Economic crises 101: Iceland

The 2008 financial crisis was bizarre for a lot of reasons. But few parts of it were as baffling as what happened in Iceland, a 300,000-person country (for you Dallasites: that’s roughly the size of Plano) whose banking system grew from a few billion dollars to $140 billion in just three-and-a-half years from 2003 to 2007—resulting in losses totaling $330,000 for every Icelandic citizen by the end of 2009. 

Few people are more familiar with Iceland’s role in the financial crisis than Bob Aliber, a world-renowned economist and longtime Professor Emeritus of International Economics and Finance at the University of Chicago who happens to have retired to Hanover, NH, just steps away from the Dartmouth campus. Tonight, my own International Finance professor invited him to speak to our class about his take on the bizarre early 2000s in Iceland. 

First, a little background on why the situation in Iceland was so freakish. Michael Lewis’s Boomerang not only outlines Aliber’s role in the crisis, but also gives context for what happened in Iceland at the start of the twenty-first century. Perhaps Lewis frames it best: “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.’” A book published in 1995 summarizes the Icelandic economic perspective: “Icelanders are rather suspicious of the market system as a cornerstone of economic organization, especially its distributive implications.” Yet, by 2007, the Icelandic banking system alone was the centerpiece of its economy. Boy, do things change fast. 

In May 2008, the University of Iceland Economics department, having heard that Aliber had for two years been prophesying the Icelandic economy’s implosion, invited him to speak to an audience of Icelandic students, bankers, and journalists. Aliber didn’t hold anything back. Boomerang recounts Aliber arguing that Icelanders, rather than “having an innate talent for high finance,” were simply riding a huge bubble that would inevitably result in a crash of epic proportions. According to one audience member, Aliber’s overall message to Iceland as a country was clear: “I give you nine months. Your banks are dead. Your bankers are either greedy or stupid. And I’ll bet they are on planes trying to sell their assets right now.” 

Aliber insists that what happened in Iceland between 2002 and 2007 is actually infuriatingly simple. In fact, not only is it infuriatingly simple, but it is eerily similar—completely analogous, even—to what happened in the Mexican peso crisis, the East Asian crisis in the 1990s, and several other crises in relatively recent memory.

Economically, the Icelandic cycle of disaster was what Aliber called a “very generic process.” In 2002, investors flooded Iceland with direct investment. Increased demand for the krona, the Icelandic currency, caused it to appreciate, which in turn caused the yields of Icelandic securities to increase across the board. Noticing these rising prices, Icelanders were quick to sell the securities they were holding for a profit. In the early 2000s, after selling his securities, an Icelander could have done several things: he could buy a new car, buy a new refrigerator…or, given that the prices of securities is still rising, he could buy more securities. (Take a guess at what he did.) Logically, the ever-rising prices and ever-increasing demand for Icelandic financial instruments was self-reinforcing. As Aliber put it, “the cash becomes the hot potato—and that hot potato becomes the ever-increasing prices of Icelandic securities.” 

Simultaneously, the amount of debt held by Icelandic citizens was growing at an astronomical rate, while the interest charged on that debt was growing, but at a much slower pace. Imagine that the debt was growing at 30% per year, while interests rates were growing at, say, 5%. In effect, as backwards as it sounds, Icelandic borrowers were able to get cash to repay their lenders in the form of new loans. Of course, such an economic process is unsustainable and did eventually come crashing down. 

Economists are famously good at providing autopsies, so to speak, after countries or companies have crashed. But autopsies are no help in preventing crises before they happen. Aliber says he saw the Icelandic crisis coming. Here’s hoping that, in the future, such prescient perspectives can be loud enough to stop disastrous economic cycles before they crash and burn. 

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The Economist: “Brave new words: Rich-world central banks explore more doveish strategies”

Growth is king. But what costs countries are willing to incur in order to achieve that growth? In particular, if all else fails, are central banks willing to accept higher inflation for the sake of higher GDP growth (i.e., to adopt a “doveish” strategy)? Japan, for one—historically a very conservative country in terms of inflation—recently raised its inflation target from 1% to 2%. The Bank of England has consistently exceeded its 2% inflation target for most of the last eight years. And the US Federal Reserve, though it puts equal emphasis on achieving full employment and low inflation, has said it is willing to pursue one at the temporary expense of the other if circumstances call for it, “focusing on whichever was further from a satisfactory level.”

The Economist makes good points. From a central banker’s perspective, the current economic environment is virtually unprecedented in that the world has seldom seen interest rates stuck near zero for so long. And for now there is no reprieve in sight, given the Fed’s commitment to keep rates near zero until at least 2014 to stimulate economic growth. In response to extenuating circumstances, monetary officials who ordinarily would never considering budging on the inflation front are suddenly turning doveish. The bigger question seems to be: for how long? It makes sense to employ unconventional policies in response to unconventional circumstances, until those once-unconventional circumstances become the norm. Sustained high inflation would be good for no one. Only time will tell when and if interest rates will recover and policy options will open up. 

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The Global Economy: Phony Currency Wars

Over the last few months, talk of “currency wars” has been all the rage. Since Japan elected new Prime Minister Shinzo Abe in September the yen has fallen 16% against the dollar and 19% against the Euro. Japan’s weaker currency, of course, means that its trading partners’ currencies are stronger in comparison to the yen, putting a dent in those trading partners’ exports. Many other countries, particularly those who, like Japan, depend heavily on exports to prop up their real GDP growth, have cried foul at the hasty weakening of the yen and have dropped hints that they too might try to devalue their own currencies in response to Japan’s policy: that is, that they might launch a currency war.

The Economist argues that frustration over the worldwide currency devaluations is overblown. The reasons for which Japan’s and other countries’ currencies are rapidly weakening, according to The Economist, will in fact help the global economy in the long run rather than hurt it.

The Economist is right. Yes, devaluation of the yen is one helpful side effect of Abe’s plan in the short-term, but the overall goal of Japan’s recent economic policy is to boost domestic spending and investment, not purely to weaken its currency. Furthermore, article correctly points out that, if Japan’s policy does end up boosting domestic demand—as it intends to do—Japanese consumers will eventually begin to buy more foreign goods and boost imports, quite the opposite of what might happen if Prime Minister Abe’s sole aim were to devalue the yen.

There has been talk in Europe of beginning to directly manage the euro to ensure that exports do not fall too far. Unfortunately, to do this would be to attack a symptom of the problem, not the root cause. While European officials, including French president François Hollande, accuse their currencies of “undermining Europe’s competitiveness,” they refuse to call it like it is: maybe these large European economies just are not that competitive to start with. Better to create growth organically than to depend on external factors to prop it up.

The best solution for Europe, according to the article, would be for Europe to follow in Japan’s footsteps and to ease monetary policy (i.e., to buy government bonds, thus increasing the money supply, driving down interest rates, decreasing borrowing costs, and boosting consumer demand). This policy would also achieve the goal of depreciating the euro in the short run. Everybody wins.

Global economic sluggishness is the problem, not exchange rates. Thankfully, this is a problem that policymakers have the tools to combat, if only they can see the real issues at hand.

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Entrepreneurial Politics, à la française: Les Pigeons

In May France elected Socialist François Hollande as president. Sick and tired of overly opulent and wealth-friendly former president Nicolas Sarkozy, much of France was momentarily overjoyed, particularly at one of Hollande’s more ambitious campaign promises: a 75% income tax on France’s top earners.

Hollande stuck to his promise. Not that anyone doubted he would: while Sarkozy is perhaps best remembered for his distastefully extravagant fête on the night of his election five Mays ago, Hollande ,who once said on television “I hate the rich,” declared while campaigning earlier this year that his “true enemy” was not a political party, but rather “the world of finance.”

Hollande’s draconian measures have caused quite the stir, particularly among the wealthiest French businesspeople. In fact, at times the story seems to be straight out of Atlas Shrugged. Bernard Arnault, a French citizen and Europe’s richest man, is seeking Belgian citizenship, as is actor Gérard Dépardieu. Wealthy French model Laetitia Casta has moved to London. Alain Ducasse, a chef, became a naturalized citizen of Monaco. The list goes on.

According to some, it is the accompanying spike in the capital gains tax – which recently doubled to 60% – not the 75% levy on income, that has spurred the mass exodus. Regardless, though the precise cause may be in question, the outcome is clearer every day.

This was all well and good for Hollande and his government until, earlier this fall, a select group of French citizens decided to mobilize its forces. Enter les Pigeons.

Les Pigeons – French slang for “suckers” – are a group of French entrepreneurs outraged, first, at the Socialist government’s new measures and, second, at the ambivalent attitude toward self-made businesspeople in France. For anonymity’s sake, the group, composed primarily of 25-34-year-olds, mobilized primarily online. But it made sure its voices were heard.

So a group of French people got together to protest a controversial government decree. This is nothing new. But here’s the interesting part: les Pigeons actually got the French state – the most bureaucratic of bureaucracies – to listen. As The Economist put it: “Usually it takes millions of demonstrators on the streets to force a French government to back down…But the pigeon movement captured the imagination thanks to its spontaneity, its grass-roots nature and its youth.” According to the Wall Street Journal, Finance Minister Pierre Moscovici said entrepreneurs selling their own business after a certain period of time would remain subject to the previous 19% flat tax rate rather than the new 60% capital gains rate.

Even more interesting, though, is what the French government’s response means: though he may badmouth French businesspeople from dawn to dusk, Hollande recognizes what really runs the French economy (the world’s fifth-largest). He can abuse them, but he can’t afford to lose them.

At the end of October, their goals having been at least partially achieved, les Pigeons decided to lay low and tone down their presence for fear of becoming counter-productive or overly-politicized. Pour l’instant, at least.

If you’re still curious as to where these French entrepreneurs are coming from, I’ve translated their call to action from October 22 (You can find in the original French here):

“We, entrepreneurs whom much of the mass have questioned, are at last speaking with no half-measure, without ambiguity.

The movement of Les Pigeons aims to oppose the new taxes laid out in the Financial Law of 2013, which run counter to entrepreneurship in France.

Some have named themselves Pigeons, and have spoken out in the name of our group of anonymous entrepreneurs.

This anonymity has allowed us to launch debate, but at the same time to avoid personal attacks of which we would doubtless have been the target.

We, the founder Pigeons, have promoted this page to 70,000 people and to the malaise of French entrepreneurs faced with the ineptitude of political choices.

We have to express ourselves in complete transparency and share our experiences.

We, the entrepreneurs at the heart of this movement, who have promoted it night and day for more than two weeks, have read all of the messages.

The movement of les Pigeons, frankly, has had success: first, because it is necessary to oppose tax revenues from a surplus of transfers of social capital, and second, because we must oppose a new measure punishing entrepreneurs – as if there were so many before.

Like many heads of businesses, we have created our companies after starting with few resources.

Like so many others, we have fought to succeed, we have endured the same difficulties at every stage of the life of a business: the launch, the failures, the development, the financing, the times when we lacked resources, and so many other obstacles.

We have been summoned to prove our patriotism by the government – but that is precisely what les Pigeons have expressed in rebelling.

We express today our exasperation in the face of measures suppressing French entrepreneurship.

Otherwise, the movement’s vision doesn’t even amount to the CEO so often disparaged.

Entrepreneurship is a state of mind shared by many of the French, who must prevail in the face of the absurdity of certain laws or political decisions.

It is time we strengthen our actions in favor of businesses, jobs, and growth in France.

The movement of les Pigeons has taught us one thing: entrepreneurs want to be left to find their own way.

Know that we remain vigilant and mobilized.

For an angry group, there are quite a lot of us: we must be heard urgently by those who govern us, and it is indispensable to pursue our actions, whether individually or near the many representative associations and institutions.

We have thus decided to go further in the initial movement of les Pigeons: we have to move beyond the boundaries of the Web and intensify our mobilization in the weeks to come, of which we will inform you.

Finally, we give a large thanks to all who have, do, and will continue to support us.”

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Dartmouth startup: SquareOne Mail

Stereotypes say innovation has left Dartmouth – that Dartmouth kids would by and large rather go corporate than start their own things. But one Dartmouth senior is proving the critics wrong.

Ever feel like email is taking over your life? SquareOne Mail, a mobile app startup launched earlier this year by three Dartmouth students and recently featured in an online startup journal, looks to rein in this problem: it sifts through and sorts those mountains of messages, leaving you to deal with only the important stuff. The SquareOne team is rolling out its first batch of public beta invites this week.

Stay posted.


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The Beautiful One-Time Budget

Earlier this week was my half-birthday. This means I’m now less than six months away from being twenty-two. That’s scary – and not just because I don’t want to grow up. It’s scary because I’ve never had a true lesson in personal finance.

From what my friends and peers tell me, I’m not the only one in this boat. Far from it, in fact. To the contrary, most adults assume that, somewhere along the way, someone teaches kids how to manage their money. For most of us young’uns, though, it never happens.

Thankfully, resources exist to help clueless young people who want to learn financial responsibility but don’t know where to start. One of the more useful voices of reason I’ve stumbled across is “Credit Card Andy.” He focuses on “teaching young 20-somethings how to manage money, maximize their wealth, and save for the future. I focus on making money really easy to understand so we can all focus on the bigger things in life.” That’s a pretty powerful mission.

Now, maybe I’ve overstated my problem. I do know how to balance a checkbook, and I do know how to set up an automatic transfer in my bank account. But, while he focuses on the fundamentals, Credit Card Andy’s lessons go beyond the basics: He preaches good, responsible financial principles and, in so doing, allows his readers to make their lives just a little bit easier.

See the link for how Andy suggests that, in one hour, young people can make their lives infinitely easier – and save themselves from a fiscal cliff while they’re at it.

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Presidential Speechwriters: Professional Mimes

Presidential Speechwriters: Professional Mimes

No one is closer to the president than his speechwriter.

Peter Robinson, President Ronald Reagan’s speechwriter, and Don Baer, who wrote speeches for President Bill Clinton, visited a group of twenty or so today at Dartmouth, and I attended the event. The linked article shares Robinson’s thoughts on the effects of the most famous speech he wrote for Reagan: the “tear down this wall!” speech in 1987, directed at Mikhail Gorbachev, leader of the Soviet Union at the time.

I’d never thought much about how close the relationship between a president and his speechwriter has to be, but it makes sense. Think about it. The speechwriter is literally putting words in the president’s mouth, and those words have to sound completely natural. You can’t do that unless you’re literally inside the head of the president – and that doesn’t happen unless you’re virtually best friends. 

Maybe the most revealing moment of today’s visit was when both Baer and Robinson did impersonations of Clinton and Reagan. It was absolutely uncanny: they were spot-on. They might as well have been professional impersonators. 

But I guess if you can write someone’s words for them, you shouldn’t have trouble speaking those words yourself. 

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Whitetruffle: Recruiting Revolution at Dartmouth

Whitetruffle is helping Dartmouth’s engineers and designers get jobs while they sleep. Join in on the revolution!

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The Scary Implications of Groupthink

Today in my Public Speaking class, I built a fort out of spaghetti and stuck a marshmallow on top.

The exercise was preparation for our group presentation unit. Next week, three of my peers and I will present on a topic of our choice, and today’s exercise was a step in building team chemistry. See the video for reference on the marshmallow experiment itself – it has quite a storied history.

While the exercise itself may be an effective – if unconventional – team-building exercise, the true lessons lie in the statistics. Specific groups of people are consistently far more successful at building marshmallow towers than others. Although you might expect marshmallow tower-building to be a relatively random skill, there is apparently a strong correlation between where a person comes from and that’s person’s ability to (1) work effectively with a team and to (2) visualize and accomplish a goal.

Why? Because certain groups of people think in certain ways. Whether or not we realize it, our environments have outsize effects on how we view the world.

On my way out of class today, one of my classmates brought up this idea with respect to management consulting firms, who hire heavily from Dartmouth. These companies are of course very successful. Yet the type of student they look for often seems to have a distinct profile: while exceptions certainly exist, they tend to focus overwhelmingly on students studying certain subjects or with certain interests.

This makes a lot of sense on many levels. Certainly, some intellectual and academic profiles equip students to solve the kinds of problems management consultants face better than others. But, for a moment, put yourself in the shoes of a business looking to solve a problem. What is the value of bringing in a team of objective and highly intelligent consultants?

My understanding is that management consultants provide value in two ways. First these consultants should be good at what they do: give them a problem, and they can logically and rationally find a solution. Second, they provide a new perspective and can see problems in new ways.

But take a closer look at the part about the new perspective. How does this happen if the vast majority of consultants see problems through the same lens? Wouldn’t it be awfully easy to miss things if everyone around you were thinking the same things as you?

I’m especially intrigued by what the results of the marshmallow experience can tell us about this phenomenon. Evidently, groupthink is powerful – the environments that surround us have tremendous effects on the ways we approach problems. Maybe, as my classmate mentioned to me earlier, these kinds of firms should consider this perspective in their hiring practices. It’s hard to dispute that, simply because of selection bias, students from certain backgrounds are often more likely to succeed in these jobs. But maybe students with a different frame of mind can see things others can’t.

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“Making Yourself a CEO”: Follow-Up

Someone suggested I expand on one of my posts from earlier this week (“The grit of a CEO“). Since I wax verbose if I don’t focus on being brief, I’ll to distill my thoughts into a few concise points.

The first of Horowitz’s ideas that stuck with me is that you can’t put the typical CEO into a cookie-cutter mold: “It generally takes years for a founder to develop the CEO skill set and it is usually extremely difficult for me to tell whether or not she will make it.” The nature vs. nurture argument is jaded, but only because it’s ceaselessly relevant. In an American environment that, compared to the rest of the world, focuses disproportionately on innate intelligence, it’s nice to hear an argument that high achievers can be not only born, but made.

Students in particular can relate to another of Horowitz’s points: “Be direct, but not mean.” Like most of us, I don’t like to be told I’m wrong. But, for me at least, it’s even more frustrating to be criticized in an indirect, roundabout way. I’d much rather learn what I did wrong and start improving right away.

Horowitz also suggests that CEOs give “high-frequency feedback”. He argues that giving honest feedback more often will let employees stop thinking about the fact they’re being critiqued and start focusing on the feedback itself. This goes for any environment: people who aren’t used to receiving frank but constructive criticism might be startled the first time they receive it. But they’ll appreciate the process once it becomes consistent.

While Horowitz applies this wisdom specifically to CEOs, he really gives more of a general lesson in motivational leadership: getting people to perform at the highest level possible. Everyone – CEOs, parents, teachers, and everyone in-between – would do well to listen.

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