Peter Day has been spending some time in Iceland and has produced two excellent episodes of his In Business radio show from “the island that went bust” as he puts it. The first episode was Iceland feels the chill and the second one was Iceland: Women.

Strangely, both episodes somehow sound optimistic. There’s light at the end of the tunnel.

In the first episode Halldór Eyjólfsson, former fisherman and CEO of 66 Degrees North, says that his company’s ads, shown above, explain the Icelandic character: “Some people say they are sad, but they’re not sad. They are fighting. They are survivors. They are living on the edge of where it’s feasible to live and they are surviving.” In fact, I know that facial expression very well. It’s how you look when the wind chill is -20° celcius.

The second episode is about the investment fund Auður Capital. It was founded by two female heavy-weights from the Icelandic investment community, Halla Tómasdóttir and Kristín Jónsdóttir, and it has feminine oriented approach to investing. “We’re prepared to use our logical intelligence as well as our emotional intelligence when it comes to investing,” they say. Their main point is that any business that is either too male or female dominated loses out on the benifits of diversity.

The situation may be bleak at the moment, but there is optimism in the entrepreneurial circles. Various Icelandic start-ups are using the sudden availability of a vast talent pool to do some very interesting things. The country will without a doubt rise from the ashes stronger than it was before, with a more diverse source of income than previously when it relied so heavily on one sector, be it aluminum, banking or cod.

I visited friends in Copenhagen the other day and in order to afford a taxi I exchanged my British pounds for some Danish kronas. While waiting in line I noticed that Copenhagen is apparently one of the few places on earth where the exchange rate for the local currency against the Icelandic krona is publicly displayed (click on the image for a larger version). Good old Danes.

Of course, given the financial meltdown, the ISK isn’t good for much these days and on the display, it had actually flatlined.

The image above is from this week’s Economist and shows one of the demonstrations that take place every Saturday  in Iceland’s main square.  The paper published a briefing about the country’s situation and it’s one of the most level headed I’ve read.

The Sunday Times’s AA Gill also covered the situation and as usual, he’s on good form:

Icelanders react to bad news the way they always have. It’s the same way they react to good news: they get hammered. Properly Valhallaed. The bars and clubs are full, the booze is expensive, and they toast each other with a grim irony.

A fresh scandal broke yesterday when it was revealed that an unknown party had pressured a local newspaper to silence one of its journalists who was writing a story about how the former CEO of Landsbanki, Sigurjón Þ. Árnason, still seems to be on the bank’s payroll.

There’s not much of a tradition for resigning over such issues (or any issues for that matter) in Iceland, so the editors are still hanging on to their job. For now.

One factor behind today’s financial crash less frequently mentioned than a housing bubble and a lack of government regulation is overconfidence in flawed risk management models.

Bubbles build and pop every 10-20 years. Blaming the US sub-prime market for the current financial melt-down is like blaming the great fire of London on Thomas Farriner’s bakery, where it started. The problem in London wasn’t a bakery, but an overcrowded street plan, thatched roofs and wooden houses.

The problem with the world’s financial system is the underestimation of the unpredictability and volatility of a highly correlated, complex system and overconfidence in our capability to model and predict it.

Nassim Nicholas Taleb has been warning against various industry standard risk-management models since 1997. Robert Goldstein’s book “When Genius Failed” told the story of Long Term Capital Management (LTCM), the hedge fund that brought Wall Street to the brink of destruction when an unforseen event, Russia defaulting its bonds, caused their sophisticated risk models to fail.

Warren Buffett summed it up nicely: “Beware geeks baring formulas”. We didn’t learn after LTCM, hopefully we will now.

Laurence Lessig wrote an excellent article in this week’s newsweek on this theme, “Why the banks all fell down” where he points out that the market isn’t composed of individual, uncorrelated, rational decision makers, like most models assume, but irrational herds.

Risk management models were supposed to be the brakes in the speeding car of the world’s financial system. But because of blind faith in these models the car was going way too fast, hence the enormity of the crash.

An Icelandic newspaper, Morgunblaðið, published this cartoon today. Click on the image for a bigger version. Iceland sinking under the weight of their banks. Rough translation: “Too much free-market capitalism for the small island.” The weird thing is that I saw this on the BBC.

I’ve been using Twitter search a lot recently to follow ongoing events in Iceland. (click: search results on “iceland”.) It is by far the fastest way to find links to new articles and news coverage and to get a snapshot of the zeitgeist of the situation.

I’m tempted to say this is the most useful tool I’ve found in a while since … that other search engine. I can only imagine how powerful this can be when Twitter gets more adoption.

Anyway, I’m keeping my fingers crossed.