Iceland

Two weeks ago I read Boomerang, which is a collection of Michael Lewis dispatches from various European countries during the financial crisis. The book was pretty unsatisfying, with the analysis and explanations offered rather facile. In the chapter on Iceland (which I believe is just a straight reposting of this Vanity Fair article) he basically attributes imprudent behavior by Icelandic bankers to the fact that they were a bunch of overly aggressive retrained fishermen (see pages 13-17 of the article). This excerpt is fairly typical of the narrative presented by Lewis:

In  retrospect, there are some obvious questions an Icelander living through the past five years might have asked himself. For example: Why should Iceland suddenly be so seemingly essential to global finance? Or: Why do giant countries that invented modern banking suddenly need Icelandic banks to stand between their depositors and borrowers to decide who gets capital and who does not? And: If Icelanders have this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years?  

...One   of the distinctive traits about Iceland's disaster, and Wall Street's, is how little women had to do with it. Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there was just one woman in a senior position inside an Icelandic bank. Her name is Kristin Petursdottir, and by 2005 she had risen to become deputy C.E.O. for Kaupthing in London. “The financial culture is very male dominated,” she says. “The culture is quite extreme. It is a pool of sharks. Women just despise the culture.” Petursdottir still enjoyed finance. She just didn’t like the way Icelandic men did it, and so, in 2006, she quit her job. “People said I was crazy,” she says, but she wanted to create a financial-services business run entirely by women. To bring, as she puts it, “more feminine v alues to the world of finance.

An amusing take, but as a comprehensive explanation it leaves something to be desired. Even if we accept that Icelanders, and Icelandic men in particular, do not possess the cultural DNA to engage in high finance, who was providing these ill-suited financiers the capital that allowed them to behave in such reckless fashion? In contrast to Lewis, who never really provided much of an answer, Tim Cavanaugh steps up with some pretty revealing information:

For every government-driven bad improvement you can find in the west, you’ll find boom-era Iceland taking it to the next level. Where the U.S. Federal Reserve’s promise to backstop financial institutions was merely implicit, the Central Bank of Iceland in 2001 gave an explicit guarantee to big banks, making it inevitable that they would become bloated with risky and ultimately toxic assets.

When markets engage in nonsensical behavior, it's a pretty sure bet you can find the hand of government at work.