Getting Iceland wrong

I have finally gotten around to reading Michael Lewis’ Boomerang, which is interesting but ultimately unsatisfying for reasons captured well by this review by Carlos Lozada in the Washington Post:

In “Boomerang,” his latest book on the planet’s seemingly endless financial implosion, journalist Michael Lewis drops in on Iceland, Greece, Ireland and Germany, and chronicles the mess they’ve made of their markets and money. Yet even as “Boomerang” captures the essence of the international economic crisis — as a sort of travelogue version of Lewis’s must-read “The Big Short” — it also offers an odd collection of searing, sometimes funny but mostly head-scratching judgments and stereotypes about the offending countries. Lewis not only shows us what the Greeks and Icelanders and Irish and Germans did to get into trouble, but he attempts to unveil their souls, too. And it’s not a pretty sight.

[cut to end]

Lewis has a wonderful talent for distilling complicated stories, whether bond trading in New York (“Liar’s Poker”) or a baseball-analysis revolution in Oakland (“Moneyball”), in simple terms and with telling detail. “Boomerang” — adapted from a series of essays he wrote for Vanity Fair — doesn’t disappoint on this score…

But the book’s incessant moralizing and stereotyping may leave readers wondering why Lewis, beyond traveling throughout Europe, also took the path from master storyteller to itinerant scold. “Boomerang” is full of wonderful characters and unforgettable scenes. But it’s also preachy, even angry, and the mix is as distracting as it is enlightening.

The tone of the book was especially unfortunate in Lewis’ treatment of Iceland, where recent events have completely undermined the book’s disparaging take. Some background from Lozada’s review:

Lewis’s financial-disaster tourism begins in Iceland, where “an entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, ‘We can do that.’ ”

And for a while, it seemed they could. From 2003 to 2007, Iceland’s banking system, stock market and real estate sector all boomed. But it was an illusion, a web of cronyism in which bankers lent each other vast sums to buy stuff — Beverly Hills condos, private jets, Elton John singing at your birthday party — at insanely inflated prices. It was all among friends, because, as Lewis writes, Iceland “is less a nation than one big extended family.”

Then the bubble burst and the banks imploded, collectively leaving each Icelander on the hook for some $330,000 in banking losses. The country’s problem, according to Lewis, is one of national character. These aren’t a bunch of sweet Scandinavians, he warns, but a people with “a feral streak in them, like a horse that’s just pretending to be broken.” (The evidence is that several men bump into the visiting Lewis on the street, without apologizing.)

And here is where the book’s shortcomings are painfully obvious from the perspective of 2012. The broader failing is that Lewis turns repeatedly to bankers in London and New York to render their verdicts on these wacky rubes, a strange approach given the failures of that same industry that he so ably documented in his far superior book The Big Short. In the case of Iceland, Lewis’ insistence on broad-brush moralizing causes him to completely misdiagnose the very political/cultural dynamics that have allowed Iceland to be among the most successful European countries in its management of the crisis, largely because he is viewing them through the lens of his sources elsewhere. This view leads Lewis to take a very dim view of Iceland’s economic leadership, here described by Lozada again:

The Icelanders thought they were special — during the boom, the president gave speeches extolling “our heritage and training, our culture and home market” — but they weren’t. Lewis pokes fun at the lack of sophistication among the country’s financial elites, not just the fishermen turned investment bankers, but the philosophers, veterinarians and poets making up the government’s economic team.

This sounds terrible, until you see what an unconventional approach rooted in a culture that values social cohesion (“less a nation than one big extended family”) over the views of people like Lewis can produce. From Bloomberg this weekend:

The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates. It costs about the same to insure against an Icelandic default as it does to guard against a credit event in Belgium. Most polls now show Icelanders don’t want to join the European Union, where the debt crisis is in its third year…

Iceland’s $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based OECD estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to November estimates.

Housing, measured as a subcomponent in the consumer price index, is now only about 3 percent below values in September 2008, just before the collapse. Fitch Ratings last week raised Iceland to investment grade, with a stable outlook, and said the island’s “unorthodox crisis policy response has succeeded.”…

As for how they were able to accomplish this:

Iceland’s approach to dealing with the meltdown has put the needs of its population ahead of the markets at every turn.

Once it became clear back in October 2008 that the island’s banks were beyond saving, the government stepped in, ring-fenced the domestic accounts, and left international creditors in the lurch. The central bank imposed capital controls to halt the ensuing sell-off of the krona and new state-controlled banks were created from the remnants of the lenders that failed.

This part speaks for itself:

The authorities are now investigating most of the main protagonists of the banking meltdown….Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.

Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.

That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.

Lewis is of course not the only one who got Iceland wrong, but he was certainly among the most disparaging. It would be interesting to see whether he has changed his view since 2009.

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