Iceland – what happened?

Original article, by Jack Smart, via Socialist Appeal (UK):

“The Icelandic economy is prosperous and flexible” (IMF 4 July 2008)

(There is) “a very real danger…that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy.” (Iceland’s Prime Minister Geir Haarde – address to the nation 6 October 2008)

Such a change in a matter of three months. Think about it. Then consider how we’ve been told how the fundamentals of the US economy have been sound for the past several years. If the same holds true for the US as Iceland, just how big is the US economy really, and how much of it is just pieces of paper saying we’re worth something?

To explain the particular crisis with Iceland’s banks, we can do no better to turn to an article written in the Financial Times on 1 July 2008 by Robert Wade, a Professor at the London School of Economics. Professor Wade explains that prior to 2000, most of Iceland’s banks were publicly owned and run with a conservative approach to issuing loans and credit. Real interest rates, i.e. interest rates taking Iceland’s relatively high inflation rate into account, were low and even negative. Credit was not given easily and it was hard for individuals to obtain a loan. Under the pressure of the capitalist class, envious at the massive profits being made by banks elsewhere, Iceland’s banking system was deregulated and privatised in 2000.

It seems Iceland went for broke (and succeeeded in getting there). They went from a state run banking system that was serving the people of Iceland (apparently well), and switched to a ‘modern’ system based on debt, leverage and paper. You just have to love those bankster thieves.

To quote Professor Wade: “The banks were privatised in 2000 in a hasty and politically driven process. Ownership went to people with close connections to the parties in the conservative coalition government which had scant experience in modern banking.” The banking regulators “preferred as light a regulatory touch as possible.”(Robert Wade – FT 1 July 2008). Of course what the good Professor means is that the elite in Iceland saw the opportunity to make a quick buck out of the banking system and arranged matters accordingly. Parliamentary democracy was seen as merely a means to this end. These actions were, of course, applauded by the capitalist class worldwide and lauded by such institutions as the IMF.

Mind you, if the IMF likes something, it’s probably bad for the people and good for the bosses. It’ll be interesting to see if Obama or McCain lets the IMF parasites dictate our national economic policy once the new term of office commences. Iceland is going to be paying the price for it’s stupidity for years to come.

The banks, hitherto operating mainly as domestic clearing banks, extended their operations to investment banking. Deregulation allowed banks, companies and individuals to borrow vast sums of money and this fictitious capital led to a massive boom. Much of this money came from outside of Iceland in what is known as the ‘carry trade’. This is a way for capitalist speculators and swindlers to borrow money outside Iceland, e.g. in the Eurozone, at low interest rates, exchange it into Icelandic Krona, and to lend it to banks, companies and individuals in Iceland at higher interest rates. The difference between the two interest rates was pocketed by the capitalist as profit.

Speaking of drawing and quartering….

Does it sound like a scam to you? It does to me. I wonder how much the standard Icelander ‘profited’ during the scam?

Of course the merry-go-round could not continue for ever. Over the past year, as the economic crisis has intensified, banks have been reluctant to lend and have been calling in their loans. The carry trade into Iceland ended and the loans made to Icelandic banks had to be repaid. The problem was that by now Icelandic banks had a high level of leverage, i.e. debt to real assets. The FT reported on 8 October 2008 that according to the central bank of Iceland, the money owed by the country’s banks to foreigners amounted in the second quarter of 2008 to six times Iceland’s GDP (annual national income). Iceland had become in capitalist eyes a “reasonably large banking system with a small country attached” (FT 8 October 2008), but the banking system itself was in crisis. The Icelandic Government introduced panic measure and ordered banks to sell foreign assets and repatriate the monies raised. On 5 October the Government announced that there was no need to introduce special measures. In the midst of the world financial crisis the very next day a bill was introduced into Parliament, and passed with opposition support, allowing the Government to take over the banks. That same day the Prime Minister addressed the nation and announced “the outlook is grim for many”.

Needless to say, there’s more to be had. Suffice it to say that the banksters and bosses are not the ones who are going to have to pay for their greed. The general Icelander will be expected to pick up the tab for the bankster frauds.

The failure of capitalism we are witnessing is a worldwide phenomenom. It’s not limited to just the US and Iceland. In all cases, it looks like the governments of the world have chosen to save the bankster scum and pass the bill on to the taxpayers. This, at best, puts the day of reckoning off for a few months. With major economies such as the UK’s contracting, the financiers who have survived will swoop in like vultures to ravage the carcass of each fallen economy.  It’s what the capitalist parasites do, and they’ll do it with the blessings of each government.

It’s time for the people of the US, and around the world, to look at the economic system and decide if it is good for them.  Not if it is good for the bosses, but if it is good for them.  The decisions they will make will help to shape the economic model for the world for the next several decades.


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  1. I keep trying to write a coherent comment (and failing), so let me just say: the IMF was lying last June.  As with the U.S. banking crisis, some people (in the U.S.) saw this coming months earlier.  I first read that Iceland was in trouble sometime last spring, I think at Big Orange; and in March, Paul Krugman did a brief post about Iceland on his NYT blog.

    In the case of the U.S., of course, smart economists (Krugman, Roubini) and investor (Warren Buffett) saw during Bush’s first term that the system would inevitably collapse.

    • dkmich on October 26, 2008 at 13:46

    Then, they replaced it with American capitalism and everything went to hell.  Sounds about right.  

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