Monday, March 9, 2009

Tulip Mania

Michael Lewis, a writer for Vanity Fair magazine, has in the magazine's April 2009 issue a rather fascinating article on the collapse of the Icelandic economy. While I profess to know next to nothing about economics, banking, metallurty, engineering and physics, what Lewis writes is a lucid tale of motivated, energetic and intelligent people getting hip deep into something and not knowing (or at least not caring) that they really don't understand what's going on.

First of all, there's this, according to Lewis (and to be fair, he says this of the global financial crisis, not necessarily just the Icelandic one):

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.
I have to ask, who doesn't behave like this -- taking short-term gains over something that might happen? There are few who can see the big picture, and even fewer in the right position who will listen to them. Don't rock the boat is the prevailing attitude. I recognize that in myself sometimes, which is why I don't go in for things like piloting planes or doing anything more complicated behind the wheels of a vehicle or a financial statement than staying between the lines and closing my eyes as I buy and hold during this meltdown. As Bill Cosby says, "Greed jumps right on your head." That seems to have happened in Iceland. He compares the country's losses -- which totalled about 850 times the nation's gross domestic product -- to the tulip mania in the Netherlands during the 16th century, when speculators bought tulip bulbs at enormously exaggerated prices until the bottom dropped out of the market, inciting a financial panic.

As I read this article, I began to see more and more of myself in it (in addition to seeing more and more how oddly people in general behave). There's this, for example:

Word spread in Icelandic economic circles that this distinguished professor at Chicago had taken a special interest in Iceland. In May 2008, [Bob] Aliber was invited by the University of Iceland’s economics department to give 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 give you nine months. Your banks are dead. Your bankers are either stupid or greedy. And I’ll bet they are on planes trying to sell their assets right now.”
Reaction to his statement was odd: A few listened, the rest tried to suppress it, including the government, which worked to push journalists not to report on the speech. The nation's economy collapsed in October, five months later. Here we learn that nobody likes to hear bad news, even if they don't quite understand it. (Lewis himself was called by a "leading current events TV show," after only three days in the country, to talk about the crisis. The audience, Lewis wrote, said, would "enjoy hearing someone try to explain it, even if that person didn’t have any idea what he was talking about—which goes to show, I suppose, that not everything in Iceland is different from other places."

Lewis aptly sums up the crisis by interviewing an Iceland fisherman who was captain of his own boat at 23 and who spent seven years learning the trade until he felt he was quite good at it, only to leave fishing to become a currency trader with little to no education in currency trading, aside from knowing the fact that people could make a lot of money at it. "For the first time, I am without a word," the fisherman-cum-trader said when Lewis asked him why he felt he could trade currency without a seven-year apprenticeship.

Simply fascinating reading. I'd like to see Lewis do similar treatment to the U.S. crisis, but I'm afraid he'd find it much more difficult. I know I do.

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