Category Archives: Economy

Michael Lewis (2009):Frozen Assets.In: Vanity Fair, Issue14.12.2009

Demonstra tors in front o f Iceland’s parliam ent building, in Reyk javík’s Austurvollur Square , on January 31. Photographs by
Jonas Fredwall Karlsson.
Wall Street on the Tundra
Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P.,
its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—
resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to
decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are
men, and the women seem to have completely given up on them, the author follows the peculiarly
Icelandic logic behind the meltdown.
ust after October 6, 2008, when Iceland effectiv ely went bust, I spoke to a man at
the International Monetary Fund who had been flown in to Rey kjav ík 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 Dev elopment Index), well-educated, historically rational human beings who had organized
themselves to commit one of the single greatest acts of madness in financial history . “Y ou hav e to
understand,” he told me, “Iceland is no longer a country . It is a hedge fund.”
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How did the economy get into this mess? Visit our archiv e “Charting the Road to Ruin.” Plus:A Q&A with
Michael Lewis.Illustration by Brad Holland.
An entire nation without immediate experience or ev en 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. Ov er the next three and a half years they grew to ov er $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 sy stem 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. Rey kjavík real-estate
prices tripled. By 2006 the av erage Icelandic family was three times as wealthy as it had been in 2003, and
v irtually all of this new wealth was one way or another tied to the new inv estment-banking industry .
“Ev ery one was learning Black-Scholes” (the option-pricing model), say s 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 study ing finance.” This in a country the size of Kentucky, but with
fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t hav e global financial institutions, or a
univ ersity devoting itself to training many hundreds of financiers, or its own currency . And y et the world
was taking Iceland seriously . (March 2006 Bloomberg News headline: ICELAND’S BILLIONAIRE TYCOON “THOR”
Global financial ambition turned out to hav e 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 ev ery Icelandic man, woman,
and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre priv ate
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 v alue
of the generally stable Icelandic krona, which had also crashed and was remov ed 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 debtdrowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became
in the U.S. economy , it nev er 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 y ears 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 y oung kids,” said the
man from the I.M.F. “In this egalitarian society , they came in, dressed in black, and started doing business.”
iv e 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
12/14/2009 Wall Street on the Tundra | vanityfair.c……/iceland200904… 2/17and Glitnir. I try to think up a metaphor for the world’s expanding reserv oir of defunct financial corporate
sponsorships—water left in the garden hose after y ou’v e switched off the pressure?—but before I can finish,
the man in the seat behind me reaches for his bag in the ov erhead 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 surv iv al. 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
expensiv e 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.
Y ou can tell a lot about a country by how much better they treat themselv es than foreigners at the point of
entry . Let it be known that Icelanders make no distinction at all. Ov er the control booth they’v e 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.” Ev ery one is from somewhere, and so we all wind up in the same line, leading to
the guy behind the glass. Before y ou can say, “Land of contradictions,” he has pretended to examine y our
passport and waved you on through.
Next, through a dark landscape of snow-spackled black v olcanic rock that may or may not be lunar, but that
looks so much as y ou would expect the moon to look that N ASA scientists used it to acclimate the astronauts
before the first moon mission. An hour later we arriv e at the 101 Hotel, owned by the wife of one of
Iceland’s most famous failed bankers. It’s cry ptically 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—ev ery thing to heighten the social anxiety of a rube
from the sticks but the latest edition of The New Y ork Observer. It’s the sort of place bankers stay because
they think it’s where the artists stay . Bear Stearns conv ened 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 sy stem as a cornerstone of economic organization, especially its distributiv e implications.”
That’s when the strange noises commence.
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Ste fan Alfsson: A fisherm an turned
banker, who wa s laid o ff from his
trading job in O ctober and now
might re turn to fishing.
First comes a screeching from the far side of the room. I leav e 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. Ev ery
y ear workers engaged in street repairs shut down the cold-water intake used to temper the hot water and
some poor Icelander is essentially boiled aliv e in his shower. So powerful is the heat being released from the
earth into my room that some great grinding, wheezing engine must be employ ed to prev ent it from
cooking me.
Then, from outside, comes an explosion.
Then another.
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
obv iously better than no sun at all, but subtly worse, as it tempts y ou to believe you can simulate a
normal life. And whatev er 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 y ear trading currencies for one of the banks. Tall, white-blond, and handsome, Olafsson looks exactly as
y ou’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 say s, then
adds that ever since the crash Rey kjav ík 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 giv e him
and stuffed it into a sack. “All ov er downtown that day y ou saw people walking around with bags,” he say s.
“No one ev er 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. “Y ou’d
figure New Y ork would hear about this and send ov er planeloads of muggers,” he theorizes. “Most every one
has their savings at home.” As he is already unsettled, I tell him about the unsettling explosions outside my
hotel room. “Y es,” he say s with a smile, “there’s been a lot of Range Rov ers catching fire lately .” Then he
For the past few y ears, some large number of Icelanders engaged in the same disastrous speculation. With
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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 y en and in the bargain made a bundle on the currency trade, as the krona
kept rising. “The fishing guy s pretty much discov ered the trade and made it huge,” say s Magnus. “But they
made so much money on it that the financial stuff eventually ov erwhelmed the fish.” They made so much
money on it that the trade spread from the fishing guy s to their friends.
It must hav e seemed like a no-brainer: buy these ever more v aluable houses and cars with money y ou 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 y oung 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 Rov er 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 v alue. The other is set it on fire and collect the
insurance: Boom!
The rocks beneath Reykjavík 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 gov ernment are charming
and scaled to the city. The half-built oceanfront glass towers meant to house newly rich financiers and, in
the bargain, block every one else’s view of the white bluffs across the harbor are not.
he best way to see any city is to walk it, but ev ery where I walk Icelandic men plow into me without so
much as a by -your-leav e. Just for fun I march up and down the main shopping drag, play ing chicken,
to see if any Icelandic male would rather div ert 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 fiv e 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 recov ering 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 likv itity problem, but they did not agree,” then stumbles off. It’s exactly what Lehman
Brothers and Citigroup said: If only y ou’d give us the money to tide us over, we’ll surv iv e this little hiccup.
A nation so tiny and homogeneous that every one in it knows pretty much every one 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
gov ernment and quit; on the other hand, if they fill out a form, they can start their own cult and receiv e a
subsidy. Another example: the Reykjavík phone book lists ev ery one by his first name, as there are only
about nine surnames in Iceland, and they are deriv ed 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
y ou wish to rev eal how little you know about Iceland, y ou need merely refer to someone named Siggor
Sigfusson as “Mr. Sigfusson,” or Kristin Petursdottir as “Ms. Petursdottir.” At any rate, ev ery one in a
conv ersation is just meant to know whomever y ou’re talking about, so you nev er 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
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she was two? “Y es, I know Björk,” a professor of finance at the Univ ersity of Iceland say s 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;
ev eryone already knows ev ery thing that needs to be known. I quickly find that it is an ev en greater than
usual waste of time to ask directions, for instance. Just as y ou are meant to know which Bjornjolfer is being
spoken of at any particular moment, you are meant to know where y ou 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, hav e 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 say s, “No one actually knows any thing about our country . Last
week we had Icelandic high-school students here and their teacher asked them to name an Icelandic 19thcentury 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.)
he world is now pocked with cities that feel as if they are perched on top of bombs. The bombs hav e y et
to explode, but the fuses hav e been lit, and there’s nothing any one 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 Rey kjavík had the same feel of incipient
doom, but the fuse burned strangely . The gov ernment mandates three months’ sev erance pay , and so the
many laid-off bankers were paid until early February , when the gov ernment promptly fell. Against a basket
of foreign currencies the krona is worth less than a third of its boom-time v alue. As Iceland imports
ev erything but heat and fish, the price of just about everything is, in mid-December, about to sky rocket. A
new friend who works for the gov ernment 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.
Still, a society that has been ruined ov ernight doesn’t look
much different from how it did the day before, when it
believ ed itself to be richer than ev er. 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 liv es working for the gov ernment that
gov ernment was a waste of life. So Oddsson went on a quest
to giv e Icelandic people their freedom—by which he meant
freedom from gov ernment controls of any sort. As prime
minister he lowered taxes, priv atized industry , freed up
trade, and, finally , in 2002, priv atized the banks. At length,
weary of prime-ministering, he got himself appointed
gov ernor of the Central Bank—ev en though he was a poet
without banking experience.
12/14/2009 Wall Street on the Tundra | vanityfair.c……/iceland200904… 6/17Bjarni Brynjolfsson: A fishing guide ,
who is back to hosting flyfishe rm en instead o f banke rs.
After the collapse he holed up in his office inside the bank,
declining all requests for interv iews. Senior gov ernment
officials tell me, seriously , that they assume he spends most
of his time writing poetry . (In February he would be asked
by a new gov ernment to leav e.) On the outside, howev er,
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—ev en though the moon was nothing like Iceland. But then, he was a tourist, and a tourist
can’t help but hav e a distorted opinion of a place: he meets unrepresentativ e 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 y ears without so much as dabbling in leveraged
buy outs, hostile takeov ers, deriv ativ es trading, or ev en 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
inv estment banker did and how he behaved—most of it gleaned from y oung 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 productiv e enterprise than trading bits of paper among themselv es. 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: Bev erly 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 buy ing 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 priv ate jets and third homes in
London and Copenhagen. They paid vast sums of money for serv ices no one in Iceland had theretofore ev er
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 Mov ement, Steingrimur Sigfusson, tells me with fresh incredulity . “And
apparently not v ery well.” They bought stakes in businesses they knew nothing about and told the people
running them what to do—just like real American inv estment bankers! For instance, an inv estment
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 ev er 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 ov er an extended period of time,”
FL Group C.E.O. Hannes Smarason, graduate of M.I.T.’s Sloan School, got himself quoted say ing, 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
Y ork that, in late 2006, spotted what it took to be an easy mark: a weak Scandinav ian 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—driv ing up the share price to absurd lev els. I spoke to another hedge fund in
London so perplexed by the many bad LBOs Icelandic banks were financing that it hired priv ate
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inv estigators to figure out what was going on in the Icelandic financial sy stem. The inv estigators produced a
chart detailing a byzantine web of interlinked entities that boiled down to this: A handful of guy s 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 themselv es 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 . Y et another hedge-fund
manager explained Icelandic banking to me this way : Y ou hav e a dog, and I have a cat. We agree that they
are each worth a billion dollars. Y ou sell me the dog for a billion, and I sell y ou 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,” say s a London hedge-fund manager. “This was
how the banks and investment companies grew and grew. But they were lightweights in the international
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, giv ing 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 interv iewed by Vanity Fair.) When Kaupthing raised its
stake to 19.5 percent, Shearer finally flew to Reykjav ík to see who on earth these Icelanders were. “They
were v ery 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 Rey kjav ík. And they
had no idea what they were doing.”
Hordur Torfason: An activist and a protest
organize r.
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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-y ear 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 hav e stopped the new Icelandic financiers from dev ouring the
ancient British merchant bank. Instead, the regulators ignored a letter Shearer wrote to them. A y ear later,
in January 2005, he received a phone call from the British takeover panel. “They wanted to know,” say s
Shearer, “why our share price had risen so rapidly ov er the past couple of day s. So I laughed and said, ‘I
think y ou’ll find the reason is that Mr. Einarsson, the chairman of Kaupthing, said two day s 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 stay ed. 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.
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 sy stem 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 ev erything.” 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 say s. “We
were being threatened with lawsuits. I was told, ‘Y ou’re Danish, and y ou 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 motiv es.’” The Danish were just jealous!
The Danske Bank report alerted hedge funds in London to an opportunity: shorting Iceland. They
inv estigated and found this incredible web of crony ism: bankers buy ing 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,” say s 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 hav e decided to make a last stab at breaking down the
Icelandic financial system,” said Central Bank chairman Oddsson in March of last y ear. 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 v ery 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 try ing to publicize the problem. Plus, most of the
people who could credibly charge Iceland—or, for that matter, Lehman Brothers—with financial crimes
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could be dismissed as crass profiteers, talking their own book. Back in April 2006, howev er, an emeritus
professor of economics at the Univ ersity 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 v ersion of Charles Kindleberger’s
197 8 classic, Manias, Panics, and Crashes, a new edition of which he’s currently editing. In it, Iceland, he
decided back in 2006, would now hav e its own little box, along with the South Sea Bubble and the Tulip
Craze—even though Iceland had y et to crash. For him the actual crash was a mere formality .
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 Univ ersity of Iceland’s
economics department to giv e 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 giv e y ou nine months. Y our banks are
dead. Y our bankers are either stupid or greedy . And I’ll bet they are on planes try ing to sell their assets
right now.”
The Icelandic bankers in the audience sought to prev ent newspapers from reporting the speech. Several
academics suggested that Aliber deliv er his alarming analy sis to Iceland’s Central Bank. Somehow that
nev er 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
y et he remains extremely fond of his hosts. “They are a v ery 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 y ears for them—and the world—to understand and exploit their natural gifts, but
now that the world was flat and money flowed freely , unfair disadv antages had v anished. Iceland’s
president, Olafur Ragnar Grimsson, gav e speeches abroad in which he explained why Icelanders were
banking prodigies. “Our heritage and training, our culture and home market, have prov ided a v aluable
adv antage,” he said, then went on to list nine of these adv antages, ending with how unthreatening to others
Icelanders are. (“Some people ev en 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,” say s 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 alway s told that the Icelandic businessmen were so clev er,” says univ ersity finance professor and
former banker Vilhjalmur Bjarnason. “They were very quick. And when they bought something they did it
v ery quickly. Why was that? That is usually because the seller is v ery satisfied with the price.”
Y ou didn’t need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into
Icelandic banks. The Netherlands gav e them $305 million, and Sweden kicked in $400 million. U.K.
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Geir Haarde: The form er prim e
minister, on January 28, one o f his
last days in o ffice .
inv estors, lured by the eye-popping 14 percent annual returns, forked ov er $30 billion—$28 billion from
companies and individuals and the rest from pension funds, hospitals, univ ersities, and other public
institutions. Oxford Univ ersity alone lost $50 million.
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 ev ery one to hav e the same amount of
ev erything. They are not. They have a feral streak in them, like a horse that’s just pretending to be broken.
fter three day s in Rey kjavík, I receiv e, 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 say s, then asks if
I’d come on and be interviewed. “About what?” I ask. “We’d like y ou to explain our financial crisis,” she
say s. “I’ve only been here three day s!” I say . It doesn’t matter, she say s, as no one in Iceland understands
what’s happened. They ’d enjoy hearing someone try to explain it, ev en if that person didn’t have any idea
what he was talking about—which goes to show, I suppose, that not ev ery thing 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 gov erned
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 Mov ement.) 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 any time they
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What he might say to them about their collapse is an open question. There’s a charming lack of financial
experience in Icelandic financial-policy making circles. The minister for business affairs is a philosopher.
The finance minister is a v eterinarian. The Central Bank gov ernor is a poet. Haarde, though, is a trained
economist—just not a v ery 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 hav e a reputation for not
knowing much about finance and for refusing to av ail 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 sev eral well-known financial economists at the Univ ersity of Iceland. Ev en
the adv ice 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
driv ing 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 v alue by the gov ernment for select purposes. Icelanders abroad have
already figured out not to use their Visa cards, for fear of being charged the real exchange rate, whatev er
that might be.
The prime minister would like me to believ e 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 y ou
are seeking to av oid: a panic.”) By implication it was not politicians like him but financiers who were to
blame. On some lev el the people agree: the guy who ran the Baugur inv estment 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 activ ist 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 y ou,” I
“Y es?”
“Is it true that y ou’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 Y ork
hedge-fund manager. The prime minister fixes me with a self-consciously stern gaze. “That’s a gross
exaggeration,” he says.
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Johanna Sigurdardottir: The new
prim e minister, the m ode rn world’s
“I thought it made sense,” I say uneasily.
“I nev er said that!”
Obv iously, I’ve hit some kind of nerv e, but which kind I cannot tell. Is he worried that to hav e 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?
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 env isioned as being on one last blowout
hav e packed and gone home. For four nights I hav e 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 CommonProperty Resource: The Fishery .” One way or another, the wealth in Iceland comes from the fish, and if y ou
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 ev ery body ’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 ev ery body.
“There is in the spirit of ev ery 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 inv estment bankers. Their overconfidence leads them to
impov erish not just themselv es 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 gov ernment intervention.
This insight is what led Iceland to go from being one of the poorest
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first openly gay head o f state . countries in Europe circa 1900 to being one of the richest circa 2000.
Iceland’s big change began in the early 197 0s, after a couple of y ears
when the fish catch was terrible. The best fishermen returned for a second y ear in a row without their usual
haul of cod and haddock, so the Icelandic gov ernment took radical action: they privatized the fish. Each
fisherman was assigned a quota, based roughly on his historical catches. If y ou were a big-time Icelandic
fisherman y ou 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 y ear to year, the numbers of fish y ou could catch changed. But your
percentage of the annual haul was fixed, and this piece of paper entitled y ou to it in perpetuity .
Even better, if y ou 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 v alue, the best fishermen, who could
extract the fish from the sea with maximum efficiency . Y ou could also take y our quota to the bank and
borrow against it, and the bank had no trouble assigning a dollar v alue to y our 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.
t was horribly unfair: a public resource—all the fish in the Icelandic sea—was simply turned ov er 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 v alue of Iceland’s fishing grounds. The new wealth transformed
Iceland—and turned it from the backwater it had been for 1,100 y ears to the place that spawned Björk. If
Iceland has become famous for its musicians it’s because Icelanders now hav e time to play music, and
much else. Iceland’s y outh are paid to study abroad, for instance, and encouraged to cultiv ate themselv es
in all sorts of interesting way s. 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 liv ing. 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 lav a generate v ast 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 hav e come to terms with
the problem. They asked themselv es: 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 ev en: What might Icelanders be especially
suited to do? No one thought that Icelanders might hav e 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 believ e. Before Alcoa could build its
smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elv es
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:
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he took more safety risks than aluminum workers in other nations did. “In manufacturing,” say s the
spokesman, “you want people who follow the rules and fall in line. Y ou don’t want them to be heroes. Y ou
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 y ou can’t help but notice something really strange about it: the
people hav e cultiv ated themselv es to the point where they are unsuited for the work av ailable to them. All
these exquisitely schooled, sophisticated people, each and ev ery one of whom feels special, are presented
with two mainly horrible way s to earn a liv ing: 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
elv es, for instance. (“This will take at least six months—it can be v ery 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.
or the fifth time in as many day s 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 conv ersation—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 ev en 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 hav e it about as good as women any where: 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 day s—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 liv es with another woman.)
Every one knows ev ery one 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 y oung 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 y et, 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 y ears, until the great bloodbath of October 2008, when he was sacked, along with ev ery other
Icelander who called himself a “trader.” His job, he say s, was to sell people, mainly his fellow fishermen, on
what he took to be a can’t-miss speculation: borrow y en 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. “Y ou don’t want to hav e some sissy boy s on y our crew,” he say s, especially as Icelandic
captains are famously manic in their fishing sty les. “I had a crew of Russians once,” he says, “and it wasn’t
that they were lazy , but the Russians are alway s at the same pace.” When a storm struck, the Russians would
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stop fishing, because it was too dangerous. “The Icelanders would fish in all conditions,” say s Stefan, “fish
until it is impossible to fish. They like to take the risks. If y ou go ov erboard, the probabilities are not in your
fav or. I’m 33, and I already hav e two friends who hav e died at sea.”
It took y ears 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 say s. “I hav e nev er 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 gav e 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 y ou act on the sea. If y ou 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 y ou mov e 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 y ou learn to fish in school?”
This marv elous training was as fresh in his mind as if he’d received it y esterday, and the thought of it makes
his eyes mist.
“Y ou 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.
“Y es.”
“And even then y ou had to sit at the feet of this great master for many months before you felt as if you knew
what y ou were doing?”
“Y es.”
“Then why did y ou think y ou could become a banker and speculate in financial markets, without a day of
“That’s a v ery good question,” he say s. 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 my self oddly sy mpathetic.
“What, exactly , was y our 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 adv iser to companies on currency risk hedging. But giv en
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 y ou don’t take risks you don’t catch
the fish. “The clients were only interested in ‘hedging’ if it meant making money,” he say s.
n retrospect, there are some obv ious questions an Icelander living through the past fiv e y ears might
have asked himself. For example: Why should Iceland suddenly be so seemingly essential to global
finance? Or: Why do giant countries that inv ented 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 hav e 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, y ou’re a fisherman!”
But they didn’t. To a shocking degree, they still don’t. “If I went back to banking,” he say s, with an entirely
straight face, “I would be a priv ate-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, Ov erconfidence, and Common Stock
Inv estment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in ov er
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 distinctiv e 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 maledominated,” 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 say s, but she wanted to create a financial-services business run
entirely by women. To bring, as she puts it, “more feminine v alues to the world of finance.”
Today her firm is, among other things, one of the v ery few profitable financial businesses left in Iceland.
After the stock exchange collapsed, the money flooded in. A few day s 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 sy stem,” 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 v erisimilitude, and to achiev e it no expense was spared. Passing one tableau of blood
and guts and mov ing on to the next, I caught my self glancing ov er 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 y ou borrow a lot of money to create a false prosperity , y ou import the future into the present. It isn’t
the actual future so much as some grotesque silicon v ersion of it. Leverage buy s y ou a glimpse of a
prosperity y ou 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 ’v e 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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Steven Hill (2010): Reconsidering Japan, Reconsidering Paul Krugman; In: Huff Post Media; November 19th, 2010

The New York Times is doing a series on Japan that it describes as an examination of “the effects on Japanese society of two decades of economic stagnation and declining prices.” Reading the series is about as cheery a task as rubbernecking at a car wreck on I-95. But unfortunately the Times series simply repeats the “conventional wisdom” about Japan put out by the same economic experts who missed an $8 trillion housing bubble in the United States, and in fact have been wrong on most of the big economic issues over the past two decades.

Look at it this way: In the midst of the Great Recession, the United States is suffering through nearly 10% unemployment and 50 million people without health insurance. A new report has found over 14% of Americans living below the poverty line, including 20% of children and 23% of seniors, the highest since President Lyndon Johnson’s War on Poverty. That’s in addition to declining prospects for the middle class, and a general increase in economic insecurity.

How, then, should we regard a country that has 5% unemployment, healthcare for all its people, the lowest income inequality and is one of the world’s leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the U.S. and China by a country mile.

Doesn’t that sound like a country from which Americans might learn a thing or two about how to get out of the mud hole in which we are stuck?

Not if that place is Japan. During and before the current economic crisis, few countries have been vilified as an economic basket case as much as the Land of the Rising Sun. Google “Japan and its economy” and you will get numerous hits about Japan’s allegedly sclerotic economy, its zombie banks, its deflation and slow economic growth. This malaise has even been called “Japan syndrome”, sounding like a disease to warn policymakers, as in “you don’t want to end up like Japan.”

No one has been more influential in defining this narrative than New York Times columnist and Nobel Prize-winning economist Paul Krugman. Throughout the 1990s, and still occasionally today, Krugman has skewered Japan’s economy and leaders. In the late 1990s, Krugman wrote a series of gloom-and-doom articles, complete with equations, theories and titles like “Japan’s Trap” and “Setting Sun”, bluntly stating: “The state of Japan is a scandal, an outrage, a reproach. It is operating far below its productive capacity, simply because its consumers and investors do not spend enough.”

Krugman was commenting on Japan’s so-called “lost decade” of the 1990s, when the Japanese economy was considered sluggish and underperforming. But let’s look at some of the Japanese metrics during that time. Throughout the 1990s the Japanese unemployment rate was — ready for this? — about three percent. Not 30, that’s 3. About half the US unemployment rate at the time. During that allegedly “lost decade,” the Japanese also had universal healthcare, less inequality, the highest life expectancy, and low rates of infant mortality, crime and incarceration. Americans should be so lucky as to experience a Japanese-style lost decade.

Reopening the case of Japan raises some important questions. How do economists such as Krugman decide what to value and prioritize, or what to measure? What is an economy for? To produce the prosperity, security and services that people need? Or to satisfy economists and their equations, theories and models? For too many economic Cassandras, if their spreadsheet columns don’t add up, if the surplus nations don’t balance the deficit nations and the supply doesn’t meet the demand, then disaster surely awaits.

Krugman has gone on the attack again recently, this time in a debate over fiscal stimulus vs. deficit reduction as a strategy toward economic recovery. As a stimulus hawk, he has written that the Germans — one of the few economic bright spots in a struggling global economy — “seem to be getting their talking points from the collected speeches of Herbert Hoover.” He is criticizing Germany for the same thing he criticizes Japan — not spending or consuming enough to stimulate its economy.

But what exactly are the Germans or Japanese supposed to buy more of? Surely Krugman has visited both countries, and it’s plainly evident that neither are lacking in any material goods or modern trinkets to speak of. Americans are the only ones who seem to think they need three refrigerators, four televisions and a car for everyone in the household. Too many economists have yet to figure out that it is this consumer-driven economic model that has crashed and burned.

Japan’s economy has been and remains successful. So is Germany’s. Unlike the trickle down U.S. economy, Japan and Germany have reached an economic steady state in which they don’t need roaring growth rates to provide for their people, and here’s why: they are better at sharing the wealth produced by their economies to foster a more broadly shared prosperity among their populaces.

But for the economic experts, apparently, it doesn’t matter if people’s needs are being met; what matters is whether their theories and equations balance. Similarly with the media like the New York Times, which has been getting it wrong for years — they also missed an $8 trillion housing bubble, as well as weapons of mass destruction in Iraq (prompting the Times to issue an unprecedented mea culpa to their readers). In the same way, the Times and the rest of the media have been missing the real story about what is occurring in Japan and Europe.

As a result, there is a common sense aspect to this that gets lost amid the rhetoric and the headlines. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. The world needs to figure out how advanced economies can provide for their people without having roaring growth rates driven by asset bubbles. If consumer-driven growth was the order of the day in the post-World War II era, going forward it is going to be steady-state economic growth — growing not too fast, but not too slowly — and learning to do more with less. Yet stimulus hawks like Krugman don’t seem to get this; they want to crank the “growth machine” into full gear with huge government stimulus spending.

But the real game is no longer strictly about economic growth, it’s also about sustainability. The era of U.S.-style trickle-down economies is over for wealthy countries because trickle-down is neither economically sound nor ecologically sustainable. The developed nations must lead the way towards a different path of development. This is not an easy challenge, yet it is the course that Japan and Germany have chosen. If the U.S. didn’t have such a trickle-down economy that has produced so much inequality — if it was, in fact, better at sharing its wealth — perhaps it wouldn’t need so much fiscal stimulus and growth.

At the recent G-20 meeting in Seoul, South Korea, German Chancellor Angela Merkel rebuffed President Barack Obama and Secretary of the Treasury Timothy Geithner’s appeals to go back to the toxic economics of Wall Street capitalism. Said Merkel, “It is essential to return to a sustainable growth path.” One cause of the crisis was that “we did not have sustainable growth. In many countries growth was built on debt and [speculative] bubbles.”

Her finance minister, Wolfgang Schäuble, was even more blunt. He described American policy as “clueless” and said the American growth model is stuck in a deep crisis. “The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base.” Catch the irony: Germany — previously sneered at by U.S. pundits for its “weak and sclerotic” economy — is lecturing America about how to grow our economy. Given Germany’s 6.7% unemployment (compared to 9.6% in the US) and an impressive record at manufacturing things that the rest of the world wants to buy, the Obama administration as well as Paul Krugman should be listening attentively.

via Huff Post media

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Marshall Auerbach (2012): Let’s Cut the Crap About Japan’s ‘Lost Decade’ In: Global Economic Intersection; December 22nd, 2012

via Global Economic Intersection

If I had a dollar for every scare story about Japan’s ‘lost decade’ (or decades), I would already own a Greek island and be done writing these blogs.  The latest example of this genre comes from yesterday’s Financial Timescourtesy of Stephen Mallaby:

Almost exactly 20 years ago I packed my stuff in London and moved to Japan. The Tokyo stock market had crashed some two years previously; the property market was in free fall; lenders that had relied on buildings as collateral were gasping for air. Yet the country was in denial about its problems. Nobody imagined that Japan would today be suffering its fifth recession in two decades.

The question is whether Europe is walking the same path.

Follow up:

Yes, by conventional metrics, it looks as if Japan has experienced nothing but economic misery over the last 2 decades.  But can really compare the loss of human capital and social implosion now characteristic of the Eurozone to Japan? It has been taken for granted that Japan collapsed in the early 1990s after a spectacular property boom burst and has not really recovered since. The conservatives also claim that Japan shows that fiscal policy is ineffective because given its on-going budget deficits and record public debt to GDP ratios the place is still in shambles.

Not so fast:  while Japan has problems it demonstrates that a fiat monetary system is stable and we should be careful comparing the Eurozone to the experiences that unfolded in Japan in the 1990s and beyond.  Consider this Huffington Post article as a counterpoint to the Mallaby argument (and, to be fair to Mallaby, he is not the first to invoke the Japan scare story):

Steven Hill which addressed some of the “myths” about Japan that motivate economic policy debate in the advanced nations (such as the US).  He write:

Reading the series is about as cheery a task as rubbernecking at a car wreck on I-95. But unfortunately the Times series simply repeats the “conventional wisdom” about Japan put out by the same economic experts who missed an $8 trillion housing bubble in the United States, and in fact have been wrong on most of the big economic issues over the past two decades.

Look at it this way: In the midst of the Great Recession, the United States is suffering through nearly 10% unemployment and 50 million people without health insurance. A new report has found over 14% of Americans living below the poverty line, including 20% of children and 23% of seniors, the highest since President Lyndon Johnson’s War on Poverty. That’s in addition to declining prospects for the middle class, and a general increase in economic insecurity.

How, then, should we regard a country that has 5% unemployment, healthcare for all its people, the lowest income inequality and is one of the world’s leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the U.S. and China by a country mile.

Doesn’t that sound like a country from which Americans might learn a thing or two about how to get out of the mud hole in which we are stuck?

Hill documents why the “you don’t want to end up like Japan” syndrome is appealing to conservatives but missed the point entirely.

According to Hill, during the lost decade, Japan maintained:

  • An unemployment rate was about three percent and about half the US unemployment rate over the same period.
  • Universal healthcare.
  • Less income inequality than the US.
  • The highest life expectancy among the advanced nations.
  • Very low rates of infant mortality, crime and incarceration.

The obvious conclusion is that “Americans should be so lucky as to experience a Japanese-style lost decade”.  I’m sure there’s a number of Greeks or Spaniards who would happen to agree with this assessment.

As Hill notes, we tend to use very narrow metrics to determine a nation’s economic success: “Americans are the only ones who seem to think they need three refrigerators, four televisions and a car for everyone in the household” is the best way to measure national well-being.  I admit that terms like “happiness” and “well being” can be somewhat amorphous, although it is only in the last 40 years or so that we have defined prosperity solely in terms of the metric of growth and of course, Japan always seem short-changed in that regard.

One shortcoming of investment-led growth is the traditional Harrod-Domar issue: it is difficult for aggregate demand to keep up with the additional supply capacities created by previous investment. This is probably less of a problem in underdeveloped economies where improvements in standards of living are badly needed (provided, of course, that the capacities of production are used for internal markets rather than exports to developed countries). But it is definitely a concern for mature economies. As a result, in the latter case growth should be refocused on socio-ecologically durable domestic consumption. At the same time, it is important to avoid the financial dynamics that have been at play in the United States. The United States has been following a strategy of consumption-led growth for the past 30 years, but it has been based on unsound financial practices induced in part by growing income inequality.  Japan has less of that problem.

Another shortcoming of investment-led growth is that it is prone to Ponzi finance. The economist Hyman Minsky explained in detail how investment was prone to income-based Ponzi finance. As we observed in the wave of mergers and acquisitions in the 1990s and more recently in the US housing bubble of the 2000s, investment is also prone to collateral-based Ponzi finance. Indeed, it creates durable assets that may rise in value, thereby providing an incentive to underwrite loans on the basis of rising asset prices rather than income. While rising collateral-based lending might be fine in financial markets, especially when no government insurance is provided, it is more dangerous in the case of durable illiquid assets such as investment goods.

It is also important to reexamine the goal of growth regardless of its sources. While economic growth may help to improve standards of living and to meet the needs arising from population growth, it is not clear that there is a direct relationship between improved welfare and economic growth, especially for developed economies. The case of Japan shows us that we need, alternative measures to the Gross Domestic Product, such as the Genuine Progress Indicator, (which incidentally show no significant improvement in U.S. economic welfare since the mid-1970s – so who has really experienced ‘lost decades”?). Rising socio-economic and environmental problems have outweighed the gains from increased final output. It’s time to move away from the simple caricature of Japan and consider whether we need a better way to measure economic progress.

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