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Iceland and Thomas Friedman
By Jon Menaster | October 19, 2008
New York Times Op-Ed columnist Thomas Friedman uses his latest op-ed to connect the tragedy of Iceland’s banking system with his theories on the flat world, and hits the nail perfectly on the head. As he begins:
If you’re looking for a single example of how the globalization of finance helped get us into this mess and how it will help get us out, you need look no further than British newspapers last week and their front-page articles about the number of British citizens, municipalities and universities — including Cambridge — that are in a tizzy today because they had savings parked in Icelandic banks, through online banking services like Icesave.co.uk
This is one of the most interesting aspects of the crisis in Iceland - that so many British citizens, and public entities had large deposits in Icelandic banks, and upon hearing about the crisis they all begun attempting to withdraw funds at once. This, of course, rendered the banks unable to continue operations due to the wonderful world of fractional reserve lending.
As Friedman later discusses:
The credit crunch hits Iceland, which went on its own binge. Meanwhile, the police department of Northumbria, England, had invested some of its extra cash in Iceland, and, now that those accounts are frozen, it may have to reduce street patrols this weekend.
Then the idea of the world being flat can really be seen clearly, and Friedman makes his main point:
And therein lies the central truth of globalization today: We’re all connected and nobody is in charge.
At first, I read this and realized with horror that he was correct - a global interconnected financial system with trillions of dollars being traded back and forth in currency, derivative, stock, bond, and who knows what else markets every day. However, upon contemplating the danger of the utter lack of regulation, one is brought back to the standard “How much regulation is acceptable or not?” question.
In response to that, many European leaders have joined together to call for a “new economic order”, without explicitly discussing what that would mean. There is also the obstacle of a US lame-duck president not feeling any immediate pressure to respond to a call for new sets of regulations on the financial industry. The bottom line is that billions of dollars in transactions every day occur without regulation (think credit default swaps) and to assure the long term stability of the economy some new regulation is needed. The only question is how much, and how long after the new regulations are in place will the companies being regulated find a way around the regulations, and thus start the never ending cat and mouse game all over again…
What do you think?
Topics: Finance |