Many people have read or watched the movie the Big Short, the author Michael Lewis wanted to know who made money on the housing crisis? In investing you can make money when the market goes up, down or sideways. In the book Boomerang written by Michael Lewis published by W.W. Norton & Company, New York, 2011 Mr. Lewis examines countries outside the United States and how they were affected by the housing market collapse. Mr. Lewis picked 4 countries – Iceland, Greece, Ireland and Germany all countries which had made the news prior to 2008.
Iceland for a time the value of everything in Iceland was rising, the stock markets, the real estate and eventually it crashed. The Iceland banks were promising high rates of return and money was flowing in from Britain and Germany and the banks were buying assets around the world at increasingly higher prices. The higher prices meant asset prices rose and everything looked rosy. It is one thing to buy assets at high prices, it is another thing to ensure maximum profits to pay high rates of return to keep money flowing.
In theory it can be done, however the roots of Iceland are is geothermal energy and the fish industry. Mr. Lewis points out a research paper called The Economic Theory of a Common Property Resource: The Fishery written in 1954 by Indian University economist H Scott Gordon. The question to be answered is why are not fisherman wealthy, despite the fact that fishery resources are the richest and most indestructible resource available to man? The problem is fish are everybody’s property, they are nobody’s property. There are no barriers to entry so anyone can fish and fish up to the point where fishing becomes unprofitable. There is the hope in fisherman of the lucky catch or winning the lottery or they are gamblers and over optimistic.
Overconfidence leads to impoverish not just themselves but also the fishing grounds. Simply limiting the fish caught will not solve the problem, it will just heighten the competition and drive down profits. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.
The government issued paper entitling fisherman a percentage of the total number of fish to be caught without damaging the long term health of the fishing industry. If you did not want to fish, you could sell your quota. If you can sell your quota, you can take it to the bank to borrow against it as the banks assigned a dollar value to your share. The fish had not only been privatized, they were securitized. This act allowed Iceland to enjoy wealth and now everyone did not have to be a fisherman. They could do other things such as being investment bankers.
Linking to dividend paying stocks, with all government policies there are unintended consequences. In Iceland, the fish were commoditized which create wealth and that was good. What were people to do? The men went into investment banking and bought assets but they should know all assets go through cycles it takes good management to keep gaining value from the assets. As you go through your investments, remember the people managing the assets still matter.
There are more questions than answers, till the next time – to raising questions.