Our guide, A.O pointed out how Iceland was coming back from their recession that was brought about when their 3 major banks failed. Proudly, he said that Iceland was the only country to have paid back its IMF emergency loans. He said that now the country was back in a big spending mode. I had already noticed that cranes were omnipresent. I hope that this spending does not mean that another bust will follow the current boom. I remember what John Kenneth Galbraith had said, “A balloon never deflates in an orderly fashion.”
In 2008 the world suffered a major recession as a result of reckless actions by bankers around the world, but particularly in the United States. Canada was actually one of the countries that largely escaped it except to the extent that Canada is an exporting country and its major trading partner was mired deep in it. Iceland suffered the crisis more directly. Its banking system was not anything as strong as the Canadian system. It was even weaker than the American banking system. The problems of Iceland occurred as a result of trying trying to mimic the feats of neo-liberalism economics around the globe. It paid a heavy price for that. As Richard Partington of the Guardian reported,
“The problems came as the country began to emulate the neoliberal policies of Ronald Reagan and Margaret Thatcher by cutting taxes to stimulate private investment throughout the early 2,000s. Inflation soared and the central bank was forced to use dizzyingly high interest rates to keep control, jacking them up to 15.5% in the months before the crash.”
As a result of such interest rates money flowed into Iceland from around the world. Everyone wanted a piece of the action, driving up inflation even more. After all these interest rates could not be beat anywhere. Yet the lenders in Iceland were not satisfied. They never are. They wanted more business. With funding from the financial markets Iceland’s banks went on a spending spree. They finance the acquisition of foreign firms, property and football teams. As a result the Icelandic banks were “taking their assets to about 10 times the size of the domestic economy.”
Because Iceland is such a small country, about half the population of Winnipeg, its currency fluctuates wildly. This was not a good situation to be in, when the world financial system came close to collapsing. As Partington explained,
“When the global economic storm of 2008 landed, with the US sub-prime bubble bursting and the world’s banks ceasing to lend to one another for fear they would never be repaid, Iceland’s big three lenders–Kaupthing, Glitner, and Landsbanki–had debts worth more than six times national annual output. They quickly came crashing down.” Economist Jessica Hinds said “Even compared to other very highly financialiced centres such as Luxembourg or Singapore, Iceland’s looked ridiculous.’
When this happened in other countries, most notably the United States, their government stepped in to save the banks, their executives, and even their shareholders and depositors from financial ruin in order to preserve the financial system. Many thought this was wise, at the time. The policy was started by George W. Bush and Barack Obama was already waiting the wings as the heir apparent and he too agreed. Bush and Obama both thought the American banks were “too big to fail,” so American and world taxpayers paid more than a trillion dollars to rescue them even though they had caused the problem in the first place by their reckless banking and business arrangements. As we all know those bankers quickly took advantage of the largesse of American taxpayers.
Iceland took a different approach. As Partington reported, “But rather than stepping in with taxpayers money like the British and Americans did, the Icelandic government lets its banks go bust. Unlike the complex UK economy and its globally significant financial system, so the argument went, relatively small Iceland could afford to do so.”
In the US and Europe many people, including those who later supported Donald Trump did not understand how the government would rescue fat bankers and let ordinary people suck socks. Thousands of Americans lost their homes. Thousands lost their jobs. It was horrible, except for comfortable bankers who accepted the government generosity , and soon started paying themselves lavish bonuses again. Very few restriction were placed on the bankers who had nearly caused the financial ruin of everyone. Like pigs at the trough, they were more than happy to except the bailouts and pay themselves huge bonuses for a job well done. Ordinary taxpayers were mystified how this could happen. They should not have been surprised. The world economies are run by the wealthy for the wealthy. It is hardly surprising that they managed to rescue their own privileged positions with such ease while ordinary citizens suffered. In Iceland “the banks were not regarded as too big to fail but, says finance minister Bjarni Benediktsson “too big to save.”
Things in Iceland were tough–for a while. Iceland went to the International Monetary Fund for a bailout loan of 2.4 billion dollars. That is equal to about $7,000 for every man woman and child in Iceland. Then Iceland imposed capital controls to keep that capital in the country. That made sense. The króna lost half its value in the first 3 years after 2008. Its GDP dropped precipitously by 15%. This was “the biggest contraction recorded by a wealthy economy during the crisis.”
Many thought Iceland was doomed. It was not. It recovered. Having come through the crisis a decade ago. Its economy soon revived. Tourism led the way. Tourist numbers rose by about 25% each year after 2010, reaching 2.2 million in 2017. Today things look pretty good, economically, in Iceland. Iceland took a different approach and is happy it did. Perhaps we could all learn something from Iceland. Whats good for the banks is not necessarily good for Iceland, or any other country.