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Icelanders rock: They let their banks go wild, too, but then they fixed them
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Iceland, a small nation whose economy was nearly crushed in the recession that started in 2008, is apparently now well on the road to recovery. A piece in Sunday's New York Times by Sarah Lyall was titled "A Bruised Iceland Heals Amid Europe's Malaise."
I confess to having a soft spot for Iceland. One of my sons was born in Reykjavik and, during a two-year assignment there, I came to appreciate the Icelanders' gritty approach to their island's limited resources and grim climate. (One August it rained every single day.)
It is also the case that, given the respective approaches of the United States and Iceland to not dissimilar economic crises, in my view the Icelanders' approach has more merit than ours.
Their banks were marginally more blatant in mishandling debt than American banks. By 2008 the three largest -- Glitnir, Kaupthing and Landsbanki -- had run up external debts of $114 billion, six times Iceland's gross domestic product. In response to what the Icelandic government politely called the banks' "high leverage," its Financial Supervisory Authority took them over. It also removed the head of the central bank, David Oddsson.
Iceland's private banks had been deregulated in 2001. (Does that sound familiar?) One of their clever unregulated stunts was to accept deposits in foreign currency, with which they speculated offshore. The Iceland krona sometimes fluctuates wildly, but the banks couldn't even repay their debts in kronur. When I lived there one could track the rate of the krona in part by the number of one-krona coins to be found on the sidewalks in Reykjavik, the capital.
When the trouble first surfaced, the Icelanders said they would cover Icelandic depositors but not foreign ones. The British and Dutch hit the roof. The British went after them through a provision in their Anti-Terrorism, Crime and Security Act of 2001. That really annoyed the Icelanders, who are members of NATO. A deal was finally worked out with conditions placed on loans to Iceland from the International Monetary Fund and fellow Nordic states.
None of this surprised me. When I lived in Iceland, the banks were already little nerve centers of tricky dealings, with interlocking directorates and links to political parties.
But Icelanders are gutsy and not afraid to tackle problems head-on. Part of this comes from their history: They are survivalists. In the 18th century a volcanic eruption blanketed the island with ash. The grass died, then the sheep died, then perhaps a quarter of the people died.
The survivalist aspect of their character is what has made them hang on to whaling in the face of close-to-universal disapproval. They remember how selling whale oil kept them afloat in dark economic days during the Napoleonic Wars.
Icelanders acknowledge that they do well during wars. During the Cold War the United States fortified their island, on a paying basis, with military facilities to track Soviet submarines and other ships and aircraft coming out of bases in the Kola Peninsula.
Among the measures that Icelanders pursued in the wake of the recession, aside from sacking their equivalent of Ben Bernanke, was to indict the prime minister, Geir Haarde, for "negligence in office." He eventually was convicted of being asleep at the switch -- or closing his eyes -- while the banks drove the country into the ground. The formal charge was failing to hold emergency Cabinet meetings in the run-up to the crisis.
The Icelandic president is a ceremonial figure, so the U.S. equivalent of the convicted prime minister would have been President George W. Bush. Neither he nor then-Treasury Secretary Henry M. Paulson nor Mr. Bernanke nor any other U.S. financial figure has yet been charged with anything for having a hand in America's financial wreckage.
Instead, the U.S. government bailed out the American banks with taxpayers' money, punished none of them or their leaders, and turned them loose again to work more damage on the American economy through credit default swaps and other unregulated acts of slimy dealing.
Iceland is now, a mere four years after its financial glacier-calving, apparently back on the economic fast track under the leadership of Prime Minister Johanna Sigurdardottir. The country has paid back many of its international loans, some of them early. Inflation is down to 5.4 percent, from a high of 20 percent when things were popping. Citizens -- as opposed to banks and companies -- have been provided debt relief. Unemployment stands at 6 percent and is falling. (U.S. unemployment is stuck at 8.2 percent.) Taxation is higher than in America, yet Iceland's economy is expected to grow by 2.8 percent this year. That compares to an IMF projection for the United States of 2 percent.
Obviously tired of the slipping and sliding of the krona exchange rate, Icelanders also are exploring tying it to either the euro or the Canadian dollar. Not the U.S. dollar.
I wouldn't want to live in Iceland. I couldn't stand the climate. One year the wind blew out all the plants I had put in the ground.
But in terms of courage and wisdom in its approach to financial problems and in its commitment to economic justice among its people, Iceland offers attractive alternatives to the swamp that the U.S. government -- and most of all Congress -- constitutes further south.
First Published July 11, 2012 12:00 am
