This article is amazingly rich… I’m still playing with all the threads. Michael Lewis comes through again — huge (literally, at about 10,000 words) – this time for Vanity Fair with a piece on the economic crisis in Iceland: ”Wall Street on the Tundra.” Highly recommended [via Felix Salmon]:
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.
The recent events in Iceland make for a superb case study in virtually every discipline of social science. In economics especially (obviously). Iceland is essentially a microcosm (in both space and time) of the global economic crisis. All of the basic causes of the crisis are hyper-concentrated in this country of 320,000, in a span of a less than a decade. Interestingly, an academic who’s currently editing a new edition of a classic text on Manias, Panics, and Crashes already included a special box for Iceland’s bubble — on the same scale as such canonic cases as the Dutch Tulip Craze and the South Seas Bubble — before Iceland’s bubble even collapsed.
In sociology it’s an information-rich case of competing sets of values; and in anthropology, Icelanders are already a very distinct and fascinating people. Lewis touches on all of these aspects — and, as usual, does so in an entertainingly vivid and humourous way — and in case you haven’t been following along (I haven’t followed it closely enough myself) he provides what I’m assuming is a pretty good narrative of what has happened there:
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.”
And…
From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík 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.
And eventually…
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.)
Until…
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.
Without even getting into the causes of the collapse itself, what’s truly astonishing is how quickly and thoroughly their society adapted to radically different ways of doing things than they’d done for 1,100 years. One I.M.F agent quoted in the article said “It was just a group of young kids… In this egalitarian society, they came in, dressed in black, and started doing business.” And people saw how great the gains were, and how easy it apparently was, and everything just cascaded.
There are a lot of straightforward lessons we can learn from Iceland about the hazards of this kind of mania. There are also some deeper insights into something more positive — lessons to help us continue to evolve our economy to be more knowledge-based and creative without losing our grounded pragmatism — specifically, our connection with a real economy based on natural resources and productive labour, and the continuity of our heritage (whatever that is, exactly)… Iceland seemed to be doing a lot right already; they just got off-track (like everyone else — though more effectively, and therefore extremely and more unfortunately).
I’m going to keep discussing these bigger questions in more depth and detail as I’ve always tried to do. I’d love to keep going about this article but it’s too theme-rich to do it justice with the time I have now (btw, I’d love to see a book from this). I’ll have to put it aside for now — but definitely check it out.
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