Unformatted text preview:

Demonstrators in front of Iceland’s parliament building, in Reykjavík’s Austurvollur Square, on January 31. Photographs by Jonas Fredwall Karlsson.FROZEN ASSETSIceland’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 blowingup their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, todecide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely givenup on them, the author follows the peculiarly Icelandic logic behind the meltdown.BY MICHAEL LEWISAPRIL 2009Just after October 6, 2008, when Icelandeffectively went bust, I spoke to a man at theInternational Monetary Fund who had beenflown in to Reykjavík to determine if moneymight responsibly be lent to such aspectacularly bankrupt nation. He’d neverbeen to Iceland, knew nothing about theplace, and said he needed a map to find it. Hehas spent his life dealing with famouslydistressed countries, usually in Africa,perpetually in one kind of financial trouble oranother. Iceland was entirely new to hisexperience: a nation of extremely well-to-do(No. 1 in the United Nations’ 2008 HumanDevelopment Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts ofmadness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”Wall Street on the Tundra | Politics | Vanity Fair http://www.vanityfair.com/politics/features/2009/04/iceland200904?printable=true1 of 2 5/5/2011 2:23 PMHow did the economy get into this mess? Visit our archive “Charting the Road to Ruin.” Plus: A Q&A with Michael Lewis. Illustration by BradHolland.An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “Wecan 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, about100 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 thanIceland’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 rapidexpansion 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 realestate went through the roof. 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 thisnew wealth was one way or another tied to the new investment-banking industry. “Everyone was learning Black-Scholes” (the option-pricingmodel), says Ragnar Arnason, a professor of fishing economics at the University of Iceland, who watched students flee the economics of fishing forthe economics of money. “The schools of engineering and math were offering courses on financial engineering. We had hundreds and hundreds ofpeople studying finance.” This in a country the size of Kentucky, but with fewer citizens than greater Peoria, Illinois. Peoria, Illinois, doesn’t haveglobal financial institutions, or a university devoting itself to training many hundreds of financiers, or its own currency. And yet the world wastaking Iceland seriously. (March 2006 Bloomberg News headline: iceland’s billionaire tycoon “thor” braves u.s. with hedge fund.)To read the complete story, pick up a copy of The Great Hangover: 21 Tales of the New Recession from the Pages of Vanity Fair (Harper Perennial),available online and at better booksellers now.KeywordsMICHAEL LEWIS, CULTURE, WORLD NEWSWall Street on the Tundra | Politics | Vanity Fair http://www.vanityfair.com/politics/features/2009/04/iceland200904?printable=true2 of 2 5/5/2011 2:23


View Full Document

UCSC ECON 130 - Homework

Download Homework
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Homework and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Homework 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?