Try as I might, I am having trouble finding staunch defenses of Iceland from the economists and think tanks responsible for the country going over the economic precipice a few months ago.  Iceland, as many people probably know, was a poster child of Milton Friedman of the University of Chicago and Michael Walker of the Fraser Institute, who developed and steered the policies that led to the disaster.  Friedman made a fateful (for Iceland) visit to the country in 1984, where he gave a lecture at the University of Iceland on “The Tyranny of the Status Quo”, in which he offered up the elixir of economic freedom and market triumphalism.  While there, he engaged in a highly influential television debate with socialist thinkers in which he very effectively belittled the direction of economic policy in the country. He became enamoured with the possibilities of policy change there, and soon became an important advisor to a group of young intellectuals in the Independence Party.  The Party took the lead in pushing the adoption of a radical program of monetarism, conservative fiscal policy, privatization, deregulation, corporate tax cuts, fisheries privatization, cuts to government enterprises and liberalization of currency and capital markets. The Heritage Institute in the United States and the Fraser Institute in Canada fell in love with the country, featuring it repeatedly as one of the most successful countries in the world in their Economic Freedom Indexes and reports.  In 2005, the Mount Pelerin Society, keepers of the Friedman and Hayek tradition and supported by many highly respected economists, devoted its 2005 annual conference to many learned presentations extolling the successes of Iceland.  Nary a negative word was heard other than the odd suggestion that more was needed.  Leading economists took turns belittling those few left in the discipline who remained skeptical and parading the triumph of their beliefs in the fashion of intolerant ideologues everywhere.

Alas, Iceland soon turned out to be a huge bust.  The collapse of its financial system in 2008 was accompanied by crippling unemployment, currency collapse, credit paralysis and the failure of the banking system.  It became a failed economy and an abject warning about the dangers of listening to the economics profession’s elites.  Today it is a basket case of immense proportions, stuck in a deep in recession, deeply in debt, and without any prospects for recovery.  Its failures are attributable to the economic policies embraced by the Independence Party and pedaled by Friedman and his disciples.  All of the policies confidently advocated by Friedman, the Pelerin Society and the Fraser Institute failed miserably.  In fact they wrecked the country.  As a real life social and economic experiment, Iceland has turned into a wrecking machine of the ideas the monetarists and neo-conservatives so confidently peddled throughout the last decade.

Perhaps more disconcertingly, the economists and policy wonks so deeply implicated in what has happened have become silent.  Not a word is heard from the Fraser Institute, the other right wing think tanks, and the university professors who had so much to say earlier.  Not a word is heard to indicate that any of them are paying attention to Iceland at all or care about what has happened.  There is no admission of responsibility and no acknowledgment of the policy failures that they played such a big part in.  Iceland and its wonderful people are now left to take responsibility alone. This must be a bitter pill for all the Icelanders who faithfully followed all they were told.  Iceland as a country had so much going for it.  It could have persevered as a small nation supported by active and progressive governments of a mild social democratic bent – a smaller version of Sweden if you like.  But it fell victim to a group of academic theoreticians full of arrogance and swagger but lacking common sense and basic social knowledge.  Nations, like people, need to watch out for snake oil salesmen.  And social engineers who think they know it all and want to remake society.

Pity the Icelanders.  They are on their own now.  I suspect that not many social engineers from outside will be welcomed any time soon.  Perhaps the Fraser Institute and all the economists who had so much wrong headed advice for Iceland are finally revealing a modicum of common sense by lying low and keeping quiet.  Hopefully they will not find another hapless victim soon.

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He following is a description of a book that has something important to say about the Fraser Institute and  similar so-called “Think Tanks”.  It is recommended reading.

Think your vote counts on issues that matter
most to you? Like global warming or health care? Well, think again.

In Not a Conspiracy Theory, How Business
Propaganda Hijacks Democracy (Key Porter, $22.95)
Donald Gutstein skilfully documents one of the
most important but least recognized political
developments in the last thirty years: the
prolonged propaganda campaigns mounted by
business to influence our opinions on fundamental
issues of social and political life. Think tanks
with impressive names and populist-sounding
agendas and staffed with credentialed researchers
with well-honed reputations churn out research
that purports to be both independent and free of
bias. But peel back the curtain and what do you
find? Big business with its big bucks and
anti-democratic agenda: maximizing and
maintaining profits no matter what. Independent
and free of bias? Not even close.

Gutstein explores the roots of corporate
propaganda in the United States and traces its
rise and influence across Canada. He documents
how corporate propaganda works, who funds it and
how it is marketed to the mainstream media …
usually without you ever knowing. For anyone who
worries that the propaganda machine has hijacked
the democratic process, Not a Conspiracy Theory is a must read.

Donald Gutstein taught in the school of
communication at Simon Fraser University and is
the author of three acclaimed but controversial
books: e.con: How the Internet Undermines
Democracy, The New Landlords and Vancouver Ltd.
He has studied the media for more than thirty
years, was co-director of Projected Censored and
NewsWatch Canada and has written articles for
print and online magazines such as Maclean’s,
Vancouver Magazine, The Tyee, Georgia Straight and Straight Goods.”

Hamid Karzai will face his main rival Abdullah Abdullah (right)

The  UN-backed Elections Complaint Commission has confirmed substantial fraud in the August election, bringing President Karzai’s vote below 50%.   The Afghan Elections Commission today (Oct. 20/09) announced a second election for November 7.  The Commission had no other choice after facing tremendous pressure from the US representative, Senator John Kerry and others in the international community who realized that they could not possibly defend the August result, and as I have argued for weeks.

The Electoral Complaints Commission (ECC) directed that ballots from 210 polling stations be thrown out, reducing Karzai’s total from the first vote to below 50% (see figure below).

While many have talked of a deal between the two leading contenders, they have both ruled that out (see AP story below).

This is a first step in restoring a semblance of democracy to a process that became a travesty.  The efforts to bring stability to Afghanistan were becoming totally discredited by the apparent unwillingness to confront Karzai on his fraud and corruption.  Whether this can repair things is questionable, but it is a first step.

Now Karzai will face the second place finisher, Dr. Abdullah Abdullah in another vote.  It seems unlikely that the warlords, drug lords andthugs that Karzai recruited will disappear from the field.  As a result the fraud and corruption of the first round will carry over into the second, even if stuffed ballot boxes and false identity papers are removed from the process.  Karzai is now forever tainted.  It is doubtful whether Aghanistan can recover.  But it is worth a try.

President Hamid Karzai and his challenger ruled out a power-sharing deal before Afghanistan’s Nov. 7 runoff, saying the second round of balloting must be held as planned to bolster democracy this war-ravaged country.

Some Obama administration officials had said the U.S. would be receptive to a deal to avoid another disruptive election if Mr. Karzai and former Foreign Minister Abdullah Abdullah agreed.

However, both Afghan candidates said on talk shows televised Sunday in the United States that they were committed to a second-round vote, despite the huge security and logistical challenges and the threat of Taliban attacks against voters.

“It has to be held. I made sure to have agreement from all the international players before agreeing to runoff to have a second round absolutely surely agreed upon and promised,” Mr. Karzai said on CNN’s Fareed Zakaria—GPS program. “Therefore, we must have a second round. If we don’t do that, we’ll be insulting democracy and a pledge to respecting the vote of the people.”

Speaking on Fox News Sunday, Mr.Abdullah was asked if he were interested in a deal to avoid a runoff.

“No, I think I should rule it out because I’m ready to go for a runoff,” he replied.

U.S. President Barack Obama’s administration is hoping the runoff will produce a legitimate government after massive ballot-rigging sullied the first-round vote. Another flawed election would cast doubt on the wisdom of sending tens of thousands more U.S. troops to support a weak government tainted by fraud.

Last Tuesday, Mr.Karzai bowed to intense international pressure and agreed to a runoff after a U.N.-backed panel voided enough of his votes in the Aug. 20 election that he fell below the 50 per cent threshold for a first-round victory in the 36-candidate race.

“ It has to be held. I made sure to have agreement from all the international players before agreeing to runoff to have a second round absolutely surely agreed upon and promised ”— Hamid Karzai

Mr.Abdullah said his focus was on making sure that the November election is carried out without the fraud that marred the first round of balloting.

Mr.Abdullah’s campaign aides have called for the top three officials on Afghanistan’s Independent Election Commission to step down because of their alleged role in electoral fraud. However, Abdullah’s campaign has stopped short of threatening a boycott if the electoral officials refuse to step down.

Mr.Karzai acknowledged fraud had taken place but insisted that the August balloting “as a whole was clean, and as a result was clear.

“I decided for peace, for stability, and for the future of democracy in Afghanistan and for the future of institutional order in Afghanistan to call for a runoff, and I find that in the interest of the Afghan people,” he said.

Mr.Karzai said that if Mr.Abdullah is interested in joining the government after the election “he is most welcome.”

“I’m known for consensus building and for inclusivity,” Mr.Karzai said. “And that’s a good trademark.”

Mr.Abdullah, speaking on CNN’s State of the Union, program, said he left the Karzai government three years ago because he did not want to be part of “the same deteriorating situation.”

Results After Recount:

The Bank of Canada signaled this week (Oct. 20) that there will be no change in credit and monetary policy for some time to come.  No doubt this is in part based on a belief that higher interest rates would further inflate the dollar and choke off some of the hoped for export driven recovery. However, the bank also stated that since the recovery is sluggish, higher interest rates and tighter credit would have an overall dampening affect. It is right about the recovery.  Unfortunately it and the government show few signs of understanding the impact of their monetary and credit policies more generally.

When government agencies report on the health of the economy, they include such things as stock market prices and house prices.  Both have been on  roar as of late, and have provided a lot of the basis for optimism in the reading of indicators.

Many market commentators have expressed surprised at the strength of stocks, and financial stocks in particular, over the past six months.  The latter have been big contributors to the stock market recovery.  The darling of the market from 06 through 07, financial stocks lost their lustre when bank portfolios were widely found to be toxic two years ago, and financial shares plunged starting in October, 2008 (see chart below). Since February 2009, however, they have made a huge turn-around, approaching but not quite reaching October 2006 levels this month.

What about that other one time darling, tech stocks?   After going into free fall with the rest of the market in the fall of 2008,  falling more than bank shares, they have now come back to where they were in September 2008, and as can be seen from the chart below, about where they were in October 2006.

Source: CTVGlobemedia

Are financials firms in better shape than the rest of the economy?  One way to explore that question is to look at how their share values stack up compared to the overall market?  The 40% points overall increase in financials since February 2009  outperforms the overall TSX by almost 10% points.   But, compared to October 2008, the overall market has increased slightly more in % terms.  And while financials have gained ground since February 2009, many feel their underlying problems have not been fixed. Banks remain undercapitalized, and may be overvalued by investors unable to see improvement in the real economy.   And if you look at the slightly longer term, since October 2006, the overall market has done better than financials.  Financials still exhibit an overall weakness compared to the market generally and the tech sector.  And they are more likely to be overvalued.

The tech economy is looking a better bet than financials based on the last six months if this recent period is any kind of measure.  Since March, they have increased by about the same % points as the overall market, which includes financials.  Thus there is not much to choose between the overall market and tech stocks based on recent performance.  All crashed after September, 2008 and all have made a remarkable come-back after February 2009.

Overall the markets seem strong with values back to or above the fall of 2006, before the problems began. But the problem with all of this is that stock market values have diverged from indicators taken from the real economy, such as GDP, consumer spending, business investment, capacity utilization of plants and employment.  The stock market results seem counter-intuitive when the underlying economic conditions in the actual sectors (the so-called real economy) are examined.  The last GDP reports show only marginal gains in output in all sectors.  Employment in everything but government is stagnant.

Stock market activity since February/March 2009 has all of the hallmarks of a bubble.  Stock prices do not reflect actual developments where it counts – in the real economy.

Likewise with housing.  The existing (already built) housing stock continues to increase in sales and value, but little is happening in new construction.  Prices of existing houses are being driven up much in the same fashion as stock prices.  For instance in the greater Vancouver region, house prices increased by about 11% between March and September, 2009, which on an annualized basis projects to 20%+.  (see “Price Index for Greater Vancouver Three Year Trend” at http://www.rebgv.org/housing-price-index?region=all&type=all&date=2009-09-01).

What do houses and stocks have in common?  Simple – they are assets. Most of the expansion in credit driven by central banks over the past few months has gone into the purchase of assets. Little is finding its way into business investment, including housing construction.  Little is financing consumption spending.  None of it creates jobs.  The real economy is still sitting on the sidelines.

This is not how the credit part of the stimulus was supposed to work.  Milton Freidman said that a rapid increase in credit would drive up consumption spending and business investment, putting factories and people back to work.  This is at the heart of monetarist theory.  The bank of Canada still follows Freidman prescriptions.  But so far it isn’t working the way he said.  People and institutions are buying assets, not goods and services, causing an inflation in the value of assets while consumer and business spending remains stagnant. Another of the foundational beliefs of economists over the past 30 years had been put to the test and failed. The list of the failures of conventional economics is getting rather long.   The sad part is that central banks continue to follow the old conventional ideas of the monetarists.  The result – having just suffered through one type of credit bubble, another is being created.  The Bank of Canada claims that prices are not increasing, and so no inflationary harm is done.  This ignores the fact that prices of stocks and house have and are inflating at a rapid rate, while the rest of the economy stagnates.

What is really needed is targeted policy that would slow the flow of credit into asset financing; in other words some form of credit allocation among sectors.  The cost and ease of access to credit for shares and housing should be heightened. Of course that smacks of old fashioned Keynesianism.  Having learned the need to go back to these ideas on the fiscal side they remain blind on the need to manage money and credit differently.

So does this mean you should get out of stocks and real estate?  Not at all.  So long as the Bank of Canada stays the course, which it said that it is going to do, asset values will remain high.  That makes it hard for young people who can’t afford more expensive housing, but no one every accused central bankers of being overly concerned about such pedestrian matters as the affordability of a place for people to sleep.  After all, is buying a  house not really an investment to make money?