Bullish on Iceland
By coincidence, two great articles on Iceland’s economic collapse came out this week. The one by Michael Lewis is funnier and available for free online so it’s been more widely linked, but the one by Ian Parker is more evocative and does more to explain what actually happened. But running through both articles is, I think, a kind of telling shadenfreude at the island’s downfall. It’s nice for us, as Americans, to spend time thinking about Iceland—a country that seemingly screwed the pooch on the great credit boom more than we did.
Nevertheless, when you step back and think about it, though Iceland’s in for some rocky times in the near future, so are we all. And in a lot of ways, Iceland’s pretty well-situated for the future.
At the end of the day, they have a well-educated, healthy population a decent infrastructure and an absence of obvious pressing social problems. It’s a small, quiet, peaceful, orderly country that will suffer through the downturn and take advantage of business opportunities when the global economy revives. The United States is neither small nor quiet nor orderly. You could imagine the hard-fought crime control gains of the 1990s being totally reversed by a years-long recession, and you could imagine that pushing one or more cities into a downward spiral from which there’s little prospect of return.
Speaking of which, there are substantially more people living in Detroit than there are people living in Iceland, and it’s not at all clear—even on the most plausible possible optimistic assumptions about the economy—how their situations are ever going to be turned around. That’s a tale of collapse really worth dwelling on.
18 Responses to “Bullish on Iceland”
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March 7th, 2009 at 8:35 am
Charles Dow Rolls in His Grave: The Distortion of the Average He Made Famous – Friday, March 6, 2009
Have you ever asked yourself why the Dow Jones Industrial Average contains non-industrial stocks? Why such a large weighting is given to financial companies such as American Express, Bank of America, Citigroup, JP Morgan and AIG (Before its removal)? After all, you wouldn’t expect to see General Motors included in a healthcare index or Goldman Sachs in the home builders index.
The Wikipedia entry for the Dow Jones Industrial Average states that:
“The average is computed from the stock prices of 30 of the largest and most widely held public companies in the United States. The “industrial” portion of the name is largely historical—many of the 30 modern components have little to do with traditional heavy industry.”
We do not dispute the claim that the “industrial” portion is largely historical. Indeed, there are components which have little to do with industry. Financial companies, who do not produce anything, comprise a large weighting the in this average of American Industry.
Over the last 20 years, the Dow Jones has been reshaped into a basket of 30 conglomerate corporations, with little regard for the actual business they’re in. Today’s Dow Jones would be unrecognizable to the man who created it over a century ago.
History
The index was first published in 1896 by Charles Dow, Founder of the Dow Jones Company and Wall Street Journal. Mr. Dow created and monitored a list of important industrial companies. Along with the Industrial Average, he created the Railroad Index (Transportation) which he would track along with the industrial stocks to gauge the health of the economy.
The Dow Theory was created based on the notion that both indexes should rise together in a healthy economy. The concept was a simple one. While industrial companies made the goods, the rails transported those goods to market. One couldn’t function without the other.
The original Industrial Average contained 12 industrial (Producers of goods) stocks:
- American Cotton Oil Company
- American Sugar Company
- American Tobacco Company
- Chicago Gas Company
- Distilling & Cattle Feeding Company
- General Electric
- Laclede Gas Light Company
- National Lead Company
- North American Company, (Edison) electric company
- Tennessee Coal,
- U.S. Leather Company
- United States Rubber Company
Notice that all of the companies in the index were producers of goods. There were no financial or bank stocks included in the average. At the time of his death in 1902, Charles Dow’s industrial average contained 12 stocks which were comprised of industrial producing companies such as US Steel, US Rubber, National Lead, American Car and Foundry, etc. Still no banks.
The Dow Jones Begins to Change (Era of Reganomics)
1982
80 years after the death of Charles Dow, American Express was added to the Dow Jones Industrial Average. This marked the first time that a financial stock was added to the century old index.
1988
American can, a manufacturer of tin cans merged with Commercial credit corporation and adopted the name Primerica.
1991
JP Morgan was introduced to the Dow Jones in 1991 and replaced Primerica corporation.
1997
Travelers Group was added to the index. The company would later change its name to Citigroup.
2004
AIG was added.
2008
Bank of America was added.
Reasons:
We struggle to find an explanation as to why such changes were made. Was it because America became de-industrialized over the last quarter century? Was it merely a reflection of big business today? With companies such as General Motors and General Electric playing dominant roles in non-core businesses such as finance and banking? Or were these financial stocks added to the index in hopes of propping up its value with companies such as JP Morgan and AIG, whose earning power seemed indestructible? Our hunch is that it was a combination of each. (More at the link.)
http://www.chartingstocks.net/2009/03/charles-dow-rolls-in-his-grave-the-distortion-of-the-average-he-made-famous/
March 7th, 2009 at 9:08 am
A subscription is needed for the New Yorker article so I’ll have to pass. I wanted to get some sense if it was there about what life was like for the Icelanders who are now genuinely poor.
The poverty rate in the US is going to soar. The income average numbers across the spectrum of deciles is going to drop. The safety net is going to be scaled back. I know, I know, with the health care thing and others the Democrats are likely to enact or try to this seems non nonsensical but the money isn’t there.
We are on the cusp of having the more desirable social order that has always been the dream of conservatives. As more and more people live in fear of losing it all they will become more conservative. Not necessarily in the political sense but in all others. An important segment of them will more openly embrace authoritarian ideologies and even actions.
Liberals seem to think we are on the edge of some longer term up cycle. Nothing could be further from the truth.
March 7th, 2009 at 9:17 am
Well, since there is no evidence at all that automobiles of some kind will be be less important in the future than they are today; since the Detroit area is already filled with plants, skilled workers and suppliers; and since there are major automotive and mechanical engineering programs at Wayne State and University of Michigan; Detroit is a natural, opportunity-rich location for investment in future automobile production. Whether it is with the current companies, restructured descendants of those companies, or new entrepreneurial ventures altogether, somebody will be making the next generation of cars in the Detroit area. However, the US could do much to make all of our industries more flexible, sustainable and consistently innovative if they shifted the provision of lifetime labor protections and benefits away from companies and industry sector unions toward the government and a national union.
March 7th, 2009 at 9:26 am
Haldor Laxness, Nobel Prize winning Icelandic author, wrote many wonderful novels including Independent People, a brilliant examination of speculation and poverty in the early decades of the last century. It is as good an explanation of what happened in Iceland in the last 15 years as anything you’ll ever read.
March 7th, 2009 at 9:37 am
“American can, a manufacturer of tin cans merged with Commercial credit corporation and adopted the name Primerica”
Idiots, they forgot the letter ‘n’.
“We’re Primerican, not Primerican’t”
March 7th, 2009 at 9:47 am
, since there is no evidence at all that automobiles of some kind will be be less important in the future than they are today; since the Detroit area is already filled with plants, skilled workers and suppliers; and since there are major automotive and mechanical engineering programs at Wayne State and University of Michigan; Detroit is a natural, opportunity-rich location for investment in future automobile production.
Well, you’re thinking of the Detroit metro area, and you may well be right as far as the suburbs are concerned–but Detroit itself is a disaster that wouldn’t be helped even if the auto industry rises to unprecedented levels of proserity.
March 7th, 2009 at 9:47 am
Anyone with some spare cash (pause while I wipe away the tears of laughter), could do worse than to simply walk in and buy Detroit and Cleveland. Average price of a home in those noble burgs is less than the average cost of a new car. Buy the places, level the houses, and start over.
March 7th, 2009 at 9:48 am
Basically we (Icelanders) pretty much blew it over the last ten years. We allowed the bankers to run amok shielded by a useless government and an even more useless SEC than you have in America. Regarding the future it will be pretty tough. Right now a substantial portion of the population and the country’s companies are technically bankrupt, i.e. they owe more than they own. This situation is especilly common among the young and highly educated people. The nearterm future of the country has a lot do with at least four things:
1) There musn’t be a brain drain away from the country
2) We somehow have to negotiate our foreign debts and hold them down to manageble levels.
3) Some ways must be found to keep those who are heavily in debt from defaulting
4) The country must somehow recover its reputation which is right now in the toilet and somehow gain access to a viable curreny.
If we somehow manage to solve these problems we should be able to rebuild as we have a number of things going for us, such as highly educated people, a relatively stable resources especially fish and energy, advanced infrastructure such as broadband along with the things Matt mentioned.
March 7th, 2009 at 10:00 am
We are on the cusp of having the more desirable social order that has always been the dream of conservatives.
Or, alternatively, from the kind of social order that makes conservatives shit themselves in their beds. All of the security systems and armed guards yer bankster can pay for don’t count for much if sufficient people decide that a few lampposts need dressing.
March 7th, 2009 at 10:20 am
Dear Matt: I suggest there are stories about Iceland and not Detroit precisely because people believe Iceland will survive its financial folly for the reasons you cited. Therefore, it is a more enjoyable story to read (hence, to hire an expensive writer like Michael Lewis to report) than a story about what is likely the irrevocable decline of U.S. industry and the resulting dire social effects, which calls our survival as a society in question.
March 7th, 2009 at 11:49 am
Haven’t the liberals been telling us for years about the wonders of “diversity?” Surely the US is more “diverse” than Iceland, so I’m sure we’ll do better, no?
March 7th, 2009 at 11:58 am
Diversity,
You’re trying to refute Yglesias with reasoned argument? Don’t be absurd. Reasoned argument is not something that the hipsters are especially fond of.
March 7th, 2009 at 12:45 pm
You’re trying to refute Yglesias with reasoned argument?
The soft bigotry of low expectations…
March 7th, 2009 at 1:11 pm
I think I pointed this out to Matt in an e-mail sometime back, but:
Isn’t it interesting how the two countries that most screwed the pooch in the global financial sector collapse went on to make history in their choice of new government leaders?
March 7th, 2009 at 1:12 pm
Incidentally, you’ve gotta love Michael Lewis’ writing.
“Icelandic males, like moose, rams, and other horned mammals, see these collisions as necessary in their struggle for survival”
March 7th, 2009 at 2:39 pm
All of the security systems and armed guards yer bankster can pay for don’t count for much if sufficient people decide that a few lampposts need dressing.
Oh, pish, that’s exactly when they count. There was a narrow period between the development of gunpowder and the internal combustion engine where you could feasibly get your way by just putting enough mooks together, but that period’s over. How do you encircle a helicopter? You don’t. How do you lay siege to a building with a helicopter pad? You don’t.
March 7th, 2009 at 2:52 pm
Senescent,
Tell it to the Viet Cong.