If you want to take a break from today's Waxman-Markey climate bill excitement but still can't wean yourself away from cap-and-trade entirely, read Michael Lewis's take on Icelandic banking in Vanity Fair. It's a morbidly humorous take on the madness, which led a perfectly fine nation that gave us Björk on a roller-coaster ride to financial ruin.
Along the way we learn about the "charming lack of financial experience in Icelandic financial-policymaking circles," the male-dominated macho world of high finance and the combination of the two: Iceland's leaders these past few years "are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions."
One regulatory lesson we can take from Iceland is how to combat overfishing:
Fishermen...are a lot like American investment bankers. Their overconfidence leads them to impoverish not just themselves but also their fishing grounds. Simply limiting the number of fish caught won’t solve the problem; it will just heighten the competition for the fish and drive down profits. The goal isn’t to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.
The solution?
[P]rivatized the fish. Each fisherman was assigned a quota, based roughly on his historical catches. ...Before each season the scientists at the Marine Research Institute would determine the total number of cod or haddock that could be caught without damaging the long-term health of the fish population; from year to year, the numbers of fish you could catch changed. But your percentage of the annual haul was fixed, and this piece of paper entitled you to it in perpetuity.
Even better, if you didn’t want to fish you could sell your quota to someone who did. The quotas thus drifted into the hands of the people to whom they were of the greatest value, the best fishermen, who could extract the fish from the sea with maximum efficiency. You could also take your quota to the bank and borrow against it, and the bank had no trouble assigning a dollar value to your share of the cod pulled, without competition, from the richest cod-fishing grounds on earth. The fish had not only been privatized, they had been securitized.
Voilà: cap-and-trade for fish -- aka "Individual Transferable Quotas" -- was born. Rob Stavins provides a good summary of how the system works in his blog post this week.
It has certainly done wonders for Icelandic fisheries and for Iceland itself. Lewis surmises that:
This insight is what led Iceland to go from being one of the poorest countries in Europe circa 1900 to being one of the richest circa 2000.
Of course, it also had its problems. With all the riches from fishing, Iceland became "a place to turn cod into Ph.D.'s," who eventually figured that banking was the way to go, which led Iceland to become Ground Zero of the global financial meltdown.
Lest anyone uses this roundabout logic to blame cap and trade for Iceland's de facto bankruptcy, I'd say there are still much bigger fish to fry as we try to use the same principles to solve overfishing around the globe -- and design sensible cap-and-trade legislation to combat climate change.
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