Tag: politics

Iceland’s Meltdown

I’ve written about Michael Lewis’ take on the Wall Street’s meltdown in my post “The Financial Crisis Explained.”  He is one of my favorite commentators and is able to take complex issues and write about them in a way that is comprehensible to the average person.

He recently wrote an article about Iceland’s meteoric rise to prominence in the global world of finance and later its amazing crash when the bubble burst.  His article should be required reading for anyone interested in finance or the global economy.

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.

I wanted to focus on an aspect of the article that I’ve written about in my post entitled “The Business School Way of Life.”  Lewis mentions that most, if not all, of the people who were involved in Iceland’s boom and bust had degrees from prestigious American and British business schools.  They learned the Business School Way of Life in America and brought it home to Iceland.  Everyone caught the fever and it has wrecked a once stable country.  Now, the currency is worthless and debt is 850% of GDP, higher than even the highly debt burdened USA’s 350%.

As an example of a person who fell into the Business School Way of Life is Stephan Alfsson. Lewis spends some time interviewing  Alfsson, a fishing boat captain turned financier, in his article.  Here’s Alfsson’s story:

Lean and hungry-looking, wearing genuine rather than designer stubble, Alfsson still looks more like a trawler captain than a financier. He went to sea at 16, and, in the off-season, to school to study fishing. He was made captain of an Icelandic fishing trawler at the shockingly young age of 23 and was regarded, I learned from other men, as something of a fishing prodigy—which is to say he had a gift for catching his quota of cod and haddock in the least amount of time. And yet, in January 2005, at 30, he up and quit fishing to join the currency-trading department of Landsbanki. He speculated in the financial markets for nearly two years, until the great bloodbath of October 2008, when he was sacked, along with every other Icelander who called himself a “trader.

So why would an expert fisherman, who began training to go to sea at age 16, promptly give up his job to turn to finance?  Why did he think that he could work in banks and be a “trader” when he had no experience and no training?  Similarly, who do students who leave business schools believe that they can accurately project risk?  Lewis tried to get Alfsson to answer:

“You spent seven years learning every little nuance of the fishing trade before you were granted the gift of learning from this great captain?” I ask.

“Yes.”

“And even then you had to sit at the feet of this great master for many months before you felt as if you knew what you were doing?”

“Yes.”

“Then why did you think you could become a banker and speculate in financial markets, without a day of training?”

Alfsson does not have an answer and Lewis lets him off the hook, but I think that it was pure greed.  Alfsson and people like him were willing to try to get rich quick.  They saw everyone around them getting rich and decided that they wanted in on the action.  In Alfsson’s case, he saw people younger than him returning from American business schools and starting banks, seemingly making fortunes overnight.  The contrast between the hard work of a fisherman and the paper shuffling that was the Icelandic banking system cannot be any more stark, yet nobody wanted to raise a concern.  As Lewis puts it,

 At the very least, in a place where everyone knows everyone else, or his sister, you might have thought that the moment Stefan Alfsson walked into Landsbanki 10 people would have said, “Stefan, you’re a fisherman!” But they didn’t. To a shocking degree, they still don’t.

We are experiencing this same phenomenon in the US.  Why didn’t anyone try to stop the hedge funds, banks and private equity firms by saying “Hey, you just graduated from college, what do you know about CDOs and assessing risk?”  Why do many people who work in these firms still believe that they can correctly model future risk?  Why do business school students still go into finance without someone asking them questions like this?

Obama’s pick for Education Secretary is Fantastic

I just realized today that Barack Obama’s new Education Secretary is Arne Duncan, the former head of the Chicago Public Schools.  He is a top notch choice who I think will do a great job.

I first heard about Duncan when I read Freakonomics a few years ago. He was the head of CPS when Steven Levitt and Brian Jacob were studying whether teachers were cheating on standardized tests by filling in or changing answers on students’ tests.  They ran some regressions and found a bunch of suspicious answer patters from a surprisingly high number of teachers.  When Levitt and Jacob brought their suspicions to Duncan and the CPS, Duncan ordered audit testing to try to confirm the results.  The retesting confirmed that the teachers were cheating for their students and Duncan ordered the firing of the guilty teachers.

Duncan could easily have swept the study under the rug and not allowed retesting, but he did not.  Instead, he made a tough decision that was unpopular with the teachers and challenged the status quo.  His choice got rid of bad teachers who were masking their poor teaching performance by cheating on tests.  It would be great to see others in government make these kinds of tough choices.  I think every government agency could benefit from people following Duncan’s example.

Hopefully, he can help bring some positive change to American schools with is hard work and innovative approach to public service.

The Stimulus and Health Care: A Bad Idea

Betsy McCaughey’s article on Bloomberg titled “Ruin Your Health With the Obama Stimulus Plan” shines a light on a portion of the stimulus plan that I had not heard of until today.  Her article is impeccably sourced and links directly to pages in the stimulus bill.  It starts out with a provision that I don’t think many people will argue with, as the benefits are obvious:

The bill’s health rules will affect “every individual in the United States” (445, 454, 479). Your medical treatments will be tracked electronically by a federal system. Having electronic medical records at your fingertips, easily transferred to a hospital, is beneficial. It will help avoid duplicate tests and errors. 

From there, the bill moves farther, into more controversial and I think potentially disastrous territory:

One new bureaucracy, the National Coordinator of Health Information Technology, will monitor treatments to make sure your doctor is doing what the federal government deems appropriate and cost effective. The goal is to reduce costs and “guide” your doctor’s decisions (442, 446). These provisions in the stimulus bill are virtually identical to what Daschle prescribed in his 2008 book, “Critical: What We Can Do About the Health-Care Crisis.” According to Daschle, doctors have to give up autonomy and “learn to operate less like solo practitioners.”

I don’t like the idea of some government bureaucrat possibly thousands of miles from my doctor’s office dictating what treatments I can and cannot receive. I do not want my doctor reviewing a script and a set of rules every time I come into the office. I would rather my doctor think critically about each decision and make a diagnosis and remedy on a case by case basis. The bill continues:

Keeping doctors informed of the newest medical findings is important, but enforcing uniformity goes too far. Hospitals and doctors that are not “meaningful users” of the new system will face penalties. “Meaningful user” isn’t defined in the bill. That will be left to the HHS secretary, who will be empowered to impose “more stringent measures of meaningful use over time” (511, 518, 540-541)

What penalties will deter your doctor from going beyond the electronically delivered protocols when your condition is atypical or you need an experimental treatment? The vagueness is intentional. In his book, Daschle proposed an appointed body with vast powers to make the “tough” decisions elected politicians won’t make.

So the plan is to “enforce uniformity” for doctors who are not “meaningful users” with “penalties” decided by the “HHS Secretary.”  This sounds like a plan for disaster.  It is even worse than the current HMO/Insurance company model because if this bill passes, people will not even have the option to pay for an experimental or risky procedure because the doctors will face “stiff penalties” for deviating from the bureaucratic regulations.  Daschle is seemingly in favor of an unelected body to make “tough” decisions on who should live and who should die.   In fact that is exactly what the bill would do:

[It creates] the Federal Coordinating Council for Comparative Effectiveness Research (190-192). The goal, Daschle’s book explained, is to slow the development and use of new medications and technologies because they are driving up costs. He praises Europeans for being more willing to accept “hopeless diagnoses” and “forgo experimental treatments,” and he chastises Americans for expecting too much from the health-care system. 

The goal is to “slow the development and use of new medications and technologies because they are driving up costs.”  While I agree that new treatments and technologies are driving up medical costs and that we should have a national debate on what to do about it, this method is asinine.  The article goes further:

The Federal Council is modeled after a U.K. board discussed in Daschle’s book. This board approves or rejects treatments using a formula that divides the cost of the treatment by the number of years the patient is likely to benefit. Treatments for younger patients are more often approved than treatments for diseases that affect the elderly, such as osteoporosis. 
In 2006, a U.K. health board decreed that elderly patients with macular degeneration had to wait until they went blind in one eye before they could get a costly new drug to save the other eye. It took almost three years of public protests before the board reversed its decision.

This solution for health care would be a disaster for America.  It would be like if when the car was first invented, the government stepped in and said “the car is getting too expensive, lets not innovate anymore, we are happy with where we are.”  If this had occurred, everyone would still be driving black model-Ts, without airbags, headlights, windshields, windshield wipers and all of the life saving innovations that have occurred since then.  It makes no sense to stifle innovation and experimental cures to appeal to the lowest common denominator.


We are supposed to accept that we are going to die earlier than necessary because our lives will not be cost effective?  We are supposed to trust a government appointee to run a formula that will let us know if we can get a treatment or not?  Further, if we are supposed to trust all of this, why is it being included in the stimulus bill?  If it passes, some entrepreneurial doctors will likely start clinics for experimental cures in other countries, leading to medical tourism like 70,000 British citizens do each year.  These doctors will leave America and begin to innovate other places, just like how some stem cell research left the United States after Bush forbid federal funding to some projects.



I think everyone agrees that something needs to be done to try to solve the rising costs of health care, but America needs a frank and open debate on health care.  Whether we end up with universal health care or some other plan, Americas need to know what is going on.  A bill of this magnitude should not be attached to a stimulus bill that is being pushed through Congress at top speed.  Hopefully this gets struck from the bill and it is brought up again at a later date.

Is Any Party Worth $170,000,000?

The inauguration is a huge national event, but to me it is just one great big party. This inauguration has more significance because of the historical ramifications, but still, is it worth the $170m price tag?

With the current state of the economy, it would have been a PR bonanza if the Obama team had scaled down some of the festivites and donated the money to a worthy cause like job training, homeless shelters or an anti-global warming initiative.