Thursday, March 12, 2009

The Iceland Saga, Part Two

This is part two of a lengthy post on the Icelandic economic crisis. You can read Part 1 here.

In the previous post on Iceland's financial collapse, Fosco took you on a whirlwind tour of numerous different sites and sources. In this post, Fosco wants to concentrate on two in-depth sources: this recent New Yorker profile of the Icelandic crisis by Ian Parker (frustratingly, only available to subscribers) and Michael Lewis's forthcoming piece in Vanity Fair.

When we last checked in on our frozen heroes, Iceland's culture and economy were in a sort of stasis. So what happens now? As Parker notes, this is what no one knows:

the question asked by any visitor was also being asked by Icelanders themselves: When a wealthy, First World country--publicly funded medicine, private jets, evenings of chamber music--experiences a catastrophe that shocks its neighbors and brings the International Monetary Fund to its aid, what happens next? How does ruin turn out?
Worryingly, we still don't know the answer. However, as Parker points out near the end of the article, there may be some measure of acceptance: ruin may not be as bad as everyone feared.
In a society with national health care, low energy costs, and little real poverty [read: a society completely unlike the US], some Icelanders--even those with monstrous new debts--allowed themselves the luxury of a slow exhalation. The opposite of prosperity is not extinction. [...] Many Icelanders seemed encouraged by thoughts of a more austere, domestic, and less self-consciously potent national reputation. There was some talk of knitting.
That's the good news. And I think, as good news goes, that it's actually pretty okay. Knitting is a somewhat reasonable activity. Cultural austerity is acceptable. Of course, things will be much worse if/when this happens in the US.

But now that we know that Fosco's beloved everyday Icelanders are probably going to be okay, maybe we should take a little time to blame the people who got Iceland into this mess. A good portion of both Parker's piece and Lewis's piece is a fascinating exposition of the roots of the Icelandic crisis.

Apparently, sometime after Fosco's last visit to the island (in the late 1990s), the government decided to cast aside the traditional model of Scandinavian socialism in favor of neoliberal economic "reform" (are you noticing a familiar villain lately?). The government privatized the banks, the phone company, and the fish-processing plants. Naturally, these newly private institutions were snapped up by members of the political ruling class. What remained of public institutions (like the Icelandic Central Bank) were de-regulated.

The Prime Minister who oversaw almost all of this neoliberalizing was Davíð Oddsson. Interestingly enough, after serving as Prime Minister, Oddsson got himself appointed as the chairman of the board of governors of Iceland's Central Bank. As Parker dryly notes, this was "an unimaginable move in almost any other political system." When Lewis tells it, this is an even stranger occurrence:
At length, weary of prime-ministering, [Oddsson] got himself appointed governor of the Central Bank—even though he was a poet without banking experience.

After the collapse he holed up in his office inside the bank, declining all requests for interviews. Senior government officials tell me, seriously, that they assume he spends most of his time writing poetry. (In February he would be asked by a new government to leave.)
And we thought GW Bush was disengaged!

But for a while, Oddsson's plan seemed to be working. He and his cronies were able to make lots and lots of money. As Parker notes:
the three main Icelandic banks--Kaupthing, Landsbandki, and Glitnir--and many of the businesses associated with them were leveraging themselves internationally. The distinction between these banks and their corporate clients is blurry: at the heart of Iceland's adventure was a small group of men and a fair amount of interconnectedness; and it's tempting, if not entirely just, to think of them as partners in a single giant national hedge fund.
And suddenly, Iceland--a country that was essentially classless due to socialism--suddenly developed a class of super-rich billionaires. This was a very good time for a lot of Icelanders, a period that Parker calls the "giddy years of growth":
an era now remembered for Range Rover traffic jams, and private parties featuring Elton John. Valgeir Valdimarsson, who until recently worked for the airline Iceland Express, compared it to the "dream season" on "Dallas." He said, "People were thinking, Wow, we're one of the richest countries in the world. They they woke up."
Many Icelanders viewed all this with bemusement. "In most cases, people were quite proud of what was happening," Andri Snaer Magnason, a leading Icelandic writer, said. [...] "But we didn't really understand it. A guy running twenty stores in Iceland suddenly had bought half the high street in London?"
It all sounds like great fun, of course. But you know what happens to leverage, right? Eventually you may have to put up some cash. As Parker explains:
In 2007, at the start of the global credit crunch, the Icelandic banks were not weighed down by weird securitized assets, but they were big--many would say irresponsibly so--and Iceland was tiny. The country had one of the smallest freely floating currencies in the world, and, before the crash, the banks had outgrown the national economy by at least nine hundred percent. (In 2007, the equivalent figure in America was eighty-one per cent.)
Ouch. I don't know a lot about finance, but I'm pretty sure that's a bad thing.

Lewis tells the story relying on different "highlights," concentrating on how these banks essentially borrowed more money than it could ever be possible to pay back:
In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”

At the same time, in part because the banks were also lending Icelanders money to buy stocks and real estate, the value of Icelandic stocks and real estate went through the roof. From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry.

In the end, Icelanders amassed debts amounting to 850 percent of their G.D.P. (The debt-drowned United States has reached just 350 percent.) As absurdly big and important as Wall Street became in the U.S. economy, it never grew so large that the rest of the population could not, in a pinch, bail it out. Any one of the three Icelandic banks suffered losses too large for the nation to bear; taken together they were so ridiculously out of proportion that, within weeks of the collapse, a third of the population told pollsters that they were considering emigration.
And lest you think that this growth was based on extremely complicated transactions that seemed like good ideas at the time, consider this description of Icelandic banking as reported to Lewis:
Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets.
Holy crap, that's insane (especially since everyone knows that dogs are intrinsically worth more than cats). And how was it possible for them to get away with it? Well, it helped that the ruling Independence Party (Oddsson's party) was not just in favor of deregulation, but also (apparently) completely incompetent:
There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde [the former Prime Minister], though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do.
Now that part, at least, is starting to sound very familiar to these post-GWB ears.

And it's in speaking of GWB that Fosco has saved the best titbits for last (just like Vanessa Williams). It may be said that behind every GW Bush there is always a Karl Rove. Well, I think it's time for you to meet Oddsson's Icelandic Rove. Hint: he's psychotic! Parker describes him:
When Iceland changed, one prominent figure was a libertarian professor of political philosophy at the University of Iceland named Hannes Hólmsteinn Gissurarson--a free-market intellectual. "In a sense, I was one of the authors of this adventure," he said in Reykjavik, in December.
I had learned that Gissurarson--whose blog takes you in one click to Edith Piaf singing "Non, Je Ne Regrette Rien"--was widely distrusted in Reykjavik.
In 2001, Gissurarson published "How Can Iceland Become the Richest Country in the World?," entertaining the idea that Iceland could build an offshore financial economy akin to that of the Channel Islands. Margaret Thatcher is one of his great heroes.
And if you think this guy is an asshole, just wait--it gets even better. This is perhaps one of the most damning conclusions to an article that Fosco has ever read. And the best part, is that Gissurarson does all of Parker's work for him:
In B5, the empty and fashionable bar, Hannes Gissurarson, the author of "How Can Iceland Become the Richest Country in the World?," had said, "Ten to fifteen guys overreached themselves, they were out of control. But that is not the cause of the collapse." The primary causes, in Gissurarson's opinion, were the international credit crunch, the treachery of Gordon Brown--the "schoolyard bully"--and the failure of the European Central Bank to show Iceland support.

He also said, as if the thought were occurring to him for the first time, that it may be that "some of us are to blame indirectly, because we created a climate in which the entrepreneur was applauded. The businessmean, the guy who takes over companies, asset-stripping--he was a hero in Icelandic folklore that was created by some of us who strongly supported the free market." He went on, "Indirectly, I take some blame for it, but, if you think about it, it's not my fault. It's the fault of the left-wing intellectuals, who should have been giving a counter-view!" He added, "You can't blame people for their successes--you have to blame those who fail. We were too successful with the free-market philosophy."


Had it suited Iceland to be rich? "Very much so," Gissurarson said. "It was a hell of a good ride. Yes, it was."
Wait. Let's just re-read one of those sentences again. In fact, let's put it in bold:

"Indirectly, I take some blame for it, but, if you think about it, it's not my fault. It's the fault of the left-wing intellectuals, who should have been giving a counter-view!"

I think I can speak for almost all Icelanders (and for any Fosco Lives! readers who have made it this far) when I say: "Fuck you." Fuck. You.

Some recommendations in contemporary Icelandic literature, including works by Nobel-winner Halldór Laxness (plus one travel guide):

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1 comment:

Jill said...

Now I know there's more to Iceland than just Bjork and salted eel (the icky eel was my one and only experience during a layover on the way to Europe). Have a great weekend. I'm off on a small adventure to a place called Lajitas. Just a road trip. Hopefully I'll get some good photos. Ciao, Fosco!