On Thin Ice

Michael Lewis wrote a terrific piece on the situation in Iceland for Vanity Fair. I remember back in October 2008 when disaster broke out on Wall Street and my sister tried to explain it all to me. At the time I thought it was strange that she kept mentioning Iceland -- possibly the last corner of the earth I would have considered a barometer for the financial crisis, let alone a powerhouse. As Lewis so eloquently makes apparent, no one has really probed the rise from obscurity of this "tiny fishing nation," which, since 2003, reinvented itself as a major player in the international financial market.

What strikes me at first is the spindly number that represents Iceland's total population: 300,000. Let's put this into perspective. In square miles, Iceland is about the same size as Virginia, which is home to 7,000,000 people. Iceland is also the second largest island in Europe. To be fair, unlike Virginia or Greece, Iceland's population density is thwarted by the fact that about half of its terrain is either pure wasteland or uniformly covered by lava deposits, relegating most of the population to the Southwest regions. Either way, 300,000 in this day and age smacks of containment.

To get back to the main issue, there are two points that really interest me about Iceland's situation. First: the numbers, and their sheer scale. In 2003, Iceland had three major banks with only a few billion dollars in assets, which accounted for 100% of its GDP. 3.5 years later, they had grown to represent $140 billion, and it wasn't even worth calculating how much of the GDP they accounted for, since they were so greatly in excess of it. As of October 2008, however, the roof fell in on the three banks. The Icelandic stock market crashed by 85% and the krona sank. It suddenly appeared that on the shoulders of 300,000 citizens sat a new debt of $100 billion of banking losses, as well as several billion dollars worth of personal debt. This now works out to about $330,000 per man, per woman - and per child. As Lewis dryly notes, Iceland's debt of 850% of their GDP is the one thing that Americans, saddled with a debt of 350% of our GDP, can point to without personal accountability.

The second thing that fascinates me is the broader socioeconomic framework in which this disaster took place. You have to wonder: a) how on earth did an unassuming society of fisherman reinvent themselves as financial wizards and b) what prompted them to step out of the centuries-long collectivist stupor they were in?

The answer to the first is perhaps simpler, or at least, can be explained. Lewis references a paper by H. Scott Gordon, written in 1954, on the "plight of the fisherman." As Gordon revealed, due to the fact that the sea and fish were public property, there were no profits to be made by fishing day in and day out for a steady catch. The fisherman's practice was to stake his livelihood on "a lucky catch"--a single catch that, with great risk but minimum equipment and expense, would return an extraordinarily high yield. Sounds a lot like investment banking...

Moreover, this effort to maximize fishing efforts was aided by a government intervention in the 1970s, which privatized fishing and allowed only the most capable fisherman to take to the seas. This, then, is the moment that Iceland modernized itself. It's also where the answer to the second question begins: with fewer opportunities to make a living on the seas, Icelanders finally had the time to renovate their culture. Until 2003 they focused on developing themselves economically, educationally and artistically--as Lewis says, Iceland became the country that produced Bjork (to my mind a dubious accolade).

But the parallels between opportunistic big catches in fishing and the high-risk/high-yield mentality employed in investment banking eventually revealed themselves. Sophisticated young Icelanders returning home with business degrees made an impression on their native peers and taught them about the possibilities of financial speculation. A blistering irony is that they were quick to borrow from the American mindset "that finance had less to do with productive enterprise than trading bits of paper among themselves." The miracle is that they got away with it. Lewis recounts his meeting with a young man - this is the story of men only, it seems - who took seven years to hone expert skills as a fisherman, but who landed a job as "an adviser to companies on currency risk hedging" without blinking twice. The traits synonymous to these two identities are clear: risk-taking, competitiveness, confidence and hyper-masculinity.

The final component of this article - perhaps the one that needs more addressing - is the cultural backstory. Lewis touches upon Iceland's history under the Norwegian and Danish monarchies, the cornerstone that fishing claims in their heritage and imagination, their collectivist impulse and their gender biases. But I want more. I'm still curious to know who the Icelanders are. How do they live and how do they view themselves within the world? What is it about them that emits a sense - even through the filter of Michael Lewis' voice - of unbroken authenticity, of feral intelligence?

I doubt their story is over.