MR pointed to this website:
What is "Seasteading"?
Seasteading means to create permanent dwellings on the ocean - homesteading the high seas. A seastead, like in the picture above, is a structure meant for permanent occupation on the ocean.
I've been reading it's online book. It's an interesting website and like all interesting websites it led me to different things:
1. Monolithic Dome Institute (MDI)
2. IMF (no, not that IMF)
The founders take this concept seriously although it sounds like the main reason they are pursuing this is idealogical/political rather than technological. They believe the technology is there and have already decided on the technology (and now need funding - what else is new). They haven't convinced me that they have all the non-political issues ironed out - mainly waste disposal. I buy into wind, current and solar as their power source but their solution to waste disposal is multi-pronged - recycle, reuse, incinerate, compost and ship to land. They discuss the pros and cons of all these but I think that the only real solution unfortunately is ship to land for most products.
We visited the Maldives once (and when I think of this proposal, I think of the problems that small island economies face -- everything needs to be shipped!) and they had designated one atoll for garbage which sounded like it was reaching its capacity.
I found the MDI site really interesting. I've always wanted to live in a dome! There is one near us that uses some of the MDI concepts of inflatable airform and polyurethane. See http://en.wikipedia.org/wiki/Roy_Mason_(architect) for a description and here and here for pictures. It claims that it is more energy efficient than a conventional home but isn't polyurethane petroleum based?
More interesting was the home they built to withstand hurricanes on Sullivans Island, SC. Why do I buy into the dome concept? I buy into its energy efficiency and living on a busy road, the insulation in these domes sound great. They can also be buried which moderates the temperatures. Unfortunately, solar panels don't seem like a good option for these houses - perhaps with nanotechnology this will become more feasible.
Will seasteading be successful? Perhaps. I think ...
1. It will probably start out in Europe - and perhaps even in the Netherlands.
2. It will probably start by clustering around off shore wind farms.
Friday, April 25, 2008
Thursday, April 24, 2008
A post on guns I had been waiting for
I've been a reader of Mark Thoma's blog for a while and I've pigeon-holed him as a "west coast liberal". On April 17, he posted a comment on Larry Bartel's NYT column titled "Who's Bitter Now?":
"... having grown up in a small-town in one of the poorest counties in California, a town where the inequality was stark, it seems to me that we are missing something with this type of analysis (in the town I grew up in, there were very few people in the upper middle class, there were wealthy rice farmers and others with wealth derived from other sources, there were a few doctors, dentists, insurance brokers, etc., but mostly the upper middle was absent, e.g. median household income in 2000 was $35,062). I tried to express some of what I think we are missing here in terms of perceptions of fairness, but I'm not sure that does a very good job of expressing what middle and lower class residents of small towns are frustrated about."
But what was more interesting was this:
"Maybe Bartels is correct, Democrats will never capture this demographic [small town] beyond breaking nearly even in vote shares, but I'd like to have a better understanding of what the problem is. It's not that this group is, from my experience, socially conservative (though this is Northern California), so I agree with Bartels on that point. Identity is big part of it I think, the Republicans have done a better job of tapping into the pickups with gun racks, duck and pheasant hunting, beer drinking, go to church on Easter, type of demographic (I no longer hunt, but I took my first hunter safety course at age 11, most of us did - I should write more about guns because rural residents view the issue very differently from urban residents, at least that's my experience)." (emphasis mine)
His posting on guns is personal and moving and can be found here. Some excerpts:
"[Recalling about duck hunting.] My uncle and cousin had extensive knowledge of ducks, I was always surprised by how much they knew. They'd see a duck flying pretty far away and could tell you if it was a wood duck, pintail, teal, widgeon, etc. ... In high school, we'd party until early into the morning, then a lot of my classmates would get up before dawn, go to the blind, set out the decoys if they weren't out already, then sit there in the cold, rain, and fog waiting for ducks and geese to fly by so they could call them in with their duck calls ..."
"If you shot a dove out of a tree instead of in flight, that was considered to be unfair and you’d be ostracized. As I said, there were rules, and you followed them."
"I followed the usual progression: Lots of exposure to guns, my own BB gun at age seven or eight, gun lessons and a shotgun by age 12. One thing, though, that I want to emphasize is how much respect for guns and gun safety was drilled into my head from day one. There were things you did, things you didn’t do, and it started from the very first time you tagged along just to watch. I won’t even try to detail all the rules, but anyone who knows them also knows that Vice-President Cheney did not have this kind of training "
"Maybe if I’d spent more time in a big city and observed first-hand the troubles that handguns can cause I’d feel different about the whole gun issue, but anything that might force me to have to register the guns I have, give them up, anything approximating that I would resist. ... hose are wonderful memories, and having the guns is somehow connected back to all of that, to my family history, to time as a kid with my dad, grandfather, uncles, and cousins. It recalls a way of life I no longer live, but it will always be with me. I can’t exactly explain how guns fit into all that, but I know that they do."
"There’s something about getting up early, trudging in the cold through wet fields until you and the dogs are dead tired, often coming up empty-handed but somehow that didn’t matter, generations of family together sharing stories from the past, and creating new ones to be told in the future. Because of all this, I think, I resist restrictions on guns. I guess it’s my history but I can’t logically explain why I resist more control over guns other than what I’ve said above."
"I have no emotional connection to the problems guns create in major cities. I see it on the news, read about it, but it’s not real. "
"... having grown up in a small-town in one of the poorest counties in California, a town where the inequality was stark, it seems to me that we are missing something with this type of analysis (in the town I grew up in, there were very few people in the upper middle class, there were wealthy rice farmers and others with wealth derived from other sources, there were a few doctors, dentists, insurance brokers, etc., but mostly the upper middle was absent, e.g. median household income in 2000 was $35,062). I tried to express some of what I think we are missing here in terms of perceptions of fairness, but I'm not sure that does a very good job of expressing what middle and lower class residents of small towns are frustrated about."
But what was more interesting was this:
"Maybe Bartels is correct, Democrats will never capture this demographic [small town] beyond breaking nearly even in vote shares, but I'd like to have a better understanding of what the problem is. It's not that this group is, from my experience, socially conservative (though this is Northern California), so I agree with Bartels on that point. Identity is big part of it I think, the Republicans have done a better job of tapping into the pickups with gun racks, duck and pheasant hunting, beer drinking, go to church on Easter, type of demographic (I no longer hunt, but I took my first hunter safety course at age 11, most of us did - I should write more about guns because rural residents view the issue very differently from urban residents, at least that's my experience)." (emphasis mine)
His posting on guns is personal and moving and can be found here. Some excerpts:
"[Recalling about duck hunting.] My uncle and cousin had extensive knowledge of ducks, I was always surprised by how much they knew. They'd see a duck flying pretty far away and could tell you if it was a wood duck, pintail, teal, widgeon, etc. ... In high school, we'd party until early into the morning, then a lot of my classmates would get up before dawn, go to the blind, set out the decoys if they weren't out already, then sit there in the cold, rain, and fog waiting for ducks and geese to fly by so they could call them in with their duck calls ..."
"If you shot a dove out of a tree instead of in flight, that was considered to be unfair and you’d be ostracized. As I said, there were rules, and you followed them."
"I followed the usual progression: Lots of exposure to guns, my own BB gun at age seven or eight, gun lessons and a shotgun by age 12. One thing, though, that I want to emphasize is how much respect for guns and gun safety was drilled into my head from day one. There were things you did, things you didn’t do, and it started from the very first time you tagged along just to watch. I won’t even try to detail all the rules, but anyone who knows them also knows that Vice-President Cheney did not have this kind of training "
"Maybe if I’d spent more time in a big city and observed first-hand the troubles that handguns can cause I’d feel different about the whole gun issue, but anything that might force me to have to register the guns I have, give them up, anything approximating that I would resist. ... hose are wonderful memories, and having the guns is somehow connected back to all of that, to my family history, to time as a kid with my dad, grandfather, uncles, and cousins. It recalls a way of life I no longer live, but it will always be with me. I can’t exactly explain how guns fit into all that, but I know that they do."
"There’s something about getting up early, trudging in the cold through wet fields until you and the dogs are dead tired, often coming up empty-handed but somehow that didn’t matter, generations of family together sharing stories from the past, and creating new ones to be told in the future. Because of all this, I think, I resist restrictions on guns. I guess it’s my history but I can’t logically explain why I resist more control over guns other than what I’ve said above."
"I have no emotional connection to the problems guns create in major cities. I see it on the news, read about it, but it’s not real. "
Tuesday, April 22, 2008
Carbon tax or Pigou Club, whatever...
I've been skeptical of the carbon tax, well not the tax per se but the way some economists seem to want to implement it:
"We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade."
Gas prices have risen by more than 10 cents per year this year and I see no change in our driving behavior:
"We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade."
Gas prices have risen by more than 10 cents per year this year and I see no change in our driving behavior:
Source: http://www.newjerseygasprices.com/retail_price_chart.aspx
I've often thought that a higher tax would be needed to change behavior and as far as I can tell right now even with a 50 cents tax I don't see us (personally with all our errands and kids activities) changing our driving habits in the short run (at least for the next 2-3 years). We've got to go where we've got to go. See Matthew Kahn's "The Environmental Impact of Suburbanization" in Journal of Policy Analysis and Management (2000). However, here's a story that contradicts my point:
The high cost of gasoline has helped fuel a sharp increase in MBTA riders over the first two months of the year and a decrease in the number and length of traffic jams, according to T officials and traffic specialists. The number of T trips rose from 27 million in February 2007 to nearly 30 million in February 2008, up more than 11 percent for the month, Massachusetts Bay Transportation Authority officials said. The numbers were up about 5 percent for January. Combined, the average increase is 8.3 percent.
I don't see a similar story for the Washington region however with its Metro system chronically underfunded and overstretched.
Studies of the price elasticity of gasoline are inconclusive. For instance, Thomas Sterner's
"Fuel taxes: An important instrument for climate policy" published in Energy Policy (2006) finds the elasticity to be high but only in the long run but does not address how long the long run is. Jonathan E. Hughes, Christopher R. Knittel, and Daniel Sperling's "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand", UCEI WP (2006) finds "that gasoline taxes would need to be significantly larger today in order to achieve an equivalent reduction in gasoline consumption."
Lastly, a cautionary tale from Monica Prasad:
"But a carbon tax isn’t a new idea. Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries — in the case of Norway, emissions have actually increased by 43 percent per capita. An economist might say this is fine; as long as the cost of the environmental damage is being internalized, the tax is working — and emissions might have been even higher without the tax. But what environmentalist would be happy with a 43 percent increase in emissions?"
Thoughts on administering standardized tests
K1 is having her ERBs this week. It wasn't clear to me what she was taking but from her description and the description on ERB's website, it sounds like the CTP4. The tests are administered by administrators at her school rather than the classroom or language/math teachers. Back in my days of standardized testing in Malaysia, these were administered very differently.
1. They were held simultaneously at the state and more commonly at the nationwide level.
2. Teachers were randomly assigned to different schools to administer the tests so that no teacher administered the school from which they were in (from). They called themselves "invigilators".
Perhaps such a system would avoid stories such as this (from PBS Online Newshour in 2000):
"Moscowitz feels she betrayed the kids because she cheated. She gave her students the correct answers on New York City exams, which boosted their scores as well as her school's academic standing. The tests that Moscowitz and other teachers P.S. 90 in the South Bronx cheated on are called high-stakes tests because their results are used to make students and teachers accountable for their performance".
Or more from NYT:
"A seventh-grade teacher was accused of leaving a sheet of answers to a citywide math test near a pencil sharpener, then urging the class to sharpen their pencils and leaving the room. More than half the students marked the answers correctly."
Perhaps the logistics of having simultaneous testing does not pass the cost benefit test. The NYT article reports:
"The eight schools affected are about 1 percent of the city's 675 elementary and 197 middle schools. No high schools were implicated."
Or perhaps, in Malaysia, the Education Ministry does not trust its teachers while in the US the school administration does. Again, from the NYT:
"Ms. Weingarten said she was heartened that in six of the nine cases, educators were turned in by their own colleagues, suggesting, she said, that most teachers have no tolerance for cheating."
But more soberly, Reason reports:
"From underreporting violence to inflating graduation rates to fudging testscores, educators are lying to the American public.
Forty-seven states and the District of Columbia proudly reported that they were home to not a single unsafe school. That would be news to the parents of James Richardson, a 17-year-old football player at Ballou Senior High in Southeast Washington, D.C., who was shot inside the school that very year. It would be news to quite a few people: The D.C. Office of the Inspector General reports that during that school year there were more than 1,700 "serious security incidents" in city schools, including 464 weapons offenses."
Unfortunately, with the advent of high-stakes testing used to evaluate teachers and to tie pay to performance, incidents of cheating will likely more increase. Or perhaps what is best is that economists should stop advocating pay for performance -- is there more evidence that awarding stocks and options have resulted in better run companies or is there more evidence that this kind of pay for performance have resulted in accounting irregularities and stock manipulation?
1. They were held simultaneously at the state and more commonly at the nationwide level.
2. Teachers were randomly assigned to different schools to administer the tests so that no teacher administered the school from which they were in (from). They called themselves "invigilators".
Perhaps such a system would avoid stories such as this (from PBS Online Newshour in 2000):
"Moscowitz feels she betrayed the kids because she cheated. She gave her students the correct answers on New York City exams, which boosted their scores as well as her school's academic standing. The tests that Moscowitz and other teachers P.S. 90 in the South Bronx cheated on are called high-stakes tests because their results are used to make students and teachers accountable for their performance".
Or more from NYT:
"A seventh-grade teacher was accused of leaving a sheet of answers to a citywide math test near a pencil sharpener, then urging the class to sharpen their pencils and leaving the room. More than half the students marked the answers correctly."
Perhaps the logistics of having simultaneous testing does not pass the cost benefit test. The NYT article reports:
"The eight schools affected are about 1 percent of the city's 675 elementary and 197 middle schools. No high schools were implicated."
Or perhaps, in Malaysia, the Education Ministry does not trust its teachers while in the US the school administration does. Again, from the NYT:
"Ms. Weingarten said she was heartened that in six of the nine cases, educators were turned in by their own colleagues, suggesting, she said, that most teachers have no tolerance for cheating."
But more soberly, Reason reports:
"From underreporting violence to inflating graduation rates to fudging testscores, educators are lying to the American public.
Forty-seven states and the District of Columbia proudly reported that they were home to not a single unsafe school. That would be news to the parents of James Richardson, a 17-year-old football player at Ballou Senior High in Southeast Washington, D.C., who was shot inside the school that very year. It would be news to quite a few people: The D.C. Office of the Inspector General reports that during that school year there were more than 1,700 "serious security incidents" in city schools, including 464 weapons offenses."
Unfortunately, with the advent of high-stakes testing used to evaluate teachers and to tie pay to performance, incidents of cheating will likely more increase. Or perhaps what is best is that economists should stop advocating pay for performance -- is there more evidence that awarding stocks and options have resulted in better run companies or is there more evidence that this kind of pay for performance have resulted in accounting irregularities and stock manipulation?
Friday, April 18, 2008
Issues or character?
On the Kojo Namdi show yesterday, I heard about how some critics were disappointed with the final "debate" between Hillary Clinton and Barack Obama. They were wondering why the questions didn't delve more into the issues so that voters can make informed choices on whom to vote for based on issues.
My 2 cents: Issues are too complex in that there are too many issues for voters to think about - voters have to summarize what is essentially a multidimensional space into a point estimate and use that point estimate to guide them on who is a better candidate based on issues. Voters may be smarter in the sense that they tend to follow the "character" questions more closely because it allows them a way to identify with the candidate. This is the Popkin argument in the "Reasoning Voter". They are waiting for the "always shuck your tamales" moment when everything suddenly crystalizes for them:
"Popkin begins his well-regarded book on the subject, “The Reasoning Voter,” with an example from Gerald Ford’s primary campaign against Ronald Reagan in 1976. Visiting a Mexican-American community in Texas, Ford (never a gaffe-free politician) made the mistake of trying to eat a tamale with the corn husk, in which it is traditionally served, still on it. This ethnic misprision made the papers, and when he was asked, after losing to Jimmy Carter in the general election, what the lesson of his defeat was, Ford answered, “Always shuck your tamales.” Popkin argues that although familiarity with Mexican-American cuisine is not a prerequisite for favoring policies friendly to Mexican-Americans, Mexican-Americans were justified in concluding that a man who did not know how to eat a tamale was not a man predisposed to put their needs high on his list. The reasoning is illogical: Ford was not running for chef, and it was possible to extrapolate, from his positions, the real difference it would make for Mexican-Americans if he were President rather than Reagan or Carter. But Mexican-Americans, and their sympathizers, felt “in their gut” that Ford was not their man, and that was enough."
The candidates are too well coached these days to fall into such a gaffe but it explains why the media fixates on character issues -- because they feel that the readers/viewers/voters want to know these things.
Update: From MR,
Mark Thoma has an An Open Letter to ABC about the Presidential Debate signed by Brad DeLong, Kevin Drum, Henry Farrell, Eric Alterman and many others.
"The debate was a revolting descent into tabloid journalism and a gross disservice to Americans concerned about the great issues facing the nation and the world.... For 53 minutes, we heard no question about public policy from either moderator. ABC seemed less interested in provoking serious discussion than in trying to generate cheap shot sound-bites for later rebroadcast. The questions asked by Mr. Stephanopoulos and Mr. Gibson were a disgrace..."
I agree. The only thing the signatories got wrong was where to send the letter. The letter should have been addressed to the American public. After all, this debate, which came in the flurry of all the tabloid journalism of the past several weeks, was the most-watched of the 2008 presidential campaign. The public got what it wanted.
My 2 cents: Issues are too complex in that there are too many issues for voters to think about - voters have to summarize what is essentially a multidimensional space into a point estimate and use that point estimate to guide them on who is a better candidate based on issues. Voters may be smarter in the sense that they tend to follow the "character" questions more closely because it allows them a way to identify with the candidate. This is the Popkin argument in the "Reasoning Voter". They are waiting for the "always shuck your tamales" moment when everything suddenly crystalizes for them:
"Popkin begins his well-regarded book on the subject, “The Reasoning Voter,” with an example from Gerald Ford’s primary campaign against Ronald Reagan in 1976. Visiting a Mexican-American community in Texas, Ford (never a gaffe-free politician) made the mistake of trying to eat a tamale with the corn husk, in which it is traditionally served, still on it. This ethnic misprision made the papers, and when he was asked, after losing to Jimmy Carter in the general election, what the lesson of his defeat was, Ford answered, “Always shuck your tamales.” Popkin argues that although familiarity with Mexican-American cuisine is not a prerequisite for favoring policies friendly to Mexican-Americans, Mexican-Americans were justified in concluding that a man who did not know how to eat a tamale was not a man predisposed to put their needs high on his list. The reasoning is illogical: Ford was not running for chef, and it was possible to extrapolate, from his positions, the real difference it would make for Mexican-Americans if he were President rather than Reagan or Carter. But Mexican-Americans, and their sympathizers, felt “in their gut” that Ford was not their man, and that was enough."
The candidates are too well coached these days to fall into such a gaffe but it explains why the media fixates on character issues -- because they feel that the readers/viewers/voters want to know these things.
Update: From MR,
Mark Thoma has an An Open Letter to ABC about the Presidential Debate signed by Brad DeLong, Kevin Drum, Henry Farrell, Eric Alterman and many others.
"The debate was a revolting descent into tabloid journalism and a gross disservice to Americans concerned about the great issues facing the nation and the world.... For 53 minutes, we heard no question about public policy from either moderator. ABC seemed less interested in provoking serious discussion than in trying to generate cheap shot sound-bites for later rebroadcast. The questions asked by Mr. Stephanopoulos and Mr. Gibson were a disgrace..."
I agree. The only thing the signatories got wrong was where to send the letter. The letter should have been addressed to the American public. After all, this debate, which came in the flurry of all the tabloid journalism of the past several weeks, was the most-watched of the 2008 presidential campaign. The public got what it wanted.
Thursday, April 17, 2008
Iceland
Somewhere I've been meaning to visit. Perhaps it might be more affordable now. From the New Yorker's James Surowiecki:
" ... analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.” ... So how did Iceland get in so much trouble? That’s the odd part of the story: it isn’t because its banks gambled on the worthless subprime securities that helped undo Bear Stearns and so many others. Iceland’s banks prudently avoided the subprime market, even as they embarked on a lending boom at home and expanded abroad. What got Iceland in trouble was something more subtle: its banks got their money primarily from international investors, making the Icelandic miracle heavily dependent on foreign capital."
Without knowing anything about Iceland's problems, this sounds like duration mismatch. Of course, this statement is vacuous since the function of the bank is to take short term deposits and lend long term. However, there are degrees of mismatches and banks are aware of how badly they can be mismatched. This was true in the case of Bank of America as documented by Moira Johnston in "Roller Coaster" and Gary Hector's "Breaking the Bank" where bank executives realized that they were in trouble when looking at the numbers, the degree of mismatch and the loan loss provisions were insufficient.
This was surprising:
"Further, the country’s troubles have made it a potential target for speculators seeking to drive down the value of its currency and perhaps cause a run on the banks. In 1998, hedge funds purportedly worked together to attack Hong Kong’s currency and its stock market, an attack that was foiled only when the government bought up a sizable chunk of the stock market. It’s not clear that a similar cabal is gunning for Iceland—the governor of its central bank insists that one is—but the notion is certainly plausible: with a population the size of Pittsburgh and a central bank whose total reserves are less than five billion dollars, the country makes an easy target for hedge funds flush with cash."
And the nugget of wisdom?
"Homeowners default on mortgages in San Diego, and suddenly people in Reykjavík are paying more for gasoline and wondering if their bank deposits are safe. That doesn’t mean that Iceland is an innocent victim. The country went overboard with spending and borrowing—between 2000 and 2007, domestic credit in the Icelandic banking system more than quadrupled as a share of G.D.P. And relying on foreign money to fuel that kind of frenzy is foolish, since it puts you at the mercy of fickle foreign investors. But Icelanders can be forgiven for wondering if they’ve really been any more reckless than many other countries—most obviously the U.S., which relies heavily on foreign capital to fund home buying and profligate consumption, and whose banking system is rife with reckless lending."
Update (October 5, 2008):
Iceland has indeed bailed out Glitnir. But here's the thing: Iceland's credit default swaps are now suggesting that the sovereign itself is a distressed credit.
Contracts on Iceland's debt jumped to 17.5 percent upfront and 5 percent a year to protect 10 million euros ($13.8 million) of bonds.
This is not how triple-A sovereigns behave. It's as though the analysts at Moody's were only able to see one step ahead, and not two: they could anticipate that Iceland would bail out its banks, but they couldn't anticipate that when a tiny country bails out a bank whose assets vastly exceed the country's own GDP, then the sovereign itself loses much creditworthiness. One scary datapoint: the assets of Kaupthing Bank amount to 623% of Iceland's GDP, which is possibly why its own credit default swaps are trading somewhere over 2500bp.
" ... analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.” ... So how did Iceland get in so much trouble? That’s the odd part of the story: it isn’t because its banks gambled on the worthless subprime securities that helped undo Bear Stearns and so many others. Iceland’s banks prudently avoided the subprime market, even as they embarked on a lending boom at home and expanded abroad. What got Iceland in trouble was something more subtle: its banks got their money primarily from international investors, making the Icelandic miracle heavily dependent on foreign capital."
Without knowing anything about Iceland's problems, this sounds like duration mismatch. Of course, this statement is vacuous since the function of the bank is to take short term deposits and lend long term. However, there are degrees of mismatches and banks are aware of how badly they can be mismatched. This was true in the case of Bank of America as documented by Moira Johnston in "Roller Coaster" and Gary Hector's "Breaking the Bank" where bank executives realized that they were in trouble when looking at the numbers, the degree of mismatch and the loan loss provisions were insufficient.
This was surprising:
"Further, the country’s troubles have made it a potential target for speculators seeking to drive down the value of its currency and perhaps cause a run on the banks. In 1998, hedge funds purportedly worked together to attack Hong Kong’s currency and its stock market, an attack that was foiled only when the government bought up a sizable chunk of the stock market. It’s not clear that a similar cabal is gunning for Iceland—the governor of its central bank insists that one is—but the notion is certainly plausible: with a population the size of Pittsburgh and a central bank whose total reserves are less than five billion dollars, the country makes an easy target for hedge funds flush with cash."
And the nugget of wisdom?
"Homeowners default on mortgages in San Diego, and suddenly people in Reykjavík are paying more for gasoline and wondering if their bank deposits are safe. That doesn’t mean that Iceland is an innocent victim. The country went overboard with spending and borrowing—between 2000 and 2007, domestic credit in the Icelandic banking system more than quadrupled as a share of G.D.P. And relying on foreign money to fuel that kind of frenzy is foolish, since it puts you at the mercy of fickle foreign investors. But Icelanders can be forgiven for wondering if they’ve really been any more reckless than many other countries—most obviously the U.S., which relies heavily on foreign capital to fund home buying and profligate consumption, and whose banking system is rife with reckless lending."
Update (October 5, 2008):
Iceland has indeed bailed out Glitnir. But here's the thing: Iceland's credit default swaps are now suggesting that the sovereign itself is a distressed credit.
Contracts on Iceland's debt jumped to 17.5 percent upfront and 5 percent a year to protect 10 million euros ($13.8 million) of bonds.
This is not how triple-A sovereigns behave. It's as though the analysts at Moody's were only able to see one step ahead, and not two: they could anticipate that Iceland would bail out its banks, but they couldn't anticipate that when a tiny country bails out a bank whose assets vastly exceed the country's own GDP, then the sovereign itself loses much creditworthiness. One scary datapoint: the assets of Kaupthing Bank amount to 623% of Iceland's GDP, which is possibly why its own credit default swaps are trading somewhere over 2500bp.
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