Friday, March 6, 2009

Why did Iceland go bankrupt?

An excellent and funny article in Vanity Fair explains it all.
Although there will soon be no need for a Central Bank in Iceland as the country will convert to the euro,
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.

A hedge fund manager explained Icelandic banking
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.”

William tells me that Belgian banks are so over leveraged that Belgium will soon follow Iceland. What will be the consequences for Belgium?

1 comment:

Mimi said...

On Meet the Press Newt says that we must look to Iceland to see the future of the world. If all bankers were/are as stupid as the bankers in Iceland, God help the world.