Iceland in Crisis

Since Iceland is one of Norway’s neighbors and since my supervisor is Icelandic, I found this article about the financial mess on Iceland quite interesting. It’s called ‘Wall Street on the Tundra’ (another title I don’t quite understand; to call Iceland Wall Street is, well, strange, I think, and while tundra may be exotic, what does it have to do with the financial trouble?), and the introductory paragraph goes like this:

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.

Among the more amusing paragraphs, you’ll find the following caricature of how Icelandic banks operated:

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.

The author (Michael Lewis) also comes up with an interesting theory of why so few seemed to foresee the global economic downturn:

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.

Hat-tip: Freakonomics

UPDATE: My Icelandic supervisor made me aware of a more informative and analytic story on the Iceland crisis from the Wall Street Journal.

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One Response to “Iceland in Crisis”

  1. Sustainable Fisheries « Kvams Says:

    […] Another problematic issue with ITQs that Messrs. Heal and Schlenker don’t discuss is how they change the distribution of income from a fishery. In a functioning market (which ITQs require to work properly), implementation of ITQs transfer all future income from a fishery to the quota holders at the time of implementation. Some people suggest that when ITQs were implemented on Iceland, a lot of fishermen got a lot of money they did not know what to spend on and that at least some of that money went into building the Icelandic financial adventure that eventually collapsed. […]

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