Thursday, April 22, 2010

Price Tag on a Viking Curse

It feels like some ancient shamanic curse has been unleashed on the descendants of the Vikings!

In the 2008-09 banking crisis, the Icelandic government guaranteed huge bail-out loans from Britain and The Netherlands. But the bank failed anyway and so the people were suddenly on the hook for the government’s loan guarantee. On March 8, Iceland held a referendum: taxpayers felt cheated and did not want to honour the government’s guarantee on the defaulted bank’s bad debt. The people overwhelmingly agreed not to pay back the loans to Britain and The Netherlands. Then last week, a giant volcano erupted and spewed ash all over Iceland and Europe! The Norse god Odin must be getting restless.

Imagine how it must feel to be an Icelander. First, it was financial disaster, then a natural disaster. Neither of these two curse-like occurrences will go away soon.

Volcanic eruptions can last for months. And ash is not like snow; it won’t just melt away in the April sunshine. It’s not merely affecting one tiny island nation; Northern Europe has felt the reverberations too. Financial journalists are currently adding up the damages for Iceland’s volcano. Isn’t it interesting how we like to attach economic cost to natural disasters? Haiti’s humanitarian relief efforts all came with a well-publicized price tag. It shows what we think is important in life: how much does it cost?

The effect of bank failures and loan defaults can last for years too. I admire the spunky Icelanders for not accepting their financial fate. In the March 8 referendum, they told the Europeans they would not pay the price of the Bank of Iceland’s folly.

In my book about investing, Beyond the Bull, I comment that, in the financial world, everything is connected to everything else. Iceland is a case in point.

We all realize that volcanoes and earthquakes are connected. They mostly occur on tectonic fault lines around the world. Small earthquakes occur every day. But lately we have been hearing about some really big ones. Haiti, Chile, and China have been hit by huge earthquakes these past few months. And then the volcano in Iceland erupted. Mother Earth is restless.

And now it appears there are financial fault lines in the banking world. It might be more accurate to call them financial default lines. And it looks as though Iceland is sitting right on a financial default line. In fact, their defiant refusal to make good the bad debts of the irresponsible Bank of Iceland might be the triggering force for the next series of financial after-shocks in the banking world.

Greece is currently unable to make payments on her national debt. Some that think Spain, Portugal, Italy, and Ireland are on shaky ground too. Will the taxpayers of those nations follow the example of their Icelandic brothers and sisters? Will they hold referenda too? Will they defy bankers’ rules too? Will it spread to North America? Remember how angry Americans were in early 2009 when the bailed-out banks tried to pay big bonuses to their traders and deal makers? Remember how frustrated they were when the big three auto executives flew to Washington in executive jets to plead for the taxpayers to bail them out? Will Americans follow the lead of Icelanders and refuse to pay for the foolish debts of an obsolete capitalist system?

There are people whose job is to predict earthquakes and financial disasters. What difficult jobs they have! And how futile are their efforts!

Geologists can predict volcanic eruptions as they draw near. They issue warnings to people living in the area that she’s going to blow! Residents have the opportunity to leave. But strangely, some people continue to live at the foot of the volcano, even though they know an eruption is coming. What strange creatures we human beings are. Even though we are warned, we ignore the warnings.

Economists and investment advisors can predict economic disasters as they draw near. But for some reason, they don’t warn the people. Did they warn investors to sell equity mutual funds before the 2008-09 stock market implosion? Did they warn us in the year 2000 to sell our stock portfolios before the high-tech implosion? But strangely, some people continue to follow the advice of those who never sell, even though they know an economic shake-up is coming. What strange creatures we human beings are. Even though they didn’t warn us, we continue to listen to them.

The Viking curse that’s rocking Iceland these days is more widespread than we think. Natural disasters and financial disasters are just normal parts of our lives. The curse is that we pay so little attention to the warnings.


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