being released from the earth into my room that some great grinding, wheezing engine must be employed to prevent it from cooking me.
Then, from outside, comes an explosion.
Boom!
Then another.
Boom!
A
s it is mid-December, the sun rises, barely, at 10:50 a.m. and sets with enthusiasm at 3:44 p.m. This is obviously better than no sun at all, but subtly worse, as it tempts you to believe you can simulate a normal life. And whatever else this place is, it isn’t normal. The point is reinforced by a 26-year-old Icelander I’ll call Magnus Olafsson, who, just a few weeks earlier, had been earning close to a million dollars a year trading currencies for one of the banks. Tall, white-blond, and handsome, Olafsson looks exactly as you’d expect an Icelander to look—which is to say that he looks not at all like most Icelanders, who are mousy-haired and lumpy. “My mother has enough food hoarded to open a grocery store,” he says, then adds that ever since the crash ReykjavÃk has felt tense and uneasy.
Two months earlier, in early October, as the market for Icelandic kronur dried up, he’d sneaked away from his trading desk and gone down to the teller, where he’d extracted as much foreign cash as they’d give him and stuffed it into a sack. “All over downtown that day you saw people walking around with bags,” he says. “No one ever carries bags around downtown.” After work he’d gone home with his sack of cash and hidden roughly 30 grand in yen, dollars, euros, and pounds sterling inside a board game.
Before October the big-name bankers were heroes; now they are abroad, or laying low. Before October Magnus thought of Iceland as essentially free of danger; now he imagines hordes of muggers en route from foreign nations to pillage his board-game safe—and thus refuses to allow me to use his real name. “You’d figure New York would hear about this and send over planeloads of muggers,” he theorizes. “Most everyone has their savings at home.” As he is already unsettled, I tell him about the unsettling explosions outside my hotel room. “Yes,” he says with a smile, “there’s been a lot of Range Rovers catching fire lately.” Then he explains.
For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn’t afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. “The fishing guys pretty much discovered the trade and made it huge,” says Magnus. “But they made so much money on it that the financial stuff eventually overwhelmed the fish.” They made so much money on it that the trade spread from the fishing guys to their friends.
It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!
The rocks beneath ReykjavÃk may be igneous, but the city feels sedimentary: on top of several thick strata of architecture that should be called Nordic Pragmatic lies a thin layer that will almost certainly one day be known as Asshole Capitalist. The hobbit-size buildings that house the Icelandic government are charming and scaled to the city. The half-built oceanfront glass towers meant to house newly rich financiers and, in the bargain, block everyone else’s view of the white bluffs across the harbor are not.
T
he best way to see any city is to walk it, but everywhere I walk Icelandic men plow into me without so much as a by-your-leave. Just for fun I march up and down the main shopping drag, playing chicken, to see if any Icelandic male would rather divert his stride than bang shoulders. Nope. On party nights—Thursday, Friday, and Saturday—when half the country appears to take it as a professional obligation to drink themselves into oblivion and wander the streets until what should be sunrise, the problem is especially acute. The bars stay open until five a.m., and the frantic energy with which the people hit them seems more like work than work. Within minutes of entering a nightclub called Boston I get walloped, first by a bearded troll who, I’m told, ran an Icelandic hedge fund. Just as I’m recovering I get plowed over by a drunken senior staffer at the Central Bank. Perhaps because he is drunk, or perhaps because we had actually met a few hours earlier, he stops to tell me, “Vee try to tell them dat our problem was not a solfency problem but a likvitity problem, but they did not agree,” then stumbles off. It’s exactly what Lehman Brothers and Citigroup said: If only you’d give us the money to tide us over, we’ll survive this little hiccup.
A nation so tiny and homogeneous that everyone in it knows pretty much everyone else is so fundamentally different from what one thinks of when one hears the word “nation” that it almost requires a new classification. Really, it’s less a nation than one big extended family. For instance, most Icelanders are by default members of the Lutheran Church. If they want to stop being Lutherans they must write to the government and quit; on the other hand, if they fill out a form, they can start their own cult and receive a subsidy. Another example: the ReykjavÃk phone book lists everyone by his first name, as there are only about nine surnames in Iceland, and they are derived by prefixing the father’s name to “son” or “dottir.” It’s hard to see how this clarifies matters, as there seem to be only about nine first names in Iceland, too. But if you wish to reveal how little you know about Iceland, you need merely refer to someone named Siggor Sigfusson as “Mr. Sigfusson,” or Kristin Petursdottir as “Ms. Petursdottir.” At any rate, everyone in a conversation is just meant to know whomever you’re talking about, so you never hear anyone ask, “Which Siggor do you mean?”
Because Iceland is really just one big family, it’s simply annoying to go around asking Icelanders if they’ve met Björk. Of course they’ve met Björk; who hasn’t met Björk? Who, for that matter, didn’t know Björk when she was two? “Yes, I know Björk,” a professor of finance at the University of Iceland says in reply to my question, in a weary tone. “She can’t sing, and I know her mother from childhood, and they were both crazy. That she is so well known outside of Iceland tells me more about the world than it does about Björk.”
One benefit of life inside a nation masking an extended family is that nothing needs to be explained; everyone already knows everything that needs to be known. I quickly find that it is an even greater than usual waste of time to ask directions, for instance. Just as you are meant to know which Bjornjolfer is being spoken of at any particular moment, you are meant to know where you are on the map. Two grown-ups—one a banker whose office is three blocks away—cannot tell me where to find the prime minister’s office. Three more grown-ups, all within three blocks of the National Gallery of Iceland, have no idea where to find the place. When I tell the sweet middle-aged lady behind the counter at the National Museum that no Icelander seems to know how to find it, she says, “No one actually knows anything about our country. Last week we had Icelandic high-school students here and their teacher asked them to name an Icelandic 19th-century painter. None of them could. Not a single one! One said, ‘Halldor Laxness?’!” (Laxness won the 1955 Nobel Prize in Literature, the greatest global honor for an Icelander until the 1980s, when two Icelandic women captured Miss World titles in rapid succession.)
T
he world is now pocked with cities that feel as if they are perched on top of bombs. The bombs have yet to explode, but the fuses have been lit, and there’s nothing anyone can do to extinguish them. Walk around Manhattan and you see empty stores, empty streets, and, even when it’s raining, empty taxis: people have fled before the bomb explodes. When I was there ReykjavÃk had the same feel of incipient doom, but the fuse burned strangely. The government mandates three months’ severance pay, and so the many laid-off bankers were paid until early February, when the government promptly fell. Against a basket of foreign currencies the krona is worth less than a third of its boom-time value. As Iceland imports everything but heat and fish, the price of just about everything is, in mid-December, about to skyrocket. A new friend who works for the government tells me that she went into a store to buy a lamp. The clerk told her he had sold the last of the lamps she was after, but offered to order it for her, from Sweden—at nearly three times the old price.
Bjarni Brynjolfsson: A fishing guide, who is back to hosting fly-fishermen instead of bankers.
Still, a society that has been ruined overnight doesn’t look much different from how it did the day before, when it believed itself to be richer than ever. The Central Bank of Iceland is a case in point. Almost certainly Iceland will adopt the euro as its currency, and the krona will cease to exist. Without it there is no need for a central bank to maintain the stability of the local currency and control interest rates. Inside the place stews David Oddsson, the architect of Iceland’s rise and fall. Back in the 1980s, Oddsson had fallen under the spell of Milton Friedman, the brilliant economist who was able to persuade even those who spent their lives working for the government that government was a waste of life. So Oddsson went on a quest to give Icelandic people their freedom—by which he meant freedom from government controls of any sort. As prime minister he lowered taxes, privatized industry, freed up trade, and, finally, in 2002, privatized the banks. At length, weary of prime-ministering, he got himself appointed governor of the Central Bank—even though he was a poet without banking experience.
After the collapse he holed up in his office inside the bank, declining all requests for interviews. Senior government officials tell me, seriously, that they assume he spends most of his time writing poetry. (In February he would be asked by a new government to leave.) On the outside, however, the Central Bank of Iceland is still an elegant black temple set against the snowy bluffs across the harbor. Sober-looking men still enter and exit. Small boys on sleds rocket down the slope beside it, giving not a rat’s ass that they are playing at ground zero of the global calamity. It all looks the same as it did before the crash, even though it couldn’t be more different. The fuse is burning its way toward the bomb.
When Neil Armstrong took his small step from Apollo 11 and looked around, he probably thought, Wow, sort of like Iceland—even though the moon was nothing like Iceland. But then, he was a tourist, and a tourist can’t help but have a distorted opinion of a place: he meets unrepresentative people, has unrepresentative experiences, and runs around imposing upon the place the fantastic mental pictures he had in his head when he got there. When Iceland became a tourist in global high finance it had the same problem as Neil Armstrong. Icelanders are among the most inbred human beings on earth—geneticists often use them for research. They inhabited their remote island for 1,100 years without so much as dabbling in leveraged buyouts, hostile takeovers, derivatives trading, or even small-scale financial fraud. When, in 2003, they sat down at the same table with Goldman Sachs and Morgan Stanley, they had only the roughest idea of what an investment banker did and how he behaved—most of it gleaned from young Icelanders’ experiences at various American business schools. And so what they did with money probably says as much about the American soul, circa 2003, as it does about Icelanders. They understood instantly, for instance, that finance had less to do with productive enterprise than trading bits of paper among themselves. And when they lent money they didn’t simply facilitate enterprise but bankrolled friends and family, so that they might buy and own things, like real investment bankers: Beverly Hills condos, British soccer teams and department stores, Danish airlines and media companies, Norwegian banks, Indian power plants.
That was the biggest American financial lesson the Icelanders took to heart: the importance of buying as many assets as possible with borrowed money, as asset prices only rose. By 2007, Icelanders owned roughly 50 times more foreign assets than they had in 2002. They bought private jets and third homes in London and Copenhagen. They paid vast sums of money for services no one in Iceland had theretofore ever imagined wanting. “A guy had a birthday party, and he flew in Elton John for a million dollars to sing two songs,” the head of the Left-Green Movement, Steingrimur Sigfusson, tells me with fresh incredulity. “And apparently not very well.” They bought stakes in businesses they knew nothing about and told the people running them what to do—just like real American investment bankers! For instance, an investment company called FL Group—a major shareholder in Glitnir bank—bought an 8.25 percent stake in American Airlines’ parent corporation. No one inside FL Group had ever actually run an airline; no one in FL Group even had meaningful work experience at an airline. That didn’t stop FL Group from telling American Airlines how to run an airline. “After taking a close look at the company over an extended period of time,” FL Group C.E.O. Hannes Smarason, graduate of M.I.T.’s Sloan School, got himself quoted saying, in his press release, not long after he bought his shares, “our suggestions include monetizing assets … that can be used to reduce debt or return capital to shareholders.”
Nor were the Icelanders particularly choosy about what they bought. I spoke with a hedge fund in New York that, in late 2006, spotted what it took to be an easy mark: a weak Scandinavian bank getting weaker. It established a short position, and then, out of nowhere, came Kaupthing to take a 10 percent stake in this soon-to-be defunct enterprise—driving up the share price to absurd levels. I spoke to another hedge fund in London so perplexed by the many bad LBOs Icelandic banks were financing that it hired private investigators to figure out what was going on in the Icelandic financial system. The investigators produced a chart detailing a byzantine web of interlinked entities that boiled down to this: A handful of guys in Iceland, who had no experience of finance, were taking out tens of billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets—the banks, soccer teams, etc. Since the entire world’s assets were rising—thanks in part to people like these Icelandic lunatics paying crazy prices for them—they appeared to be making money. Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.”
O
n February 3, Tony Shearer, the former C.E.O. of a British merchant bank called Singer and Friedlander, offered a glimpse of the inside, when he appeared before a House of Commons committee to describe his bizarre experience of being acquired by an Icelandic bank.
Singer and Friedlander had been around since 1907 and was famous for, among other things, giving George Soros his start. In November 2003, Shearer learned that Kaupthing, of whose existence he was totally unaware, had just taken a 9.5 percent stake in his bank. Normally, when a bank tries to buy another bank, it seeks to learn something about it. Shearer offered to meet with Kaupthing’s chairman, Sigurdur Einarsson; Einarsson had no interest. (Einarsson declined to be interviewed by Vanity Fair.) When Kaupthing raised its stake to 19.5 percent, Shearer finally flew to ReykjavÃk to see who on earth these Icelanders were. “They were very different,” he told the House of Commons committee. “They ran their business in a very strange way. Everyone there was incredibly young. They were all from the same community in ReykjavÃk. And they had no idea what they were doing.”
Hordur Torfason: An activist and a protest organizer.
He examined Kaupthing’s annual reports and discovered some amazing facts: This giant international bank had only one board member who was not Icelandic, for instance. Its directors all had four-year contracts, and the bank had lent them £19 million to buy shares in Kaupthing, along with options to sell those shares back to the bank at a guaranteed profit. Virtually the entire bank’s stated profits were caused by its marking up assets it had bought at inflated prices. “The actual amount of profits that were coming from what I’d call banking was less than 10 percent,” said Shearer.
In a sane world the British regulators would have stopped the new Icelandic financiers from devouring the ancient British merchant bank. Instead, the regulators ignored a letter Shearer wrote to them. A year later, in January 2005, he received a phone call from the British takeover panel. “They wanted to know,” says Shearer, “why our share price had risen so rapidly over the past couple of days. So I laughed and said, ‘I think you’ll find the reason is that Mr. Einarsson, the chairman of Kaupthing, said two days ago, like an idiot, that he was going to make a bid for Singer and Friedlander.’” In August 2005, Singer and Friedlander became Kaupthing Singer and Friedlander, and Shearer quit, he said, out of fear of what might happen to his reputation if he stayed. In October 2008, Kaupthing Singer and Friedlander went bust.
In spite of all this, when Tony Shearer was pressed by the House of Commons to characterize the Icelanders as mere street hustlers, he refused. “They were all highly educated people,” he said in a tone of amazement.
H
ere is yet another way in which Iceland echoed the American model: all sorts of people, none of them Icelandic, tried to tell them they had a problem. In early 2006, for instance, an analyst named Lars Christensen and three of his colleagues at Denmark’s biggest bank, Danske Bank, wrote a report that said Iceland’s financial system was growing at a mad pace, and was on a collision course with disaster. “We actually wrote the report because we were worried our clients were getting too interested in Iceland,” he tells me. “Iceland was the most extreme of everything.” Christensen then flew to Iceland and gave a speech to reinforce his point, only to be greeted with anger. “The Icelandic banks took it personally,” he says. “We were being threatened with lawsuits. I was told, ‘You’re Danish, and you are angry with Iceland because Iceland is doing so well.’ Basically it all had to do with what happened in 1944,” when Iceland declared its independence from Denmark. “The reaction wasn’t ‘These guys might be right.’ It was ‘No! It’s a conspiracy. They have bad motives.’” The Danish were just jealous!
The Danske Bank report alerted hedge funds in London to an opportunity: shorting Iceland. They investigated and found this incredible web of cronyism: bankers buying stuff from one another at inflated prices, borrowing tens of billions of dollars and re-lending it to the members of their little Icelandic tribe, who then used it to buy up a messy pile of foreign assets. “Like any new kid on the block,” says Theo Phanos of Trafalgar Funds in London, “they were picked off by various people who sold them the lowest-quality assets—second-tier airlines, sub-scale retailers. They were in all the worst LBOs.”
But from the prime minister on down, Iceland’s leaders attacked the messenger. “The attacks … give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,” said Central Bank chairman Oddsson in March of last year. The chairman of Kaupthing publicly fingered four hedge funds that he said were deliberately seeking to undermine Iceland’s financial miracle. “I don’t know where the Icelanders get this notion,” says Paul Ruddock, of Lansdowne Partners, one of those fingered. “We only once traded in an Icelandic stock and it was a very short-term trade. We started to take legal action against the chairman of Kaupthing after he made public accusations against us that had no truth, and then he withdrew them.”
One of the hidden causes of the current global financial crisis is that the people who saw it coming had more to gain from it by taking short positions than they did by trying to publicize the problem. Plus, most of the people who could credibly charge Iceland—or, for that matter, Lehman Brothers—with financial crimes could be dismissed as crass profiteers, talking their own book. Back in April 2006, however, an emeritus professor of economics at the University of Chicago named Bob Aliber took an interest in Iceland. Aliber found himself at the London Business School, listening to a talk on Iceland, about which he knew nothing. He recognized instantly the signs. Digging into the data, he found in Iceland the outlines of what was so clearly a historic act of financial madness that it belonged in a textbook. “The Perfect Bubble,” Aliber calls Iceland’s financial rise, and he has the textbook in the works: an updated version of Charles Kindleberger’s 1978 classic, Manias, Panics, and Crashes, a new edition of which he’s currently editing. In it, Iceland, he decided back in 2006, would now have its own little box, along with the South Sea Bubble and the Tulip Craze—even though Iceland had yet to crash. For him the actual crash was a mere formality.
W
ord spread in Icelandic economic circles that this distinguished professor at Chicago had taken a special interest in Iceland. In May 2008, Aliber was invited by the University of Iceland’s economics department to give a speech. To an audience of students, bankers, and journalists, he explained that Iceland, far from having an innate talent for high finance, had all the markings of a giant bubble, but he spoke the technical language of academic economists. (“Monetary Turbulence and the Icelandic Economy,” he called his speech.) In the following Q&A session someone asked him to predict the future, and he lapsed into plain English. As an audience member recalls, Aliber said, “I give you nine months. Your banks are dead. Your bankers are either stupid or greedy. And I’ll bet they are on planes trying to sell their assets right now.”
The Icelandic bankers in the audience sought to prevent newspapers from reporting the speech. Several academics suggested that Aliber deliver his alarming analysis to Iceland’s Central Bank. Somehow that never happened. “The Central Bank said they were too busy to see him,” says one of the professors who tried to arrange the meeting, “because they were preparing the Report on Financial Stability.” For his part Aliber left Iceland thinking that he’d caused such a stir he might not be allowed back into the country. “I got the feeling,” he told me, “that the only reason they brought me in was that they needed an outsider to say these things—that an insider wouldn’t say these things, because he’d be afraid of getting into trouble.” And yet he remains extremely fond of his hosts. “They are a very curious people,” he says, laughing. “I guess that’s the point, isn’t it?”
Icelanders—or at any rate Icelandic men—had their own explanations for why, when they leapt into global finance, they broke world records: the natural superiority of Icelanders. Because they were small and isolated it had taken 1,100 years for them—and the world—to understand and exploit their natural gifts, but now that the world was flat and money flowed freely, unfair disadvantages had vanished. Iceland’s president, Olafur Ragnar Grimsson, gave speeches abroad in which he explained why Icelanders were banking prodigies. “Our heritage and training, our culture and home market, have provided a valuable advantage,” he said, then went on to list nine of these advantages, ending with how unthreatening to others Icelanders are. (“Some people even see us as fascinating eccentrics who can do no harm.”) There were many, many expressions of this same sentiment, most of them in Icelandic. “There were research projects at the university to explain why the Icelandic business model was superior,” says Gylfi Zoega, chairman of the economics department. “It was all about our informal channels of communication and ability to make quick decisions and so forth.”
“We were always told that the Icelandic businessmen were so clever,” says university finance professor and former banker Vilhjalmur Bjarnason. “They were very quick. And when they bought something they did it very quickly. Why was that? That is usually because the seller is very satisfied with the price.”
You didn’t need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. U.K. investors, lured by the eye-popping 14 percent annual returns, forked over $30 billion—$28 billion from companies and individuals and the rest from pension funds, hospitals, universities, and other public institutions. Oxford University alone lost $50 million.
Geir Haarde: The former prime minister, on January 28, one of his last days in office.
Maybe because there are so few Icelanders in the world, we know next to nothing about them. We assume they are more or less Scandinavian—a gentle people who just want everyone to have the same amount of everything. They are not. They have a feral streak in them, like a horse that’s just pretending to be broken.
A
fter three days in ReykjavÃk, I receive, more or less out of the blue, two phone calls. The first is from a producer of a leading current-events TV show. All of Iceland watches her show, she says, then asks if I’d come on and be interviewed. “About what?” I ask. “We’d like you to explain our financial crisis,” she says. “I’ve only been here three days!” I say. It doesn’t matter, she says, as no one in Iceland understands what’s happened. They’d enjoy hearing someone try to explain it, even if that person didn’t have any idea what he was talking about—which goes to show, I suppose, that not everything in Iceland is different from other places. As I demur, another call comes, from the prime minister’s office.
Iceland’s then prime minister, Geir Haarde, is also the head of the Independence Party, which has governed the country since 1991. It ruled in loose coalition with the Social Democrats and the Progressive Party. (Iceland’s fourth major party is the Left-Green Movement.) That a nation of 300,000 people, all of whom are related by blood, needs four major political parties suggests either a talent for disagreement or an unwillingness to listen to one another. In any case, of the four parties, the Independents express the greatest faith in free markets. The Independence Party is the party of the fishermen. It is also, as an old schoolmate of the prime minister’s puts it to me, “all men, men, men. Not a woman in it.”
Walking into the P.M.’s minute headquarters, I expect to be stopped and searched, or at least asked for photo identification. Instead I find a single policeman sitting behind a reception desk, feet up on the table, reading a newspaper. He glances up, bored. “I’m here to see the prime minister,” I say for the first time in my life. He’s unimpressed. Anyone here can see the prime minister. Half a dozen people will tell me that one of the reasons Icelanders thought they would be taken seriously as global financiers is that all Icelanders feel important. One reason they all feel important is that they all can go see the prime minister anytime they like.
What he might say to them about their collapse is an open question. There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart central bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.
“Why is Vanity Fair interested in Iceland?” he asks as he strides into the room, with the force and authority of the leader of a much larger nation. And it’s a good question.
As it turns out, he’s not actually stupid, but political leaders seldom are, no matter how much the people who elected them insist that it must be so. He does indeed say things that could not possibly be true, but they are only the sorts of fibs that prime ministers are hired to tell. He claims that the krona is once again an essentially stable currency, for instance, when the truth is it doesn’t currently trade in international markets—it is assigned an arbitrary value by the government for select purposes. Icelanders abroad have already figured out not to use their Visa cards, for fear of being charged the real exchange rate, whatever that might be.
The prime minister would like me to believe that he saw Iceland’s financial crisis taking shape but could do little about it. (“We could not say publicly our fears about the banks, because you create the very thing you are seeking to avoid: a panic.”) By implication it was not politicians like him but financiers who were to blame. On some level the people agree: the guy who ran the Baugur investment group had snowballs chucked at him as he dashed from the 101 Hotel, which his wife owns, to his limo; the guy who ran Kaupthing Bank turned up at the National Theater and, as he took his seat, was booed. But, for the most part, the big shots have fled Iceland for London, or are lying low, leaving the poor prime minister to shoulder the blame and face the angry demonstrators, led by folksinging activist Hordur Torfason, who assemble every weekend outside Parliament. Haarde has his story, and he’s sticking to it: foreigners entrusted their capital to Iceland, and Iceland put it to good use, but then, last September 15, Lehman Brothers failed and foreigners panicked and demanded their capital back. Iceland was ruined not by its own recklessness but by a global tsunami. The problem with this story is that it fails to explain why the tsunami struck Iceland, as opposed to, say, Tonga.
But I didn’t come to Iceland to argue. I came to understand. “There’s something I really want to ask you,” I say.
“Yes?”
“Is it true that you’ve been telling people that it’s time to stop banking and go fishing?”
A great line, I thought. Succinct, true, and to the point. But I’d heard about it thirdhand, from a New York hedge-fund manager. The prime minister fixes me with a self-consciously stern gaze. “That’s a gross exaggeration,” he says.
“I thought it made sense,” I say uneasily.
“I never said that!”
Obviously, I’ve hit some kind of nerve, but which kind I cannot tell. Is he worried that to have said such a thing would make him seem a fool? Or does he still think that fishing, as a profession, is somehow less dignified than banking?
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t length, I return to the hotel to find, for the first time in four nights, no empty champagne bottles outside my neighbors’ door. The Icelandic couple whom I had envisioned as being on one last blowout have packed and gone home. For four nights I have endured their Orc shrieks from the other side of the hotel wall; now all is silent. It’s now possible to curl up in bed with “The Economic Theory of a Common-Property Resource: The Fishery.” One way or another, the wealth in Iceland comes from the fish, and if you want to understand what Icelanders did with their money you had better understand how they came into it in the first place.
The brilliant paper was written back in 1954 by H. Scott Gordon, a University of Indiana economist. It describes the plight of the fisherman—and seeks to explain “why fishermen are not wealthy, despite the fact that fishery resources of the sea are the richest and most indestructible available to man.” The problem is that, because the fish are everybody’s property, they are nobody’s property. Anyone can catch as many fish as they like, so they fish right up to the point where fishing becomes unprofitable—for everybody. “There is in the spirit of every fisherman the hope of the ‘lucky catch,’” wrote Gordon. “As those who know fishermen well have often testified, they are gamblers and incurably optimistic.”
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.
Johanna Sigurdardottir: The new prime minister, the modern world’s first openly gay head of state.
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.
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t 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.
But this, of course, creates a new problem: people with Ph.D.’s don’t want to fish for a living. They need something else to do.
And that something is probably not working in the industry that exploits Iceland’s other main natural resource: energy. The waterfalls and boiling lava generate vast amounts of cheap power, but, unlike oil, it cannot be profitably exported. Iceland’s power is trapped in Iceland, and if there is something poetic about the idea of trapped power, there is also something prosaic in how the Icelanders have come to terms with the problem. They asked themselves: What can we do that other people will pay money for that requires huge amounts of power? The answer was: smelt aluminum.
Notice that no one asked, What might Icelanders want to do? Or even: What might Icelanders be especially suited to do? No one thought that Icelanders might have some natural gift for smelting aluminum, and, if anything, the opposite proved true. Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called “hidden people”—or, to put it more plainly, elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people.” The other, more serious problem was the Icelandic male: he took more safety risks than aluminum workers in other nations did. “In manufacturing,” says the spokesman, “you want people who follow the rules and fall in line. You don’t want them to be heroes. You don’t want them to try to fix something it’s not their job to fix, because they might blow up the place.” The Icelandic male had a propensity to try to fix something it wasn’t his job to fix.
Back away from the Icelandic economy and you can’t help but notice something really strange about it: the people have cultivated themselves to the point where they are unsuited for the work available to them. All these exquisitely schooled, sophisticated people, each and every one of whom feels special, are presented with two mainly horrible ways to earn a living: trawler fishing and aluminum smelting. There are, of course, a few jobs in Iceland that any refined, educated person might like to do. Certifying the nonexistence of elves, for instance. (“This will take at least six months—it can be very tricky.”) But not nearly so many as the place needs, given its talent for turning cod into Ph.D.’s. At the dawn of the 21st century, Icelanders were still waiting for some task more suited to their filigreed minds to turn up inside their economy so they might do it.
Enter investment banking.
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or the fifth time in as many days I note a slight tension at any table where Icelandic men and Icelandic women are both present. The male exhibits the global male tendency not to talk to the females—or, rather, not to include them in the conversation—unless there is some obvious sexual motive. But that’s not the problem, exactly. Watching Icelandic men and women together is like watching toddlers. They don’t play together but in parallel; they overlap even less organically than men and women in other developed countries, which is really saying something. It isn’t that the women are oppressed, exactly. On paper, by historical global standards, they have it about as good as women anywhere: good public health care, high participation in the workforce, equal rights. What Icelandic women appear to lack—at least to a tourist who has watched them for all of 10 days—is a genuine connection to Icelandic men. The Independence Party is mostly male; the Social Democrats, mostly female. (On February 1, when the reviled Geir Haarde finally stepped aside, he was replaced by Johanna Sigurdardottir, a Social Democrat, and Iceland got not just a lady prime minister but the modern world’s first openly gay head of state—she lives with another woman.) Everyone knows everyone else, but when I ask Icelanders for leads, the men always refer me to other men, and the women to other women. It was a man, for instance, who suggested I speak to Stefan Alfsson.
Lean and hungry-looking, wearing genuine rather than designer stubble, Alfsson still looks more like a trawler captain than a financier. He went to sea at 16, and, in the off-season, to school to study fishing. He was made captain of an Icelandic fishing trawler at the shockingly young age of 23 and was regarded, I learned from other men, as something of a fishing prodigy—which is to say he had a gift for catching his quota of cod and haddock in the least amount of time. And yet, in January 2005, at 30, he up and quit fishing to join the currency-trading department of Landsbanki. He speculated in the financial markets for nearly two years, until the great bloodbath of October 2008, when he was sacked, along with every other Icelander who called himself a “trader.” His job, he says, was to sell people, mainly his fellow fishermen, on what he took to be a can’t-miss speculation: borrow yen at 3 percent, use them to buy Icelandic kronur, and then invest those kronur at 16 percent. “I think it is easier to take someone in the fishing industry and teach him about currency trading,” he says, “than to take someone from the banking industry and teach them how to fish.”
He then explained why fishing wasn’t as simple as I thought. It’s risky, for a start, especially as practiced by the Icelandic male. “You don’t want to have some sissy boys on your crew,” he says, especially as Icelandic captains are famously manic in their fishing styles. “I had a crew of Russians once,” he says, “and it wasn’t that they were lazy, but the Russians are always at the same pace.” When a storm struck, the Russians would stop fishing, because it was too dangerous. “The Icelanders would fish in all conditions,” says Stefan, “fish until it is impossible to fish. They like to take the risks. If you go overboard, the probabilities are not in your favor. I’m 33, and I already have two friends who have died at sea.”
It took years of training for him to become a captain, and even then it happened only by a stroke of luck. When he was 23 and a first mate, the captain of his fishing boat up and quit. The boat owner went looking for a replacement and found an older fellow, retired, who was something of an Icelandic fishing legend, the wonderfully named Snorri Snorrasson. “I took two trips with this guy,” Stefan says. “I have never in my life slept so little, because I was so eager to learn. I slept two or three hours a night because I was sitting beside him, talking to him. I gave him all the respect in the world—it’s difficult to describe all he taught me. The reach of the trawler. The most efficient angle of the net. How do you act on the sea. If you have a bad day, what do you do? If you’re fishing at this depth, what do you do? If it’s not working, do you move in depth or space? In the end it’s just so much feel. In this time I learned infinitely more than I learned in school. Because how do you learn to fish in school?”
This marvelous training was as fresh in his mind as if he’d received it yesterday, and the thought of it makes his eyes mist.
“You spent seven years learning every little nuance of the fishing trade before you were granted the gift of learning from this great captain?” I ask.
“Yes.”
“And even then you had to sit at the feet of this great master for many months before you felt as if you knew what you were doing?”
“Yes.”
“Then why did you think you could become a banker and speculate in financial markets, without a day of training?”
“That’s a very good question,” he says. He thinks for a minute. “For the first time this evening I lack a word.” As I often think I know exactly what I am doing even when I don’t, I find myself oddly sympathetic.
“What, exactly, was your job?” I ask, to let him off the hook, catch and release being the current humane policy in Iceland.
“I started as a … “—now he begins to laugh—“an adviser to companies on currency risk hedging. But given my aggressive nature I went more and more into plain speculative trading.” Many of his clients were other fishermen, and fishing companies, and they, like him, had learned that if you don’t take risks you don’t catch the fish. “The clients were only interested in ‘hedging’ if it meant making money,” he says.
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n retrospect, there are some obvious questions an Icelander living through the past five years might have asked himself. For example: Why should Iceland suddenly be so seemingly essential to global finance? Or: Why do giant countries that invented modern banking suddenly need Icelandic banks to stand between their depositors and their borrowers—to decide who gets capital and who does not? And: If Icelanders have this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years? At the very least, in a place where everyone knows everyone else, or his sister, you might have thought that the moment Stefan Alfsson walked into Landsbanki 10 people would have said, “Stefan, you’re a fisherman!” But they didn’t. To a shocking degree, they still don’t. “If I went back to banking,” he says, with an entirely straight face, “I would be a private-banking guy.”
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ack in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics published an intriguing paper called “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in over 35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is that men not only trade more often than women but do so from a false faith in their own financial judgment. Single men traded less sensibly than married men, and married men traded less sensibly than single women: the less the female presence, the less rational the approach to trading in the markets.
One of the distinctive traits about Iceland’s disaster, and Wall Street’s, is how little women had to do with it. Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there was just one woman in a senior position inside an Icelandic bank. Her name is Kristin Petursdottir, and by 2005 she had risen to become deputy C.E.O. for Kaupthing in London. “The financial culture is very male-dominated,” she says. “The culture is quite extreme. It is a pool of sharks. Women just despise the culture.” Petursdottir still enjoyed finance. She just didn’t like the way Icelandic men did it, and so, in 2006, she quit her job. “People said I was crazy,” she says, but she wanted to create a financial-services business run entirely by women. To bring, as she puts it, “more feminine values to the world of finance.”
Today her firm is, among other things, one of the very few profitable financial businesses left in Iceland. After the stock exchange collapsed, the money flooded in. A few days before we met, for instance, she heard banging on the front door early one morning and opened it to discover a little old man. “I’m so fed up with this whole system,” he said. “I just want some women to take care of my money.”
It was with that in mind that I walked, on my last afternoon in Iceland, into the Saga Museum. Its goal is to glorify the Sagas, the great 12th- and 13th-century Icelandic prose epics, but the effect of its life-size dioramas is more like modern reality TV. Not statues carved from silicon but actual ancient Icelanders, or actors posing as ancient Icelanders, as shrieks and bloodcurdling screams issue from the P.A. system: a Catholic bishop named Jon Arason having his head chopped off; a heretic named Sister Katrin being burned at the stake; a battle scene in which a blood-drenched Viking plunges his sword toward the heart of a prone enemy. The goal was verisimilitude, and to achieve it no expense was spared. Passing one tableau of blood and guts and moving on to the next, I caught myself glancing over my shoulder to make sure some Viking wasn’t following me with a battle-ax. The effect was so disorienting that when I reached the end and found a Japanese woman immobile and reading on a bench, I had to poke her on the shoulder to make sure she was real. This is the past Icelanders supposedly cherish: a history of conflict and heroism. Of seeing who is willing to bump into whom with the most force. There are plenty of women, but this is a men’s history.
When you borrow a lot of money to create a false prosperity, you import the future into the present. It isn’t the actual future so much as some grotesque silicon version of it. Leverage buys you a glimpse of a prosperity you haven’t really earned. The striking thing about the future the Icelandic male briefly imported was how much it resembled the past that he celebrates. I’m betting now they’ve seen their false future the Icelandic female will have a great deal more to say about the actual one.
Author Michael Lewis is a contributor to The New York Times Magazine.
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