Friday, October 10, 2008


Due to the complete collapse of its banking system, Iceland is in trouble. This morning, it assured everyone that it is not bankrupt. I think we all have the same reaction: can’t Bjork do something about this? Since the warbling gamin has been silent on this issue – and seriously, is she any less authoritative than Bush or McCain on economic issues? – we are left to see what this has done. It seems the Brits have invested a lot in Icelandic banks, which had aggressive interest rates which drew in a lot of money. Local governments in the UK have deposited some $1.36 billion in Icelandic banks. Now Iceland has taken over the banks to prop them up, but they haven’t done anything for depositors. So the British government has frozen Icelandic bank assets in the UK, so they can get some compensation for investors. Lots of local governments and charities may get next to nothing back.
So what does this mean to Americans, who, after all, all Americans care about? Well, it’s indicative of how dangerous everything is out there. Most of us have pension plans which have investments, investments which are less designed for safety than for maximum return. Most private pension funds are under funded, hoping that rising payouts from equities will make everything work. All the people with 401k plans and IRAs are a lot poorer today than they were 10 days ago. The closer you are to retirement, the scarier this is. Even conservative 401k management, based on index funds and blue chips, has failed, with losses which can only be described as catastrophic.
This is all the result of a system where investing in stocks and their prices is the driving force in the market, rather than investing in companies and their success. And even when the success of companies is important, it is only short term success, not long-term success, growth rather than stability. This is a dangerous way to run an economy, and this month has demonstrated the results. If it was just in the US, it would be bad, but it’s in much of the world, and that is a multiplier. Iceland is not alone and neither are we.

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