Iceland

by hilzoy

Via Paul Kedrofsky, here's a gorgeous and heartbreaking account of economic collapse in Iceland:

"Trust in the banks had evaporated and people were trying to find a safe haven for their cash. One man had waited for six hours in a bank while his life savings, more than £1m in kronur (at IKr200 to the pound), were counted out in cash in front of him. "I feel like an innocent man dragged from his bed, put in a barrel and hurled over Gullfoss!" wrote one journalist that morning. "We have been brought down by a handful of men who bet our nation’s wealth, fame and prosperity on a throw of the dice." Gullfoss is one of Iceland’s tourist attractions -- a majestic 100ft waterfall.

On collecting our daughter from her handball practice, I learnt the news that her club could not obtain the foreign currency it needed to release their new team shirts from customs. The city's myriad sports teams rely on local sponsors and our daughter also brought the news that this source of funding for her team was likely to dry up in the months to come. Later that evening, Skype, our communications lifeline, would not renew our credits with an Icelandic credit card. E-mails began to arrive from friends overseas, alarmed by news reports and asking if we were all right.

But all this was trivial compared with the financial distress, in some cases ruin, that now faces a significant proportion of the population."

The crisis in context:

"For Icelanders, the golden years were the early years, shortly after the land was settled in the ninth century. The Viking tradition, the Althing -- the legislative assembly dating to 930 -- and the literary canon of Sagas and Eddas are the nation's cultural bedrock. But after that, Iceland almost disappears from the history books. While the agricultural revolution, the Renaissance, the industrial revolution came and went, while the fine cities of Europe were being built, while artists from Michelangelo to Mozart were pouring forth their creations, while the great inventions and discoveries were being invented and discovered, Icelanders were hunkering down in their turf houses, meeting the hardest challenge of all -- survival.

They survived plague, famine, earthquakes and volcanoes. There were times when some even considered abandoning the island. But they stayed on. They stayed and survived. Icelanders will tell you that only the fittest survived, but that is only half the story, because survival requires another key attribute: stubbornness. And Icelanders have it in spades. It is a national trait, and they view it not as a weakness but as a virtue. It comes from experiencing hardship and enduring it. It means finding satisfaction in a simple task done well and sticking to it; finding comfort and solace in family and kinship and being bound by those familial bonds and duties. And perhaps most important of all, it means believing in the independence of the individual as part of the fabric of nationhood, and fighting for that independence. Put simply, the country has values.

And this is what sets this catastrophe apart from the earthquakes and plagues of former years. This is a man-made disaster and worse still, one made by a small group of Icelanders who set off to conquer the financial world, only to return defeated and humiliated. The country is on the verge of bankruptcy and, even more important for those of Viking stock, its international reputation is in tatters. It hurts. (...)

We live now in a foreign-currency lockdown, and although the government has assured everyone that there are sufficient reserves to buy essentials such as oil, grain and medical supplies for the winter, such assurances only serve to create a further sense of unease in a people who have learnt to take such commodities for granted."

It's the best explanation I've seen of how it feels to live in a country whose first-world economy has completely melted down. Willem Buiter and Anne Sibert have a good account of what led up to it here. Buiter also has a scary piece about the possible relevance of Iceland's story to the UK here.

To judge by the stock market, a lot of people seem to think that we are at, or past, the worst of this crisis. I don't think so.

Comments

[Don the libertarian Democrat]

I'm glad you're covering this as well as Paul. I thought that this went terribly unnoticed, and the FT printing it was important.

2. November 2nd, 2008 at 3:39 pm

I think that the big problem was this:

http://www.nytimes.com/2008/11/02/world/europe/02iceland.html?scp=1&sq=iceland%20britain&st=cse

“The troubles between the countries began three weeks ago when Britain took the extraordinary step of using its 2001 antiterrorism laws to freeze the British assets of a failing Icelandic bank. That appeared to brand Iceland a terrorist state.

“I must admit that I was absolutely appalled,” the Icelandic foreign minister, Ingibjorg Solrun Gisladottir, said in an interview, describing her horror at opening the British treasury department’s home page at the time and finding Iceland on a list of terrorist entities with Al Qaeda, Sudan and North Korea, among others.

In a volatile economic climate, in which appearance matters almost as much as reality, being associated with terrorism is not a good thing.

“The immediate effect was to trigger an almost complete freeze on any banking transactions between Iceland and abroad,” said Jon Danielsson, an economist at the London School of Economics. “When you’re labeled a terrorist, nobody does business with you.”

The Icelandic prime minister, Geir H. Haarde, accused Britain of “bullying a small neighbor” and said the action was “very out of proportion.” In a recent speech in Beijing, Sir Howard Davies, a former deputy governor of the Bank of England and now the director of the London School of Economics, said that Britain had used a “beggar thy neighbor” approach to Iceland.

And an online petition signed so far by more than 20 percent of Iceland’s population said the British prime minister, Gordon Brown, had sacrificed Iceland “for his own short-term political gain,” thereby turning “a grave situation into a national disaster.”

In other words, Britain used extraordinary measures to halt the movement of funds that Iceland needed to avert the avalanche. By the way, Britain is doing a pretty good job of looking out for it’s own interests in this crisis. Brown has just been in the Gulf trying to direct money to Britain."

By the way, the big problem that I was referring to was the current dispute with Britain. Obviously, other factors were at work in this crisis for Iceland.

[Anthony]

Speaking as a Brit, I find the approach of the British government in employing our counter-terrorism legislation against Iceland extremely disturbing. Most other Brits I know who are aware of the move are also pretty concerned about what's going on. Unfortunately, large sections of the press haven't picked up on it. Apart from anything else it serves as a clear vindication of the warnings some people within the security community have been making about the abuse of anti-terror legislation. This is just the latest (and most drastic) in a series of instances of its use creeping into cases that bear no relation to actual terrorism.

That said, it's not entirely a one way street. My personal view is that the government's approach has been both unethical and fairly myopic. That said, it's also worth pointing out that this all started after the Icelandic government froze British assets in an attempt to stop them being withdrawn, in a manner that was arguably illegal. This resulted in a fairly major shortfall in Britain, as many sectors of the domestic government hold assets in Icelandic banks.

It's worth noting that I think there's a domestic aspect to this. The government claims that the advice it was given was that Icelandic banks were all Triple-A rated and that investing in Iceland was as risk free as putting the assets anywhere else in the world. However, there seems to be some evidence that the British Treasury was warned earlier this year that the Icelandic banks could be headed for serious trouble, but failed to pass this information down the line to the local government agencies responsible for depositing tax revenues. If the government acknowledges that the money has gone down the spout, it invites further questions from a furious public. If the government plays hardball, it goes some way to turning it into a straight fight between the UK and Iceland, in which the government is able to pose as the guardian of the British taxpayers' interests.

This fits in with the recent pattern in which, bizarrely, Gordon Brown is actually enjoying a popularity boost due to his posing as some sort of global economic leader, even though the crisis with which he is trying to deal is hitting Britain especially hard in large part due to the failures of his own economic stewardship.

[d'd'd'dave]

//"For Icelanders, the golden years were the early years, shortly after the land was settled in the ninth century.//

Thanks to a warm globe.
Green folks are conspiring to reduce greenhouse gasses and keep Iceland from returning to the conditions extant during it's prior glory.

[ThatLeftTurnInABQ]

Yves Smith is also keeping an eye out for Iceland, drawing in part on some of the same sources (VoxEU). I found the following particularly chilling (and not in a good way, nor by way of making a cheap pun which would be out of place here):

In domestic currency terms the Icelandic GDP has contracted by 15% due to the crisis, in Euro terms 65%.)

The total losses to Icesave may therefore exceed the Icelandic GDP. While the amount being claimed by the UK and the Netherlands governments is unclear, it may approximate 100% of the Icelandic GDP. By comparison, the total amount of reparations payments demanded of Germany following World War I was around 85% of GDP

and

Opinion polls in Iceland indicate that one third of the population is considering emigration.

As if this wasn't bad enough, winter is nigh. I hope the people in Iceland get some help soon.

[bitchphd]

Well, *we* might be past the worst of it, here in the U.S. But part of what's so heinous about this crisis is that it's one we've caused but don't seem to be suffering from in as major a way as some other places (yet anyway). Partly we have the institutions set up after the depression to thank for that, I think.

[Turbulence]

And Icelanders have it in spades. It is a national trait, and they view it not as a weakness but as a virtue.

The first few generations of Icelanders were really stupid. They should not have attempted to settle Iceland. Even though it once looked like northern Europe, Iceland is very different in that its soil regenerates much much slower than soil in northern Europe. As a result, erosion on the island does not heal. When the Icelanders introduced sheep, they turned large chunks of the island into barren moonscape. Iceland is the sort of place where people can live but really cannot sustain serious agriculture.

Green folks are conspiring to reduce greenhouse gasses and keep Iceland from returning to the conditions extant during it's prior glory.

This is very wrong. Iceland is not going to return to its pre-colonization state. The soil is gone and it ain't coming back, no matter how hot it gets.

[Ken Lovell]

I start to feel sorry for them ... then I remember Björk ...

[John Thullen]

"To judge by the stock market, a lot of people seem to think we are at, or past, the worst of this crisis."

The stock market is full of shit.

To judge by the stock market when it hit its highs 18 or 20 months ago, good times were going to roll forever.

Never listen to the confidence men and women on Wall Street.

They attend great schools to learn to lie to themselves about the American dream so they can they lie to us about the American dream so that we buy them the American dream so that they can receive their year-end bonuses.

If we don't don't buy it, we bail it with our tax dollars so they can receive ...... their year-end bonuses.

Keep dreaming.

[Hartmut]

One consolation: Icelanders are unlikely to freeze to death in winter because they can't afford oil. Most homes are heated geothermally thanks to the volcanic nature of the land (and btw, Iceland is completly South of the Arctic circle unlike half of Norway).
But it is unbelievable how expensive the food is.

[russell]

The first few generations of Icelanders were really stupid. They should not have attempted to settle Iceland.

Dumb@sses. Whey didn't they look ahead 500 or 1,000 years? :)

This is very wrong. Iceland is not going to return to its pre-colonization state.

Turb, I think (hope) that triple-d-dave was making a joke.

But it is unbelievable how expensive the food is.

Yeah, but their lamb and salmon are really, really good.

Bad behavior on the part of Gordon Brown to the side, I think the issue with Iceland is that some of their financial folks thought it would be a good idea to jump on the leverage-your-way-to-easy-money train, but the Icelandic economy was just not large enough to take the hit when the margin call came.

They probably will not be the last case like that.

Thanks -

[Barry]

Hilzoy: "To judge by the stock market, a lot of people seem to think that we are at, or past, the worst of this crisis. I don't think so."

Let's see - the tech sector is collapsing, and the consumer spending is collapsing. So perhaps, just perhaps, any good things in the stock market are due to Bush's ex-GS CEO pumping $700 billion into the pockets of the elites, with no strings or obligations worthy of the name.

I think that those who think that we are through the worst are either people only concerned with the elites, or those who are paid to tell us what the elites want.

[lowly_adjunct]

The first few generations of Icelanders were really stupid. They should not have attempted to settle Iceland.

Because, of course, the whole reason those Norwegians (and other assorted Scandinavians) settled Iceland was all for the agricultural sustainability.

[Gary Farber]

I thought they came for the waters.

[Turbulence]

Because, of course, the whole reason those Norwegians (and other assorted Scandinavians) settled Iceland was all for the agricultural sustainability.

I never claimed they did. They started a colony there in the hopes of becoming economically successful. For centuries they maintained robust trade with Europe. As I understand it, the colonizers were not exactly the dregs of Scandinavian society. Charting a boat to Iceland was a choice made by a group of prosperous folk who hoped to become much more prosperous. They made an investment, it turned out to be a bad one, and instead of admitting that the colonization of Iceland was not such a good idea, they stubbornly stuck with it.

While agricultural sustainability was not their goal, it is a requirement. If your civilization can't procure enough food to eat, you die. If your civilization can do so only marginally, you'll probably die, but more importantly, you'll suffer horribly for a long long time.

[Don the libertarian Democrat]

Anthony, I don't know if you'll find this amusing, but I really enjoyed your post:

And Iceland Mr. Brown? Was That Cricket?
I mentioned Brown's response to Iceland, and how in England I keep reading about beggaring your neighbor when it comes to the U.S. I didn't know that I'd get immediate confirmation from The Times:

"In a veiled warning to the next American President, Gordon Brown described protectionism as the “road to ruin” yesterday as international tensions surfaced at the start of the G20 summit in Washington. "

"Mr Brown was already risking confrontation with the President-elect in barely coded criticism of a planned measure to bail out America’s ailing carmakers, a plan Mr Obama supports. “I do think it is really important that we send out a signal today that protectionism would be the road to ruin,” the Prime Minister said, in a speech to the Council of Foreign Relations in New York.

“If we get into a situation where countries made decisions irrespective of what happened anywhere else, then we will see the same problems of other times. The dividing line here is between an open society capable of trading round the world, against a protectionist response that happened in the 1930s and is totally unacceptable.”

The EU said that it was ready to take action against the US at the World Trade Organisation if aid for the stricken US car industry was judged by the European Commission as illegal under international rules. The US Congress approved a $25 billion (£17 billion) aid package for American carmakers in September, although no timetable was fixed for payments to be made."

Sorry old chap. Need to invoke terrorism laws which say that we need to make our own cars. That's cricket.

[Bernard Yomtov]

I thought they came for the waters.

They were misinformed.

[ThatLeftTurnInABQ]

The EU said that it was ready to take action against the US at the World Trade Organisation if aid for the stricken US car industry was judged by the European Commission as illegal under international rules. The US Congress approved a $25 billion (£17 billion) aid package for American carmakers in September, although no timetable was fixed for payments to be made."

Ouch, this isn't going to end well.

At least we grow our own food. That's some consolation I guess.

[Jim]

The Icelandic part of this crisis was not made in America, as some moral exhibitionist upthread asserts. The Icelandic part of this crisis was made by a few Icelanders who went viking in the financial markets, and now it is devastating their own country - for a change. Good.

The British government did the right thing, which was to protect its citizens. It may have had other responsibiities, but none that come before that one. The Icelandic banks were irresponsible, and the Icelandic gvernment complict, when they assured depositers that the Icelandic government was backing htose deposits hwne the banks' liabilities exceeded the GDP by baout 600 times. That was simple fraud.

The Icelanders will get by. They will go back to eating mutton and fucking their cousins for a while, until they fangle up some new scam.

[Gary Farber]

"They will go back to eating mutton and fucking their cousins for a while, until they fangle up some new scam."

This doesn't add to your credibility, at least with me. Whichever of the zillions of "Jim"s that posts to the internet you are, that is. (Also a great way to limit credibility: make yourself effectively not pseudonymous, but anonymous.)

[Brynjar]

I can see the same amount of bullshit is floating here as in most other comment sections found on the internet.... really idiotic statements; lack of land was a primary reason why people left Norway, to find *new* land to live in, they weren't a bunch of investors.... The soil here is not all gone, and great efforts have been put into healing the wounds, and a lot of good things have come out of that.
Jim, just go rot in hell, it's exactly people like you who are making an ass out of Britain and sending public opinion here on the country down the drain.

[hilzoy]

Um, Jim: profanity is not allowed here. Neither is incivility, which includes describing whole nationalities as incestuous. Given Jim's comments, I will not warn Brynjar, other than to say: the excuse you have this time is not generally valid. ;)

[Turbulence]

lack of land was a primary reason why people left Norway, to find *new* land to live in, they weren't a bunch of investors

They weren't financial investors, but there were involved in a speculative venture as are all colonists. Many of the colonists brought with them Irish slaves so we're not talking about impoverished people who had no hope of survival when they left. Instead they were well of people hoping to improve their holdings by taking a risk.

The soil here is not all gone,

Did someone here say it was? The point remains, a large fraction of the Island's soil blew away and the forests are gone.

and great efforts have been put into healing the wounds, and a lot of good things have come out of that.

I'm sure that's true. But that doesn't mean that sticking with the settlement was a good idea. I mean, if the original colonists had never settled Iceland or had decided to bail out during the ensuing centuries when it became less inhabitable, those good things would still have happened. The only difference is that a long line of people would have enjoyed a higher standard of living and would have suffered less. A whole lot of parents would not have had to watch their children die. That's what happens when you settle in agriculturally marginal areas.

Today, Iceland is an incredible country and a wonderful place to live. If it had been settled later, at a time when technological improvements allowed the population to sustain adequate nutrition, a lot of suffering could have been avoided.