Thanksgiving prayer

Eliezer Yudkowsky:
And as she said this, it reminded me of how wrong it is to give gratitude to God for blessings that actually come from our fellow human beings putting in a great deal of work.

So I at once put my hands together and said,

"Dear Global Economy, we thank thee for thy economies of scale, thy professional specialization, and thy international networks of trade under Ricardo's Law of Comparative Advantage, without which we would all starve to death while trying to assemble the ingredients for such a dinner as this. Amen."


Somali pirates capture huge oil tanker


How long can this go on?

The longer that shipping companies and their countries continue to allow ships being held hostage, the better equipped and organized the pirates will get; the longer their range will be; the more ships and the more valuable ships they will hijack; the higher ransoms they'll demand; and the more difficult they will be to eventually eradicate.

These trends are already underway:
The location of the latest attack, far out to sea, suggested that the pirates may be expanding their range in an effort to avoid the multinational naval patrols now plying the Gulf of Aden and the Arabian Sea.

“I’m stunned by the range of it,” said Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff, at a news conference in Washington. The ship’s distance from the coast was “the longest distance I’ve seen for any of these incidents,” he said.

The vessel was headed for the United States via the Cape of Good Hope when it was seized, Reuters reported.


Only a few years ago, the average ransom was in the tens of thousands to hundreds of thousands of dollars. Now payments can range from $500,000 to $2 million.

The pirates’ profits are set to reach a record $50 million in 2008, Somali officials say. Shipping firms are usually prepared to pay, because the sums are low compared with the value of the ships.


Maritime experts recently have noticed a new development in the gulf — the pirates’ use of “mother ships,” large oceangoing trawlers carrying fleets of speedboats which are then deployed when a new prize is encountered.

“They launch these boats and they’re like wild dogs,” said Mr. Choong in Kuala Lumpur. “They attack the ship from the port, from starboard, from all points, shooting, scaring the captain, firing RPGs and forcing the ship to stop.”


Skilled, unskilled, unaware

A 1999 paper by Kruger and Dunning, Unskilled and unaware of it, has recently been receiving attention. In summary, they tested people on a few tasks while measuring their self-assessments, and found that the worst performers consistently rated themselves above average in the tested tasks. They attributed this effect to a deficiency of metacognitive skill in the worst performers, a conclusion that found resonance with many readers - including me at the time.

But Robin Hanson points to Burson, Larrick and Klayman's 2006 paper which reinterprets Kruger and Dunning's work. They argue that the issue at work is not a metacognitive deficiency, but effectively that people tend to estimate their absolute performance in a task (how well they'll do on an objective performance metric), and do not compensate for that the task is either easy or difficult for everyone. Estimating absolute performance requires awareness of oneself and the task, whereas estimating relative performance requires awareness of everyone else as well. This latter part is difficult.

It turns out that everyone is bad at estimating other people's abilities. The worst performers tend to overestimate their relative ability for easy tasks, but tend to be more accurate for hard tasks. The best performs tend to underestimate their relative ability for hard tasks, but tend to be more accurate for easy tasks. In tasks of medium difficulty, the overall bias is lowest.

It appears, therefore, that there is no reason to think that there's a metacognitive deficiency in poor performers. It's just that when asked for a relative performance comparison, everyone starts with an absolute assessment of their performance, and then fails to compensate for everyone else's skills.

Which is understandable. The only people who really know about everyone's relative skills in a particular task is those who administer tests and see everyone's results.


The clever rebooting by Windows Update

If I ever meet the guy who cleverly decided that, after automatically installing an update, Windows should reboot unless you explicitly postpone, even if you're doing other things on the computer, and cannot see the damn Postpone window - well, if I ever run into that fellow... I'm going to kick him in the balls, and I'm going to keep kicking until my foot hurts.

Several times now, me and my wife have played games, and it has happened that Windows helpfully went and rebooted itself while playing. This is because no one clicked the Postpone button, you see, and if no one clicked that button, then obviously no one cares. The fact that no one sees the Postpone dialog because a game is running full screen, well, apparently that didn't enter anyone's equation.

The manager responsible for this feature, please present yourself to Frigate Bay so I can kick you in the balls.

Bring spare balls. I'll kick you once for each time this has happened.

Yes. I know I can switch the updates to manual. I have now done so on the machine I use for games. But I shouldn't have to. The stupid dialog shouldn't reboot if the computer is playing content full screen, or if someone is interacting with the PC.

"The case for forward-looking protectionism"

The Financial Times Economists' Forum published this bone-headed article by Ha-Joon Chang, a South Korean now at University of Cambridge, who studied under Robert Rowthorn, "a leading British Marxist economist".

Among other things, Ha-Joon Chang calls for the U.S. both to employ some protectionist policies, as well as to encourage developing countries to make use of them to develop their fledgling industries; as if their own protectionism isn't part and parcel of what's been obstructing progress for developing countries in the first place.

He also makes a pointless appeal to Alexander Hamilton, citing the weighty argument that he appears on the $10 bill (so his policies must have been good).

Here's my response (currently awaiting moderation on FT):
Trade barriers imposed by developing nations necessarily:

(1) Help only those infant industries whose consumers are predominantly local.

(2) Harm those same local consumers by restricting their access to more expensive, lower quality local goods, rather than allowing them access to cheaper and higher quality foreign goods. (If such were not the case, trade barriers would not be necessary.)

The world’s marketplace is global. If developing countries are to have worthwhile industries, those industries will have to compete globally. There is a huge leap from serving a few poor customers held hostage by trade barriers, to competitiveness on the global markets. Companies that need privileged access to their small local market in order to function cannot make that leap. Companies that can make the leap, do not need trade barriers.

I do not see how the developed world will become developed by organically growing competitors to world giants. How are those competitors going to make the leap from providing inferior products and services to an artificially protected local market, to competing effectively worldwide?

How is this going to happen, if the neighbors of such countries, themselves being developing countries, have their own protectionist agendas?

If protectionism doesn’t work for these reasons when employed by a large group of small countries, then at what size country does it begin to work?

Alexander Hamilton was born in Nevis. Some say that the U.S. constitution was drafted requiring presidents to be U.S.-born specifically with the aim of excluding Hamilton.

How much credence does one get from appearing on a dollar bill? Robert Mugabe is also on his country’s currency. Does it add to his economic credibility?

They can't even cut the power right in St. Kitts

I wrote last month about how there was a fire in the St. Kitts power station that damaged two of the largest generators and cut the generating capacity in half. Thus began a period of power outages which started daily and prolonged (8-12 hours, depending on the part of the island) and which has recently improved to 2-6 hours per day or so, at least where we live (Frigate Bay).

Of course, the day after the fire, officials were predicting how this load shedding would be necessary for about two weeks, but everyone who is familiar with how things work here knows that two weeks doesn't really mean two weeks. It means two months, or two years, or however long it takes. Whatever.

Recently, they started cutting power to our area more frequently again. But there is an additional problem: instead of cutting power outright, as they should be doing, the voltage first drops, then rises again, then drops further, then rises. It takes about a minute, maybe two, for the power to really go. Meanwhile, the various appliances - the air conditioners and our voltage regulators - switch on and off, and on and off, beeping as the motors start, then stall, then power up again, then stop, and start again...

Not only is the local power company incapable of supplying the island with reliable power; they don't even know how to shut it down right.

Things are like that in pretty much every aspect of our life here in St. Kitts. Construction is especially like that; see this A je to short film for a highly accurate impression. Everything needs to be done 2 or 3 times because they always destroy X while doing Y, especially if no one is around to tell them how to do things right before there's damage.

But enough carping. We didn't come here for the mad skillz of the local work force, and things are actually improving, although they can't seem to be improving fast enough. For one thing, there is now a real cinema, with recent movies, clean seats and multiple screens. We find it very welcome, and it has increased our going out at least twofold. :)


A question for Ron Paul (on Freakonomics)

Freakonomics has published the first part of Ron Paul's answers to their readers' questions. The guy strikes me as probably the most reasonable, clear-headed politician I've encountered. He seems almost like a Warren Buffett of politics, except that in politics, dishonesty is what's rewarded, so Ron Paul isn't doing very well. (He's doing well with about 10% of people who actually have a clue, but that will never include most voters. I wonder how many supporters he has in Detroit.)

That having been said, though, I sincerely hope (but do not really expect) that - at least in the second part - he might get around to answering my question. Essentially, what I'm wondering about is this:
Q: Do you believe that it is possible to make positive incremental changes to our monetary policy, entitlements, taxes, etc. within the system, or is it just a matter of waiting for failure and then coming in with a solution?

A: Yes, I do believe we can make successful changes. And I want to start making those changes now so that we can avoid a devastating collapse. But we need to start quickly before it’s too late. If we can cut spending and balance budgets, beginning with our overseas expenditures, we can do a lot to fix this mess. We also need monetary reform. I would begin with the incremental step of repealing legal-tender laws and legalizing the use of gold and silver to act as a currency alongside the dollar. That would help stabilize the dollar and strengthen our monetary system. [denis: my emphasis]
I just don't see things happening this way. If gold and silver are allowed to act as currency alongside the dollar, the effect will be a collapse of the dollar. This is unless issuing policy for the dollar is rewritten to credibly ensure that the supply of dollars will increase no faster than the supply of gold and silver. This, in turn, would basically prevent the state from being able to protect bank depositors in the event of a financial crisis; and this, in turn, would bury banks. Which then prompts the question that I ask:
The way I understand it, one of Dr. Paul’s fundamental proposals is to deregulate currency, allowing people to use gold as they choose to, or whatever else they like. This renders an inflatable fiat currency non-viable, and provides the state with no way to support banks in rumor-based runs or in liquidity crises. This in turn leads to the Iceland effect, where banks go down not because they are insolvent, but because there is a run on them or because the market temporarily dries up.

The monetary policy that Dr. Paul is proposing would therefore make it foolish to put money in a bank, as any interest gained is likely to be outweighed by risk of the bank’s failure.

My question to Dr. Paul is as follows: is your opinion that banks are not fundamentally important to prosperity and growth? If they are not, then what is your opinion of the economists who say that banks are a crucial link between borrowers and savers?

On the other hand, if banks are important for GDP growth, then what system do you envision would replace banking, after your monetary policy has rendered bank deposits foolish, and banks prone to fail?

— denis bider


The Bomb prevented a yet greater tragedy

Not to advocate the triggering of mass annihilation in anger, but it looks like the bombs that exploded over Japan in WWII - and caused it to surrender - might have saved more than they destroyed. By Joseph Coates in a comment to Hiroshima: The lost photographs:
The use of atomic weapons for the first time on Earth by the U.S. against the Japanese Empire and its civilian cities has always been a frustrating horror for me. I am alive because of it.

My father was an 18 year old kid (on a "great adventure") and unaware of the potential fate that would await him as he sailed with thousands of other soldiers in late October on a troop ship steaming across the South Pacific to invade Japan in Operation Olympic for "X-Day", as it was called.

Instead of probably being wounded or more likely killed while landing on the heavily defended mountains and beaches of Ōsumi Province or Satsuma on the island of Kyūshū in a massive invasion that was to make D-Day look like a skirmish — he helped rebuild Japan.

Names like Miyazaki, Ariake, and Kushikino, the three main invasion points, would be in our history books. The beaches of D-Day would be remembered with the beaches of X-Day, named after car brands: Austin, Buick, Cadillac, Stutz, Winton, Zephyr.

The Japanese had prepared an all out last stand defense of Japan, Operation Ketsugo, with no reserves.

Had the invasion happened, it is estimated that millions of American soldiers would have been killed or wounded and tens of millions of Japanese soldiers and civilians. The Pentagon ordered 500,000 Purple Hearts in preparation for the invasion of Japan and usually the military does not order enough of anything. Until just a few years ago, these unused invasion of Japan Purple Hearts were the Purple Hearts all recipients of all subsequent U.S. wars were given.

My father and countless other allied soldiers, Marines, and sailors never invaded Japan. He was switched to the Corp of Engineers after the Japanese Empire surrendered and promoted to sergeant so he could coordinate construction work for the Tokyo airport. After this, he went to college under the GI bill, got married, and raised a family. He helped run a number of companies, including a company founded by his brother (who was in the Navy during the war) which invented and sold, and still sells, important technology used in the manufacturing of microchips and later, LCD displays. (Your computer, its screen, your cell phone, ipod, et al could not have been made without it.)

He is alive, my family is alive, I am alive because the U.S. did not invade Japan. Many more U.S. and Japanese citizens and their families are alive too. The technology, medicines, and other inventions since WWII developed during or later by my father’s generation have saved and enriched billions of lives.

But if the U.S. had invaded Japan, would we have lost some crucial figures of that generation and the economic, technological, and creative prosperity of the late 20th Century?

The economics of religion

I think a great issue to pursue, for a person of the kind that might have written Freakonomics, would be the economics of religion.

We know that many religious leaders do not actually believe what they preach, but they preach what’s going to be well received by their audience. In this sense, religions are a bit like mainstream media. We don’t hear about “Oprah’s Mystery Man” because Murdoch thinks that everyone should know, we hear about it because they think it drives ratings.

In a similar parallel, it would be interesting to investigate how much religious policies are ratings-driven. How well would a Pope be received if he told everyone “I reconsidered, it is okay to use condoms”? Or if he said that “a regulated market in human organs would be okay”?

Already, the Catholic Church is more tolerant and more science-friendly in its views than many Christians in the U.S. If the purpose of a religion is to maximize its number of followers, what happens if a religious leader endorses views with which its followers do not agree? Is the purpose of religion really leadership, or is it more so to make people feel good about their existing views?

In other words - is it the dog (the Pope) that wags the tail (the believers); or is it the tail that wags the dog?

The Pope doesn't want you to be able to sell your kidney

The Pope - all-knowing and all-wise, and as his followers expect from him, the authority on all topics remotely having to do with ethics - spoke about organ donation:
"Any logic of buying and selling of organs, or the adoption of discriminatory or utilitarian criteria ... is morally unacceptable," he stressed.
To translate: the Pope would rather see a million people die, than have another million people voluntarily sell their spare kidney.

Because, you see, not being able to sell your kidney is much more important than saving a million people from dying.

According to the Pope, apparently, selling your kidney is an abomination. But a million people dying, prevented by people like the Pope from getting the kidneys that they desperately need, that's just "unfortunate".

Death, you see, is the natural course of things. You must accept it. If your kidneys are about to fail, surely God sees fit that you die now. It is God's will.

Could it be God's will then, pretty please, that the Pope die soon, and be replaced by someone more illuminated?

Yeah... as if that's likely. Ever.

To be fair, the Catholic Church is one of the less preposterously dark-ageist cults that this world has. See this for an example of yet more "enlightened" "leaders".


A single, controlling majority shareholder in finance

Tim Bray publishes his opinions on what the coming changes in financial sector regulation should be like. Some make sense, but I don't agree with all of them.

I think a big part of the problem is the agency conflict of interest, and the ineffectiveness of shareholder democracy.

This is not such a big deal when a company in the "real" economy goes astray. In that case, shareholders suffer, and there are some externalities, but they are limited.

The problem is greater, though, when any of the cornerstone companies of finance go astray.

Perhaps it would not be a bad idea to require that finance businesses must have a single, controlling majority shareholder.

This would limit their size, which helps in the sense that too big to fail is too big to exist, and it would provide for better corporate oversight, as a single, controlling majority shareholder is more likely to steer the company on the right path than an ineffective democracy of smaller shareholders which management strings along by their noses.

Also, when politicians do eventually get to the business of revamping finance regulation, perhaps a good idea would be for them to choose a small number of countermeasures - one, two, but certainly no more than three - from all of the ideas proposed. Ideally, one decisive countermeasure should be chosen which is going to be effective - will likely fix the problem - and will be simple enough to understand.

Instead, what is actually likely to happen is that a huge variety of proposed countermeasures will be bundled together to create a straitjacket, for "good measure", to "make sure" that the crisis will not happen again.

It's a good thing to prevent a repetition of the crisis, but it's better yet not to suffocate future finance.


The state of Cuba

My friend Maša has recently visited Cuba. Here is my translation of part of her blog post where she describes some of her impressions:
The first surprises began soon after landing. When one drives onto Autopisto Nacional - the only and the largest highway on the island - one begins to seriously question how many accidents they have. The road has enooormous holes and if you don't know the road, it can probably straight out destroy your tires rather than just puncture them. Left and right there's no safety fence, there's no centerline, no roadsigns or signposts, while on the road there are ox wagons, groups of cyclists training, cyclists and roadside vendors selling various things, trying to attract a driver's attention.

Despite all of the above, we did not see a single accident in three weeks, and we traveled almost 2000 km. [denis: Cuba apparently had 1,000 fatalities in 2001 and about 172,500 cars in 1998, for about 0.5% fatalities per year per car. The U.S. has about 40,000 fatalities per year and about 250 million cars, for about 0.016% fatalities per year per car. Cuban cars are more than 30 times as deadly. It is doubtful that they are driven 30 times as much.] The cars are dilapidated, they hardly even stay in one piece, while people drive over that wreck of a road much faster than we would (while of course braking before holes), however I didn't see anyone overtaking brazenly, and I didn't see anyone cut off another driver. One wonders how much help road signs, highways and airbags are, when people [in Slovenia] drive so damn recklessly. [denis: Slovenia has modern European roads, modern cars, about 300 road fatalities per year and about 1,000,000 cars, for a fatality rate of 0.03% per year per car, which makes a Slovenian car about twice as dangerous as a U.S. car, but 15 times less dangerous than a Cuban car. Figures would change in some direction when accounting for the number of miles driven.]

I have come to detest socialism much more than before, but I'm also angry at the arrogant Americans. Yeah, great... every month, each Cuban gets one paltry packet of rice, oil, salt, and so on (and women now EVEN get 10 hygienic pads), health care is free, schools also. But what help is that, when they take back most of everything people earn, and the remainder is nowhere near enough to live normally. And then doctors work as waiters and professors work as taxi drivers, because only working in tourism can make life bearable. Until work is not sufficiently rewarded, people simply won't work more and better - and that goes for you as well, dear voracious Slovenia!

If you are seen in public with a tourist and you have a police record from before (which you can probably get just by sneezing too loud), you go to jail. Committees for revolutionary defense serve to snitch on people and god help if you get on your neighbor's wrong side and he reports you for talking against the revolution. You need the state's permission to set sail to the sea, so that you might not by chance escape from this heavenly political system. To work out papers for a regular trip out of the country, you need 4 months and at least some 4 visits to Havana (and the costs of traveling there aren't small). You practically cannot buy a car unless you're at the trough or you work in a government company. And then the poor people, who don't have much to begin with, are being sold cathode ray TVs at about the same price as you can buy an 8" larger LCD in Slovenia. If that's not screwing people, I don't know what it is.
Maša goes on to argue against American economic sanctions against Cuba, which policy indeed seems unreasonably harsh and inequitable until you realize that Americans owned much of Cuba and were expropriated in the glorious revolucion. The economic sanctions may still seem harsh, and it definitely doesn't help Cubans, but when a nation expropriates your citizens, one could argue the justification.

So there you have it, Cuba as observed by a European tourist in late 2008.

Democracy may be beneficial economically after all

Elias Papaioannou and Gregorios Siourounis:
Cross-country comparisons have produced little evidence that democracy improves economic growth. This column summarises research using within-country comparisons over time to show that democratising countries realise higher long-run growth after the volatile transition period. Democracy’s value may lie in its dynamic aspects.


While there is significant heterogeneity across countries (Persson and Tabellini, 2007), our results suggest that, if anything, the average effect of successful democratic transitions on growth is positive. Our “within” evidence shows that the experience of the past four decades suggests that even moderate political reforms can also bring sizable economic gains. Most importantly, our dynamic analysis suggests that growth is usually volatile and negative during the transition period. Yet after the consolidation of democracy, growth stabilises at a higher rate. This J-shaped pattern accords with F.A. Hayek’s (1960) idea that the “as is true of liberty, the benefits of democracy will show themselves only in the long-run, while its more immediate achievements may well be inferior to those of other forms of government.”

Pensions and fertility

An interesting article by Francesco Billari and Vincenzo Galasso describes their research into fertility of those Italians who were affected by reduced pensions, compared to those who were not. Their data shows that fertility increased by 13% even after controlling for factors such as age. If children are seen as investment goods (might help you in old age) as well as consumption goods (can be a source of satisfaction), then their findings indicate that the investment view can dominate: apparently, couples tend to have more children when the adequacy of their pensions is in question.

This points out a useful policy for countries that have low fertility combined with an aging population: reduce the expectation of pension benefits immediately for people young enough to have more kids as a result. This helps make the long-run pension budget viable both by reducing the expected outlays (less benefits) and by increasing the expected income (more workers in the future).

Such a reduction will also stimulate the affected workforce to put more effort into providing a safety net for themselves, and count less on the state's ability to provide it. This leads to higher GDP growth, which makes everyone better off for it.

To make things fair, this should be coupled with increasing the retirement age (rather than reducing benefits) for people who are too old to have more children. When pensions were first introduced in the 19th century, they were primarily for the very small percentage of people who were too old and fragile to take care of themselves. This, not a twenty year long holiday, is the purpose of pensions.

Let's shift the system a bit towards its original purpose, and it will not be on the verge of falling apart as it is today. Since medicine is now making such mediocre progress with further increasing our lifespans, the change in the retirement age does not need to be much more than a couple of years.

You can have your early retirement if you can pay for it, but it's not fair to have it at younger workers' expense.

To make things just, perhaps those who raised more children could be spared some of the retirement age increase. After all, it is their children, and their investment in raising them, that is now supporting the existing retirees.

The demerits of DST

Stephen J. Dubner opened a debate on Freakonomics with an article about DST.

Whatever the ostensible benefits of DST, they are overwhelmed by the hassle of hundreds of millions of people who have to adapt, many of whom have serious problems with it - e.g. parents with children.

Furthermore, the silly time changes affect not only the communities who adopt them, but also communities that do not: businesses in Arizona shift schedules because of DST elsewhere, viewers in non-DST communities shift their sleep patterns because their favorite shows come on later, etc.

DST is a preposterous charade in an attempt to pursue minuscule or illusory savings. It is not only social engineering on a grand scale, it is useless feel-good social engineering on a grand scale.

I know how difficult it is to adapt systems to different DST rules. That's why I think the U.S. politicians who voted to change the DST schedule recently, instead of abolishing it altogether, should be sent to a no-happy place for a time comparable to the duration of people's lives that they wasted: a long duration indeed.


The monkeys came to power

Foreign media refer to Slovenia as having performed a good transition from a centrally planned single-party state to a modern market democracy. But for all the praise it receives, Slovenia is populated disproportionately by leftist zealots who, after four years of centrist government by Janez Janša, recently won major elections. Letting no time go to waste, they are already coming up with stunts like these.

Borut Pahor - president of the Social Democrats, the party that got the most votes - promised today that the coming government would focus on "economic democracy", by which he apparently means a combination of employee shareholdership, employee participation in management, and employee participation in profits. The way I understand it, the newly elected leftists plan to make these things into law.

If you speak Slovenian, read Marko's excellent article on how silly the idea is of legally mandating employee participation in profits. Giving employees profit shares is a good idea for companies with high-value-added employees, but it only works if it is voluntary. An involuntary mandate will just result in companies finding ways to avoid the law: e.g. by not officially hiring people but rather working with them on a contractual basis; or by having another company employ the workers and outsource them; etc. In the short term, the net result is merely yet more bureaucratic burden on the economy, as if Slovenia does not yet have enough. In the longer term, the government can either silently give up, keep the new rules knowing they don't work to avoid admitting its error; or it can further tighten rules, causing a vicious cycle of regulation-workaround that will ultimately smother the economy.

Then there's Katarina Kresal, the charismatically naive young leaderette of the Liberal Democracy of Slovenia (the party's name is a 2-decade-old oxyomoron), which is part of the new governing coalition. Ms. Kresal is quoted saying:
We are in times when our economy should be more actively protected, so we should think about a potential purchase of Mercator [Slovenian equivalent to Wal-Mart] by the State and a later sale at a higher price, which would also be good for all taxpayers.
Wow, let's get the state into the business of making gratuitous investments in "national champions", for the benefit of the political-economic elite that runs the place!

How did everyone not think of that as a crucial step in the transition to a market-oriented economy?

While Borut Pahor could be sincere but misguided, Ms. Kresal's proposal is a transparent servility to the powers who run Slovenia: the few people who own much of the economy and most of the media, and who have been adept at using their political ties, particularly among the leftist parties, to publicly promote "national interest", the real purpose of which is to bleed the public purse and to discourage competition for their business.

What's funny is how the public lets itself be strung along, happily letting itself be convinced by essentially non-arguments.

This combination of leftist zealots and populist oligarchists is now coming to power in Slovenia. The monkeys have prevailed, and will run that country for the next 4 years.


Iceland's mistake

Willem Buiter and Anne Sibert publish this brief but insightful article summarizing their findings when Icelanders asked them to look at their banking sector in early 2008:

Briefly, they state that Iceland's problem was being (1) a small country, with (2) a large, internationally exposed banking sector, having (3) their own currency, and (4) limited ability to provide their banks with backup financing in difficult times, relative to their banks' obligations.

Even if their banks were solvent and profitable, which they very well might have been, they were prone to collapse during a liquidity crisis, because they did not have a large enough economy to back them.

Buiter and Sibert suggest that Switzerland, Denmark, Sweden, and even perhaps the UK may be in a similar predicament.