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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The Iceland Saga, Part One

The first part of a two-part post on the Icelandic economic crisis.

Fosco has mentioned before that he loves Iceland immoderately. He and his college roommate lboom went to Iceland twice in the late 1990s and fell in love with the place. So much so that Fosco has fantasies about living the rest of his life in coolest city in the world, Reykjavík. That way, he could spend at least one day a week submerged in the coolest spa in the world: the Bláa lónið (aka the Blue Lagoon. No, not that one).

Sadly, you've probably heard that things in Iceland aren't very stress-free as of late. As Fosco noted last fall, Iceland's entire banking system has collapsed. Fosco is actually surprised that this story hasn't received more press attention so far. After all, the media usually loves disasters when they happen to white people (and Icelanders are indeed quite white--almost transparent, actually). Maybe the Icelandic crisis just can't compete with our own American crisis (although Iceland's in a lot more trouble); or perhaps no one wants to suggest that what could happen in Iceland could perhaps happen elsewhere (like here).

Whatever the reason, Fosco is here to fill in the blanks. This is what you need to know about the Icelandic financial crisis.

One thing about Icelanders: they are a generally a practical and reasonable people. During the immediate aftermath of their economic collapse, foreign reporters had a hard time finding much of a "human story," owing to a general lack of hysteria. This piece from The Daily Beast found one major difference: "No One's Eating Pie Anymore." Hmmm. What could that mean?

In some ways, Icelanders are a lot like Americans. They look like they’re from Portland, Maine. I attended a party here and the host cooked three pies: apple, pumpkin and pecan – then we all sat around and watched the U.S. presidential debate. To say that these people are more dedicated to U.S. politics than Americans is an understatement.
[...]
Until food and supplies run out, the country remains in the quiet before the storm. During the first week, the main shopping street was jammed with cars filled with families driving slowly, aimlessly. They didn’t know what to do. The restaurants were empty. The only rejoicing to be found was in expat hangouts, where dollars, recently worth 70 krona, were suddenly worth 150.

Part of the reason for the lack of despair, the article notes, is that Icelanders aren't terrified by the possibility of poverty:

It’s only as the long slow slide continues that Icelanders will make it very clear that they’re not like Americans. Americans don’t know how to be poor. Witness the millions of us who live totally on credit, and the fact that we have no idea how to sustain ourselves. We make reality TV shows about our attempts at hunting and survival, while Iceland was still a poor farming country just twenty years ago. There’s an old guy in Reykjavik who grew up in a nearby cave. Yeah, caveman. They may look like us and talk like us, but they can also do stuff like farm and knit and fish. The editor of one of the two major newspapers here told me, “I’ve always assumed that if my editing or music career doesn’t work, I can always gut fish.” It was his teenage job.

Maybe Americans could learn that kind of equanimity... but I'm not holding my breath.

Of course, that doesn't mean that some Icelanders weren't angry. Take pixie chanteuse Björk, for example. Right after the collapse, Björk wrote an editorial noting that the Icelandic government was planning to use the economic crisis as an opportunity to grant aluminum rights to environmental rapists like Alcoa and Rio Tinto, rights that would cause a great deal of environmental damage to Iceland. As Björk notes:

Usually I don't notice politics. I live happily in the land of music-making. But I got caught up in it because politicians seem bent on ruining Iceland's natural environment. And I read last week that, because of the crisis, a number of Icelandic MPs are lobbying for the environmental assessment to be ignored so that the dams can be built as quickly as possible to give Alcoa and Rio Tinto the energy they need for the two new smelters.

Yes, the "I don't notice politics" line is annoying as hell; but she's exactly right about the rest of it. It may be an economic collapse for the Icelandic people, but it looks like it's Christmas for Alcoa! Whee!

So things were looking pretty bad last fall; and then know what made them worse? Gordon Brown. As in Prime Minister of Great Britain. You see, before the collapse, because Iceland's banks were crooked and incompetent, they were returning a great rate of interest. Consequently, many British municipalities, pensions, charities, etc. decided to invest their money in Icelandic accounts. When the banks failed and were seized, those assets were frozen. This angered Britons and their Government responded: by seizing all Icelandic assets in Great Britain under the legal authority of anti-terrorism laws. Yoink! Being treated like terrorists rankled Icelanders apparently. As this article noted, law-abiding residents of Iceland were a tad angry about being compared to terrorists:

"Ordinary Icelanders are no more responsible for the risk-seeking businessmen who happen to hold our passport than the people of north London are responsible for the destructive behaviour of the talented Amy Winehouse," said Icelandic professor Eirikur Bergmann Einarsson in the Guardian.

Well-played, Professor Einarsson.

But Icelanders are both resourceful and witty. As this piece notes, Icelanders responded by creating photographic postcards to send to Gordon Brown, informing him that they are not terrorists. Here's one of the cuter examples (and no, I don't know why they call him "Darling"--isn't Iceland grand?):

(And yes, every living person in Iceland--of any age--is extraordinarily beautiful.) There are now tens of thousands of these photographs; you can browse them here.

So let's fast-forward our narrative to January of 2009. Suddenly, Icelanders started to get a little more restless. Protests started to get big. And nasty. Well, just a little nasty (this is still Iceland). HuffPo's Iceland correspondent even noted that "Iceland Is Burning" (which seems to have been a slight exaggeration, although something does appear to have been on fire in one of the accompanying photos--probably just briefly). Heartbreakingly, blogger Iris Erlingsdottir made this plea for help:

Over the past eight years, America ceased being the City on the Hill, shining its light to the rest of the world. America and Britain closed the NATO air base in Iceland, and have made no offer to help Iceland in its time of trouble. We need help, not only to break down the old power structure, rotten to the core, but also to prevent it from being rebuilt. We desperately need stability, economic assistance, impartial advice, and fair supervision.

Barack Obama, a nation turns its lonely eyes to you. Please!

Clearly, Obama has other priorities, Iris. Could we interest you in a (slightly-used) Dick Cheney?

Sure enough, days later the Icelandic Government collapsed and a caretaker coalition took over (crazy Parliamentary system!) until new elections can be held. The new Icelandic Prime Minister is Jóhanna Sigurðardóttir, the first woman Prime Minister in Icelandic history and the first openly gay world leader (although there are still those pesky rumors about Stephen "Mr. Gropey" Harper). You've got to hand it to Iceland: even when their country is on the verge of dissolution, they manage to elect an elegant lesbian GILF as Prime Minister! Now that is style.

So where does that leave Iceland? Well, in some kind of stasis, it seems. The evil Balrogs of the IMF have shown up and have provided a loan and a plan to stabilize the economy (read: will make Icelanders pay for generations for the sins of a few ultra-capitalist robber barons). The banks are still frozen. No one has any money. Unemployment is up. Elections are still over a month away.

Fosco gets a daily dose of Icelandic news (thanks to a recommendation from his pal M-Life) from this site: Icelandic News in English. It's sad, of course--especially the description of the site itself:

Here you will find Icelandic news translated to English. I lost my job at the end of October as a result of the depression so, for now, I consider my job to be translating Icelandic news for those of you who are interested in this crisis that is shaking the very foundations of the Icelandic society.

Once again, we have to admire the Icelandic spirit. Unfortunately, the translations provided are not always so good (for one thing, newspaper articles never provide enough context for a foreign audience). And, for another thing, I think the translator's command of English is a bit imperfect (although much better than Fosco's command of Icelandic, natch). Here's a great line from an obituary of an Icelander who taught in the US:

He was a teacher of literature and penmanship at the Southwest Minnesota state university for the past 27 years.

I'm going to go out on a limb and say that he probably taught "writing." Of course, when Fosco laughs at a translation mishap like this, he's mostly just laughing to drive away the tears. Poor Iceland!

You can read Part 2 here.

Icelandic literary recommendations. The Icelandic Sagas (written in the 10th and 11th centuries) are a great treasure of world literature. They are also surprisingly readable and interesting. Some recommended collections/editions:

Click through to purchase.



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Fosco's Travel Guide for Lutherans

For your Sunday enjoyment, here's a gorgeous church picture. This is the Hallgrímskirkja, a Lutheran church that dominates the skyline of Fosco's beloved Reykjavík, Iceland.

Years ago, Fosco and his college roommate lboom visited this church. Strangely enough, that's a statue of Leifur Eiríksson in front (who you may know from elementary school as Leif Ericson or from your teenage years as Liv Tyler).

Should you ever visit Reykjavík (and I recommend that you do), you should consider staying at the Hótel Vík. As they say, "you must try it."

Fosco Left his Heart in Iceland

Fosco has been to Iceland twice and he loves it. They have super moody music, gorgeous landscape (no trees!), and a surprisingly vibrant national literature.

And how can you not love a country that has 100% literacy? That organizes its phone book by first name? That ferments sharks underground and then eats them?

Iceland rawks.

Sadly, though, Iceland has had a wee bit of trouble recently. Thanks to the world-wide crisis in weird financial derivatives, Iceland's banking system has collapsed. As the NYTimes reports, almost two weeks ago,

the government took over the last of three major banks and shut down the stock exchange.

Trading in the Icelandic krona ceased, with foreign banks no longer willing to take the currency — even at what seemed like bargain rates.

This is bad stuff (and not just for Iceland).

Can you imagine what would happen in the US if our banking system collapsed? How would you and your neighbors react? (Here's Fosco's guess.) However, the Icelandic people are responding in ways that only make Fosco love them more.

The BBC has it covered. It turns out that Icelanders are handling it all with the poise and equanimity of a Barack Obama:

A few passers-by [in Iceland] commented that, actually, things were perhaps not that bad. They didn't have any money anyway, so they had nothing to lose.

And how about the angry rioting mobs? Well, not quite:

By midday a crowd of Icelanders had gathered in the square in front of parliament to show unity, they said - stressing that this was certainly not a protest.

And to some degree that was what it felt like - people coming together for moral support.

As Icelandic rock star Bubbi Morthens notes:

"They feel that this gathering, and friends and family and love, are important. This is not a time for anger."

Can you see now why Fosco finds Icelanders to be so refreshing? So, take a moment today to send some money to the Iceland rescue!