I have written about the Asset Bubble that is possible in Iceland and I have started to see green shoots of it already. Check out the housing prices to see the asset bubble formation. It really bothers me that nobody wants to bell the cat, I speak to my banking friends and they are all waiting for the good old times to come back. It is not going to happen, maybe it will for a small group of people… much smaller than the last time and that is what casuses social rifts. I think the most important statement made in the interview was that we have moved away from Finance for Industrial and Productive things to Finance of Financial things. The double leverage that is possible with financial instruments that make $1 get multiplied by 10 and 10 again in the short term produces $100 but in the long term does not produce anything. In the meanwhile that $1 carries the risk of destroying $100 in value. No wonder Warren Buffet called derivatives Weapons of Mass Destruction. Should we worry about this problem? absolutely! You think Iceland is different because Iceland allowed the banks to fail? think again, look at the balance sheet of Icelandic Government, a majority of the liabilities have been allocated to re-capitalize the banks… guess who has to pay those liabilities? the tax payer.
I agree that we need to re-think financial economics, but lets not throw the baby with the bath water. The original premise that financial capital was created to make productive things has been lost in this debate. I am sure there are many ways to solve the current debt problem and Steve Keen gives some suggestions but there are other ways as well.
Lets take the case of Iceland, everyone wants to speculate on Real Estate once again… I mean really? concrete is more valuable than solutions to problems the future generation is going to face? Top 10 companies in the market capitalization are not in Real Estate the last time I looked. We need to focus on what creates value in Iceland. I have had many discussions with the executives in the banking sector, believe me there is absolutely no learning in terms of changing the ways of doing things. Every bank wants to clean up their balance sheet so they can go on building up the asset bubble on real estate. No-one is thinking about which sector or industry should they be investing in. I have written about my vision for Iceland and why we should be investing in Entrepreneurship, the sector that I wrote about is highly scalable, employs high technology and highly skilled labor force, is environmentally clean and things made in this sector actually can be sold anywhere in the world. How much capital is deployed in this sector by the Iceland you ask… Nothing, Nada, Zilch! The classic reason that I get is it is risky, what is risky? speculating on real estate or investing in Entrepreneurs who work tirelessly to really solve a nagging problem.