Icelands Economic Recovery

December 21, 2011 8:13 PM

"In the 2008 economic meltdown, Iceland nearly collapsed. Its three banks failed, it's currency lost 50 per cent of its value and in an unprecedented display of anger, usually peaceful Icelanders took to the streets to protest. But Iceland defied the orthodox economic wisdom of the time---bailouts and slashing government services---and now is on the road to a recovery that the rest of Europe envies. The hero of the hour and the man almost solely responsible for this remarkable turnaround is the country's president Olafur Grimmson." This CBC Sunday Edition Interview is a fascinating listen.

There are lessons World Leaders could learn says Paul Krugman Nobel winning Economist. Lots of commentary on web that say "Let the Banks Fail" and "Iceland Broke the rules and got away with it". Though, there are some unresolved issues to be taken into consideration.

"Social Science Research Network Paper on the US economic crisis states" ... three or four alternative approaches pose tests of our relative commitments to markets, organization, globalization and political control." and that protective regulation is needed to prevent these economic catastrophes. This last link has a pdf to download.

There is hope.

posted by smudgedlens (35 comments total)

Creditors should not be entirely immune from all forms of risk, including risk of default backstopped by the taxpayer.

If we lived in a capitalist society they wouldn't be.
posted by T.D. Strange at 8:21 PM on December 21, 2011 [11 favorites]

Iceland's foreign trade consists mostly in commodities exports. Aside from oil, the US service and manufacturing economy heavily depends on its trade relationships with other countries. What do you think would happen if FMAC told Chinese and Japanese sovereign wealth funds that all of the bonds it had issued wouldn't be backed up by the government, even though the government had given China tacit assurances that it would back them up?
posted by anewnadir at 8:45 PM on December 21, 2011

Icelands boom prior to the bust was built on financial services just like in the USA.
posted by humanfont at 8:49 PM on December 21, 2011 [4 favorites]

I honest to god applaud Iceland's moves, however I don't think how Iceland handled it is easily transferable to a larger scare. And yes, that might mean that the global economic system is too big and certain actors have too much power/influence. How we get from here to there is murky at best, especially as, in general, even well intended and smart people aren't willing to make the changes in lifestyle and governance.

Frankly I've thought the US is too big of a country (economically and militarily) anyways, in my heart of hearts I think any country that can topple any world wide system is too big
posted by edgeways at 8:54 PM on December 21, 2011 [1 favorite]

Ólafur Ragnar Grímsson is many things, but the "hero of the hour and the man almost solely responsible for this remarkable turnaround" he is not. He was a nationalist champion of the idiot bankers who drove the Icelandic economy off a cliff, for one. Here's a speech he gave in 2005. Sample quotes:

No one could have predicted the extraordinary success in recent years, a success which does indeed raise challenging questions about prevailing business strategies, theories and training in modern times.
[...]
I am convinced that our business culture, our approach, our way of thinking and our behaviour patterns, rooted in our traditions and national identity, have played a crucial role. All of these are elements that challenge the prevailing theories taught in respected business schools and observed in practice by many of the big American and British corporations.

We are succeeding because we are different, and our track record should inspire the business establishment in other countries to re-examine their previous beliefs and the norms that they think will guarantee results.
[...]
Third, Icelanders are risk takers. They are daring and aggressive. Perhaps this is because they know that if they fail, they can always go back to Iceland where everyone can enjoy a good life in an open and secure society; the national fabric of our country provides a safety-net which enables our business leaders to take more risks than others tend to do.
[...]
Fifth, there is a strong element of personal trust, almost in the classical sense of “my word is my bond.” This enables people to work together in an extraordinarily effective way because they are fostered in communities where everyone knows everyone else.
[...]
Eighth on my list is the heritage of discovery and exploration, fostered by the medieval Viking sagas that have been told and retold to every Icelandic child. This is a tradition that gives honour to those who venture into unknown lands, who dare to journey to foreign fields, interpreting modern business ventures as an extension of the Viking spirit, applauding the successful entrepreneurs as heirs of this proud tradition.
[...]
Taken together, these thirteen elements have given the Icelandic business community a competitive edge, enabling us to win where others either failed or did not dare to enter. Our entrepreneurs have thus been able to move faster and more effectively, to be more original and more flexible, more reliable but also more daring than many others.

The track record that Icelandic business leaders have established is also an interesting standpoint from which to examine the validity of traditional business teaching, of the theories and practice fostered and followed by big corporations and business schools on both sides of the Atlantic.

I hope I don't have to explain how ironic the speech is, given how the economy was flown into the ground by these businessmen who challenged the validity of traditional business teaching. He was a wide-eyed fool who gulped down every last bit of snake-oil he was handed. The businessmen he extols as "poets of enterprise" have been exposed as naive idiots, conniving hucksters, fraudulent criminals and banal nobodies who merrily followed their captains of financial industry into whirling cesspools of accountancy swindles, shell games and sham loans.

That he takes credit for any sort of financial recovery is beyond laughable. The office of the Icelandic presidency is largely powerless, besides being able to refuse to sign a piece of legislation, which triggers a national referendum. Other than that no formal power is vested in the office. He has had nothing to do with any of the decisions made by the government, either the one in power when the economy collapsed or the current one (led by Jóhanna Sigurðardóttir). This whole interview is a farce.
posted by Kattullus at 8:54 PM on December 21, 2011 [43 favorites]

Iceland was breaking the rules when it was hanging with Goldman. When it became apparent it was bankrupt from overly leveraged debt it couldn't afford to back its investment banks debts and they defaulted. It's currency was devalued in traded markets, and it's been crawling up from bankruptcy.

Iceland was too small to continue breaking the rules, and it's fall didn't drag anyone else with it.

Other countries large banks failing will have greater impact on still other countries banks, so those countries are attempting to manage the failures.

I don't get the impression that Icelands model is directly applicable in larger systems.
posted by dglynn at 8:55 PM on December 21, 2011 [3 favorites]

Paul *Krugman, I think you mean. My husband wants to have his economics babies lately, and I liked him long before (and including) now, so "Krugman says" has become common enough to be a weird joke between us.
posted by Nattie at 9:06 PM on December 21, 2011

"Interpreting modern business ventures as an extension of the Viking spirit"? Yikes.
posted by koeselitz at 9:27 PM on December 21, 2011

I'd agree that President Ólafur Grímsson looks like a financial criminal, but lap dog he is not, or he grew a pair in 2008 at least.

At a lunch with all ambassadors to Iceland, he said "The North Atlantic is important to Scandinavia, the US and Britain. This is a fact these countries now seem to ignore. Then, Iceland should rather get some new friends" and promptly suggested that Iceland should invite Russia to use the Keflavík Air Base. Iceland wants figure head strongman, fine.

I'm curious if he's aiding or obstructing the Icelandic Modern Media Initiative (IMMI) though (previously).
posted by jeffburdges at 9:35 PM on December 21, 2011 [1 favorite]

Lest some get the wrong idea about what the "let the banks fail" bit means, here's one of the Bloomberg's quotes from that link which clarifies:

Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.

[...]

“Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York.

What was absolutely necessary was to keep the credit system functioning and avoid a run on the banks. What wasn't necessary was preventing any of the banks' shareholders and creditors from taking any losses. Because they should have. And some of those big banks should have gone into receivership. As I think Krugman recently wrote (might have been someone else), what we did with GM is a good model for what we should have done with some of these banks.

That said, there's some very good reasons that Iceland's situation isn't comparable in many ways to the US's.

For one thing, a lot of the people who took big losses from what was done in Iceland were non-Icelanders, not just foreign lenders, but also many people in the UK who had deposited money in Icelandic banks because of high rates. Most (certainly not all) of the similar losses that would have occurred in the US would have been other US institutions and that would have just shifted the problem elsewhere. And it wouldn't have been politically acceptable in the way that doing the same to foreigners is acceptable.

For another thing, the scope of the problem was(is) hugely larger in the US than in Iceland. As amazingly stupidly leveraged as the Icelandic banks were and how big the debt became relative to Iceland's GDP (really, it made the US situation look sane and conservative by comparison), Iceland is still a tiny, tiny country; smaller than most middle-sized US cities.

There's a connected set of issues here that should be understood separately. How to handle financial crisis of this size and how to handle failing banks which are "too big to fail". And then how to handle the macroeconomic crisis that arises as a result of the financial crisis.

With regard to the first issue, it's what's mostly being discussed in these links and here. You make sure that your whole finance system doesn't get broken and stop functioning, but you don't do this by way of merely writing a blank check to big banks to keep them afloat. And you especially don't leave the should-have-failed banks under the same ownership and management as before, and with no regulatory/systemic changes enforced that would keep them from repeating their mistakes. (Incidentally, it's not the case that there's something that's simply "too big". Canada's banks are relatively as big with regard to their economy and financial system, and yet Canada didn't have the same problems to the same extent as the US and elsewhere, and it weathered the whole thing much better. Why? Because they didn't deregulate as excessively as the US and much of Europe did and their banks were not allowed to be as overleveraged and were not allowed to be in such an uncertain state.)

There's a way to do this all right, so that the apocalypse doesn't happen while at the same time the taxpayers aren't handing money to millionaires who will just turn around and make the same mistakes all over again, sooner or later. (Financial bubbles and crashes and crises just keep happening; and they happen for the same damn reasons, over and over.)

A wrong way to do it is what we in the US ended up doing, because a lot of what was wrong still hasn't been corrected with regard to the assets involved, and most of what was wrong still hasn't been corrected with regard to the systems, regulation, and practices which made this all possible.

But note that it also was very wrong to simply (initially) let the bank fail, as we did with Lehman Brothers. What's interesting about that is that this was a very conservative decision, oddly, with Paulson saying that this was capitalism "at its best". But pushing (or allowing no other possibility for) Lehman into Chapter 11 so precipitously was the match that set fire to the whole system. Yeah, it would have happened some way or another soon; the whole system was a powder key and the real match was the housing bust. But because of the interconnectedness of all of this, it's not the right thing to do to let something like Lehman Brother fail in the same way that you'd have some other company go into bankruptcy. Even doing it the right way would have required a great deal of intervention in the form of capital.

With regard to the second issue, the macroeconomic situation that results from a financial crisis of this size, you make sure that inevitable fall-off of demand as everyone freaks out and attempts to save because of fears about both their investments/savings and their future earnings is counter-acted by a government that is the only actor capable of doing this.

Frankly, I'm not sure I understand the reasoning behind the austerity doctrine in this larger context. I understand it well enough with regard to the fact that a whole bunch of people have gotten it into their heads that this whole problem was caused, somehow, by excessive sovereign debt even though that's not what caused the financial crisis at all. Yeah, it involved debt. And, given the world today, it necessarily involved sovereign debt in various capacities. But at root the crisis had everything to do with an international financial system of which a portion had gotten drunk on mortgage lending that had safe and unsafe loans pureed into an undifferentiated paste that was then mixed with other debt and sold and resold and divided up and sold and resold, and insured against, and mixed in with the entire rest of the international system, and, being drunk, and being in character a drunk, an addict, this whole system had lost sight (because it had willingly deluded itself) of where the risk was and how much it was and so kept borrowing money against future expected income, which was expected partly on the basis of how swimmingly everything had been going because people were buying houses and properties and investing in factories because, well, credit was cheap and things were going well and people were happy.

If you saw the movie Margin Call, then basically what was depicted in it as happening at Lehman Brothers was what happened to the entire financial system, around the world because it's all interconnected now and the US is such a big part of it, at the time. Somebody, finally, actually looked at the numbers and realized that if anything went even a little bit wrong then, if the good times stopped rolling just a little bit, then there wouldn't be enough money coming in to pay the money that had to go out, and then like dominoes, everything would fall down in sequence. Well, there were people who had known this. But also, things had started to not be as good, as the housing boom that fueled this went bust, and also someone finally realized that something had to be done to minimize their losses, like rats abandoning a sinking ship. Or, rather, like the people who are bailing out the ship deciding to abandon ship.

Anyway, this whole thing about sovereign debt being responsible for the financial crisis and the resulting international recession is a load of bullshit. Nevertheless, a lot of people, a lot of "Serious People", as Krugman sarcastically refers to them, believe it. Or at least they publicly claim to believe it. And so those people say that the way to solve these macroeconomic problems are to reduce sovereign debt. So, austerity.

The direct argument they're making is that this is all about "confidence" and that it's not a demand-side problem at all, but rather a supply-side problem where the capitalist class, the investor class, is uncertain about the future and so they're not making their money work for them and thus insuring that the world's workers are happy workers and if we can fill them with "confidence", all will be well. And, supposedly, what really, really worries these capitalists is how much sovereign debt various countries have. And so, interestingly, their preferred solution is something that ends up not easing people's unemployment but, in fact, makes it worse (at least temporarily). I mean, obviously. When GM decides to not spend 100 million dollars that it had been planning to spend, everyone knows this means that jobs will be lost. But, somehow, when the government decides not to spend 100 million dollars that it had been planning to spend, a whole bunch of "serious people" tell us that this means that...unemployed people will get new jobs! Wow!

Uh, yeah, anyway.

Poor Ireland has bought into the wrong way of solving both these problems. Iceland basically solved both problems the right way. And, by the way, everyone—all the "serious people"—were adamant that Iceland doing what it did meant that it would be an economic hellhole for the next ten or more years while, in contrast, Ireland doing what it has done would mean everything would be great Real Soon Now.

Actual history has proven these serious people very, very wrong on both counts. But it's not changed their opinions one tiny little bit. Which should perhaps make one consider that they're true motives are different from what they claim them to be.
posted by Ivan Fyodorovich at 9:56 PM on December 21, 2011 [22 favorites]

Well, if they're doing so well maybe they could start paying the UK back!
posted by Artw at 9:56 PM on December 21, 2011

[fixed Kruger/Krugman in post ]
posted by taz at 10:14 PM on December 21, 2011 [2 favorites]

If you saw the movie Margin Call, then basically what was depicted in it as happening at Lehman Brothers was what happened to the entire financial system, around the world because it's all interconnected now and the US is such a big part of it, at the time. Somebody, finally, actually looked at the numbers and realized that if anything went even a little bit wrong then, if the good times stopped rolling just a little bit, then there wouldn't be enough money coming in to pay the money that had to go out, and then like dominoes, everything would fall down in sequence. Well, there were people who had known this.

My pet conspiracy theory is that it was these assholes
--the commodities speculators who drove the price of oil through the roof in 2008. It was what knocked over the housing market. All those people who were just barely able to pay their mortgages with sane gas prices, who suddenly got pickepocketed at the pump. Maybe that small group of assholes cornering the petroleum market didn't know what they were doing, but if they were savvy enough to corner the global energy market maybe they were savvy enough to short the global economy too.
posted by mullingitover at 10:58 PM on December 21, 2011 [2 favorites]

Well, if they're doing so well maybe they could start paying the UK back!

Paying them back... what, exactly? Unsecured high-risk deposits? Why the fuck would they bail out British investors? Or are the Master Race of the British Isles meant to be immune to the downsides of capitalism?
posted by rodgerd at 11:02 PM on December 21, 2011 [1 favorite]

rodgerd: small deposits in Icelandic banks (including UK deposits) were meant to be guaranteed by the Icelandic government, as part of the deal for Icelandic banks being able to operate in the EU. This is absolutely standard, just like bank deposits in the US or UK or New Zealand are guaranteed by the government. The Icelandic government refused to pay out to non-Icelandic depositors, and did pay out to Icelandic depositors (at above the required guarantee level). So yeah, they should honour their obligations.
posted by Infinite Jest at 12:20 AM on December 22, 2011 [3 favorites]

Anyway Ivan Fyodorovich's post is great, with a caveat: one thing we learned in the 2008 crisis was that we don't have an effective way of putting large banks into receivership. This is one of the things that regulators have been working on, both at the regulatory level, so that they have the legal powers and the skills to put banks into receivership, and at the bank level, requiring banks to develop 'living wills' so that they can be more easily broken up and otherwise dealt with, if they become insolvent. So probably the US couldn't have done exactly what Iceland did, though I agree it would have been a better option.
posted by Infinite Jest at 12:27 AM on December 22, 2011

Why the fuck would they bail out British investors?

You say "investors", they would say "savers". The laws of most (all?) countries maintain that there is a difference. This is (non-ironically) what the current UK proposal to separate out banks' retail (i.e. savings and mortgages) and investment operations is all about.
posted by GeorgeBickham at 2:03 AM on December 22, 2011

"the Master Race of the British Isles"

Coming from a New Zealander, we'll take that as a compliment.
posted by marienbad at 2:10 AM on December 22, 2011 [1 favorite]

Well, if they're doing so well maybe they could start paying the UK back!

They've already started.

On the topic of the president, I'll add to what Kattulus posted in saying that his non-action of referring Icesave legislation to public referendum may cost us dearly. EFTA is now taking us to court over the matter, for not paying back foreign depositors in Icesave in a timely fashion. Say what you will about the dubious promises made by Icesave at the time, the law is the law: governments are responsible for guaranteeing that deposits made into its country's banks can be withdrawn by anyone, any time. Instead, when our banks collapsed, we allowed Icelanders to withdraw their money; just not foreigners.

This, it seems, is a violation of Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994, a part of Iceland's treaty with EFTA and as well a part of Iceland's own domestic law.

So now we're being taken to court, and if EFTA can prove that we broke this law - and let's face it, it's not exactly Trial Of The Century material here - then there will be repercussions. At the very least, this will likely mean interest over the past three years on every single deposit made into Icesave.

So yes, thank you every so much, Mr. President, you stalwart defender of all things Icelandic, for helping to make Iceland look like one of the least trustworthy places to put your money, for possibly costing us more than the original Icesave deal(s) would have by forcing this matter before an international court, and for trying your best to puff up your chest as some champion of the people to any foreign media outlet who puts a mic in your face, as if you never had a hand in traveling around Europe and cheerleading for the very people who ruined us.
posted by Marisa Stole the Precious Thing at 3:36 AM on December 22, 2011 [3 favorites]

-the commodities speculators who drove the price of oil through the roof in 2008. It was what knocked over the housing market. All those people who were just barely able to pay their mortgages with sane gas prices, who suddenly got pickepocketed at the pump.

Oil is still circa $100 a barrel. If there was plenty about, wouldn't the producers pump a bit more? I keep reading about the new USA oil boom, where a possible 500,000 barrels a day of expensive to produce Bakken shale oil will somehow replace current Saudi imports.
Maybe the giant increase in house price finance coincided with us hitting the limitations of inexpensive to produce oil?
I'm not sure how the argument follows that house prices were sustainable, as long as the price of oil didn't increase is not an example of speculation.
posted by bystander at 4:15 AM on December 22, 2011 [1 favorite]

But Iceland defied the orthodox economic wisdom of the time---bailouts and slashing government services---and now is on the road to a recovery that the rest of Europe envies


A few points on that:
Iceland's currency depreciated (whereas struggling eurozone nations can't depreicate their currency against their main trading partners - other eurozone nations);
Iceland imposed currency controls (same issue);
Are we sure that Iceland didn't slash government services? My impression was that Iceland had received IMF (and EU?) support in exchange for raising taxes and cutting spending. If you look at the latest IMF report on Iceland it seems to confirm that: "a primary adjustment of 6 percent of GDP has been achieved in just two years....Public administration has been restructured and scaled down, cost-reducing reforms in the health and education sectors are underway, and rate increases for all major taxes have supported revenues throughout the downturn" (p 12). Can Kattalus or Marisa STPT give us any more information?
posted by Infinite Jest at 4:58 AM on December 22, 2011 [1 favorite]

Iceland’s New Bank Disaster:

Stuck with bad loans and bonds from bankrupt issuers, foreign investors in the old banks sold their bonds and other claims for pennies on the dollar to buyers whose web sites described themselves as “specializing in distressed assets,” commonly known as vulture funds.
[...]
At the time when those bonds were sold in the market, Iceland’s government owned 100% of all three new banks. Representing the national interest, it intended for the banks to pass on to the debtors the write-downs at which they discounted the assets they bought from the old banks.
[...]
The vultures became owners of two out of three new Icelandic banks. On IMF advice the government negotiated an agreement so loose as to give them a hunting license on Icelandic households and businesses. The new banks acted much as U.S. collection agencies do when they buy bad credit-card debts, bank loans or unpaid bills from retailers at 30% of face value and then hound the debtors to squeeze out as much as they can, by hook or by crook.
These scavengers of the financial system are the bane of many states. But there is now a danger of their rising to the top of the international legal pyramid, to a point where they are in a position to oppress entire national economies.

posted by Bangaioh at 6:03 AM on December 22, 2011 [1 favorite]

The joke going around in 2008 was 'what's the difference between Iceland and Ireland' 'six months.' It's a pity that's not the case now.
posted by Elmore at 7:24 AM on December 22, 2011

Are we sure that Iceland didn't slash government services?

There were cuts made, on both national and municipal levels, to a number of social services. The government was able to save some money by combining ministries (e.g., the Ministry of Social Affairs and the Ministry of Health combining into the Ministry of Welfare), as well as making some cuts to the university, cuts to government child support, and some pet projects were put on hold. On a municipal level, the city of Reykjavík made cuts to the music school, and the playschools have really felt it: schools have been combined, teachers have been told they won't be getting any more overtime pay, and some towns in the country won't provide food for playschool children anymore.

The economy is recovering, yes. Unemployment is declining (annually trended - it goes up during the winter), and I've seen construction starting up again, more jobs available, prices starting to come back to reasonable levels and such.

But this has got to be the 500th article I've seen about "Iceland's economic miracle" which gives the president too much credit and downplays or ignores a lot of the facts of daily life that we've had to struggle with here.
posted by Marisa Stole the Precious Thing at 7:29 AM on December 22, 2011 [3 favorites]

Mea Culpa re: mispelling Paul Krugman. Thanks for correcting Taz.
posted by smudgedlens at 7:53 AM on December 22, 2011

If Iceland refuses to pay Britain off, whilst using its recovery to ease internal austerity measures, could Britain retaliate by imposing a naval blockade and/or no-fly zone?
posted by acb at 9:23 AM on December 22, 2011

Even if we can't replicate exactly what Iceland did, I think we should at the very least be looking at a trust busting spree that will make Teddy Roosevelt look like a piker.

Too big to fail == too big to exist.
posted by sotonohito at 11:04 AM on December 22, 2011

If Iceland refuses to pay Britain off

Iceland is paying Britain and Holland back already (if you don't trust an Icelandic news source, here's Reuters). Or rather, the funds of the Old Landsbanki are being paid into the depositors' insurance funds of those respective countries. The first payment was made earlier this month.

Are they just not reporting this over there or something? I have another British friend who says she's heard nothing about this.
posted by Marisa Stole the Precious Thing at 12:15 PM on December 22, 2011

If Iceland refuses to pay Britain off, whilst using its recovery to ease internal austerity measures, could Britain retaliate by imposing a naval blockade and/or no-fly zone?

They could just invade again considering how easy it was the last time.
posted by Copronymus at 12:29 PM on December 22, 2011

Invading and installing a Goldman Sachs administrator to oversee the rehabilitation of the "failed state" would be a last resort.
posted by acb at 1:33 PM on December 22, 2011

Speaking purely as a Canadian, I have only one thing to say: everything you see on the CBC is wrong.
posted by 314/ at 2:29 PM on December 22, 2011

We already have the IMF to do exactly that, acb. It's not a new policy.
posted by mek at 2:34 PM on December 22, 2011

Speaking purely as a Canadian, I have only one thing to say: everything you see on the CBC is wrong.

Speaking purely as another Canadian, no.
posted by Turtles all the way down at 2:35 PM on December 22, 2011 [3 favorites]

Actual history has proven these serious people very, very wrong on both counts. But it's not changed their opinions one tiny little bit. Which should perhaps make one consider that they're true motives are different from what they claim them to be.

Ivan, can you speculate for us?
posted by Transl3y at 3:36 PM on December 23, 2011

I talked about that a bit in a comment in a related thread a few days ago.
posted by Ivan Fyodorovich at 8:25 PM on December 23, 2011