Hvað segi ég erlendis um bankahrunið?

Ég svaraði fyrir skömmu spurningum hins vinsæla pólska tímarits Uwazam Rze um Ísland, kreppuna og bankahrunið. Hér fara svör mín (á ensku, en verða birt á pólsku í tímaritinu) á eftir spurningunum, sem eru feitletraðar:

 

1) What was the reason of the bank crisis in Iceland in 2008-2009?

There was an international crisis which hit Iceland sooner and somewhat harder than other countries. It was not a domestic crisis. The causes of the international crisis were: 1) the American subprime loans, 2) too low interest rates in America and elsewhere, 3) too much sovereign debt, both in Europe and in America, 4) new financial techniques which tended to underestimate risk.

It was a typical credit bubble which burst, although bigger than we have seen for a long time. In my opinion, it is quite well explained by the Austrian theory of the business cycle, as explained by Ludwig von Mises and Friedrich von Hayek.

The reason the crisis hit Iceland harder and sooner than other countries was that the Icelandic banks were much bigger than the Central Bank and the Ministry of Finance could sustain, as lenders-of-last-resort, and that other countries were unwilling to help save the Icelandic banks. Indeed, the British government made the crisis worse by closing all means of transferring money to and from Iceland for a while, by closing the affiliates of the Icelandic banks in Britain (while saving all other banks in the United Kingdom at the same time!) and by putting one of the Icelandic banks on its list of terrorist organizations, and briefly, also the Central Bank and the Ministry of Finance. It was outrageous behaviour.

A third domestic factor contributing to the fall of the banks was that the lending risk was underestimated because many of the debtors were closely related and should have really been counted as one risk-bearing entity, not many. These debtors were in some cases intimately related to the owners of the banks. But, basically, I would argue that the Icelandic bankers were no better and no worse than bankers elsewhere. (And if they were so stupid, how could they obtain all this credit abroad? Were their creditors, the foreign bankers, then not stupid?)

2) How was the crisis overcome? Was it the best solution? What else could be done?

Basically, what the Icelanders did was not to bail out the banks. The banks went technically, if not formally, bankrupt, and the Icelandic government refused to save their foreign operations while the domestic bank accounts were guaranteed, and new banks founded on the ruins of the old banks. Nothing else could have been done in my opinion.

3) Which role did politicians play in bringing Iceland to the crisis and in overcoming it?

Icelandic politicians had no role in starting the international financial crisis. Politicians in the US could possibly be blamed for the subprime loans (especially some of Clinton’s ministers) and for tolerating a very soft monetary policy by the Fed, i.e. low interest rates, for so long (by reappointing Alan Greenspan). And European politicians could be blamed for incurring too much debt, especially in the PIGS (Portugal, Ireland, Greece and Spain) countries.

Iceland is in the EEA, European Economic Area, so the politicians could not prohibit the Icelandic banks to expand abroad, so long as they could find customers there, depositors and creditors. Indeed, the banks operated under precisely the same rules as banks in other European countries. Iceland introduced the same legal framework for financial institutions as the other European countries. It could be argued, though, in retrospect, that the financial supervisory board (the responsibility of the Ministry of Trade, in the hands of the Social Democrats during the last years before the crisis) was too lax, too soft on the banks, especially about allowing them to count as many risk-bearers groups that were essentially united.

The crisis was overcome by not bailing out the banks. This was a policy advocated by the governor of the Central Bank, David Oddsson, the former prime minister and leader of the conservative-liberal party, the Independence Party. He can be regarded as the author of this kind of response. But most Icelanders agreed. There was nothing else to do. However, the present very left-wing government has created stagnation, by not allowing hydro-electric and thermal plants to be built, and by attacking the flourishing fishing industry in Iceland, threatening to change the rules under which it operates, fundamentally. As the Wall Street Journal has written, this seems almost suicidal.

4) How did the crisis affect the public in Iceland?

There were essentially two domestic groups adversely affected. First, those who owned shares in the banks, lost them entirely. The value went down to zero. Secondly, since most long-term loans in Iceland, especially mortgages, are indexed, those who had recently taken out a loan or a mortgage, were hit hard by the fall of the krona, and the ensuing inflation. They saw their assets drop, while their obligations increased.

However, the Icelanders took the crisis more seriously than most other European nations, because they are not used to any national catastrophes. They have hardly known a crisis since the Great Depression. In fact, seven other European nations was hit harder than Iceland, in terms of reduction of GDP in 2009. Iceland had a reduction of less than 7%, while Latvia, Lithuania, Estonia, Finland, Slovenia, Romania, and Ireland saw more reductions.

5) How did the crisis affect Iceland’s public finances?

In 2008, essentially there was no public debt. It had been paid by the revenue from privatized companies. But of course the cost of restructuring the Icelandic part of the banks put a great burden on the government. 

6) What do you think about joining the EU and the euro zone? Is it good or bad for Iceland and why?

I do not think Iceland should join the EU, for several reasons: 1) the EU is becoming a super-state, without any democratic mandate, run by faceless, unaccountable bureaucrats; the centralizing forces are changing it from an open market to a closed state; 2) Iceland is despite the crisis a rather affluent country which would lose by joining, just like Switzerland and Norway; 3) Iceland has a very efficient fisheries policy which would be damaged by the Brussels bureaucrats: in Europe, fishing grounds are held in common, in Iceland, there are individual, transferable fishing rights that have proved very efficient; 4) Iceland has the necessary access to the European market by the EEA agreement; 5) Iceland should nurture trade and good relationship with the BRIC countries, Brazil, Russia, India and China, and also with the United States and Canada, and it could not make free-trade agreements with those countries, if it would be a member of the EU.

7) What is the actual condition of Iceland’s economy (after overcoming the crisis)?

The economy grew a little in 2010 to 2011, but now it is stagnant. The present very left-wing government seems not to be interested in economic growth. It does the opposite to what is usually done in a depression: it has raised taxes and cut government investment (to a historical low). All the revenue flows to its constituents, namely the public employees. There is no awareness of the fact that wealth has to be created before it is consumed. The government has done its best to drive all the rich people from Iceland, by various means, such as special taxes.