March 13, 2009

Things that act like Hedge Funds (but shouldn't)

I've been trying to really get a grip on a few things. First, there was this article in Vanity Fair about the disastrous decision by Iceland to turn itself into a hedge fund in 2003.

Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”

Now, what on earth could have caused a nation of rational (Bjork aside), well educated people to have made such a bad decision? Easy. Mr. Deregulation himself, Milton Friedman, whose teachings were very popular... especially with poets who found themselves running a country.

Then came Bernanke's admission the AIG was functionally a hedge fund attached to an insurance company. With even dumber management insuring far too much risk for far too little money.

In Iceland's case, as in America, the culprit was a belief that greed would override stupid decision making, in effect, faith in people to make rational, well informed decisions. In Iceland, the entire economy was changed overnight from safe and steady to 'how much risk can I lard on?'. In the case of the US, over the last thirty years we have dismantled the regulatory framework it took a generation to put into place after the last major financial calamity, the Great Depression.

We did this to ourselves and now it's time we suck it up and realize that the market CAN'T self regulate. Actually, most of us already knew that but we're throwing our lot in with you folks who are just now coming to the conclusion that Ayn Rand and Milton Friedman really were full of shit.

Finally, I'm forced to agree with Stevie Forbes. Of all goddamn people. Which makes me want to vomit blood.

Posted by mcblogger at March 13, 2009 12:24 PM

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