Description
The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics.
Case Study on Financial Crisis in Global: Iceland
Some Things Old and Some Things New: Beginning to Place Iceland's Financial Crisis in Global and Historical Context Abstract: In 2008, Iceland's financial economy exploded after more than a decade of fast and expansive growth. This paper charts the historical origins of that financial boom and eventual bust. It situates Iceland's financial bubble and burst in a broader history of financial crises. The author surveys Icelandic economic history and macroeconomic data from the mid 1990s through the aftermath of the crisis, and finds that it shares some characteristics of other regional financial crises in the late 20th century and late 2000s while differing in others. The scale and scope of Iceland's financial crisis reveals the inherent risk of financial service led growth strategies, serves as a cautionary tale about the importance of oversight, and presents one example of post-crisis recovery paths. I. Introduction
Prior to the 1980s and 1990s, Iceland's economy was highly insular and nationalized. Banks were largely government owned, and Iceland's legal system strictly governed credit and discouraged trade. In less than twenty years, Iceland's financial sector transformed into a 'wild frontier' zone of investment banking, and fomented an economic crisis of epic proportion when its three major banks defaulted over three days in 2008. (Lewis, 2009) This paper investigates how Iceland's rise and fall compares to other nations' financial crises in the late 20th century and early 21st century. It grounds comparatively recent phenomena in economic events that may seem to be the distant past; however, the roots of the Icelandic crisis resemble the roots of the US financial crisis in what they owe to developments and changes in the relations between the government, industry, financial interests, and increasing inequality among the nation's population. The phenomena that attended Iceland's crisis
resemble situations in other countries, but the combination of 'first world' and 'third
WORKING PAPER world' trends in financial crises (in terms of causes and consequences) indicate a new direction in financial crisis that may reflect a changing global financial landscape. II. A Brief and Annotated Timeline of Iceland's Economic Development and Financial Crisis (Financial Crisis events are italicized):
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a.1918: Iceland gains independence from Denmark (after a history of being part of various Scandinavian empires) b.1918 - 1960s: Iceland's highly regulated economy centers around fishing (highly competitive) and farming with a nationalized banking sector c.1976: Icelandic government introduces a quota system for fishers d.1984: Icelandic government allows fishers to trade their quotas; suddenly, fishers begin to accumulate profits. As the price of fish goes up, inequality increases, and GDP increases. e.Mid 1980: Icelandic government begins to shift - politically and philosophically - to the right. The government: i.Drops trade restrictions ii.Relaxes control of the exchange rate iii.Deregulates Icelandic industries, particularly the banking sector iv.Joins the European Economic Arena f.1990s: Daniel Oddson becomes prime minister. Under his tenure, the Icelandic government: i.Cuts the corporate tax rate from 33% to 18% ii.Raises "taxes on low and average income earners by enough to raise tax revenues from 39% to 49% of GDP" (Wade, 2009, 11) iii.Does not cut public spending g.Mid 1990s: Daniel Oddson oversees various significant changes in the Icelandic banking sector. Among these: i.Iceland's real interest rates become positive ii.Iceland's banking sector changes from having "relatively large state-owned banks" to a highly concentrated system with 3 banks - Landsbanki, Kaupthing, and Glitnir - that "were some hybrid of commercial and investment banks" (Sigurjonsson, 2010, 10) iii.New incentive structures emerge in newly privatized banks, including, "aggressive compensation schemes, stock options for employees and flat organizational structures." (Sigurjonsson, 2010, 9) iv.Government decides to privatize banks to Icelandic Agents only (Sigurjonsson, 2010, 12) h.Mid to Late 1990s:
WORKING PAPER i.Icelandic government promotes the purchase of shares in newly privatized banks, particularly by Icelandic citizens (Sigurjonsson) ii.Investment bankers begin borrowing and lending significant amounts, with little scrutiny (Sigurjonsson) 2001: Iceland's Central Bank pursues an inflation targeting policy. Early 2000s: i.Iceland's interest rates rise significantly, from 5.3% in 2001 through 15.25% in 2007 ii.Simultaneously, Icelandic inequality increases (Gini coefficient rises from 0.26 to 0.42) iii.Housing prices triple from 1998 through 2008 iv.Many countries invest in Icelandic banks v.Icelandic banks buy shares of Iceland's main media companies, while Icelandic media companies simultaneously buy shares of banks vi.David Oddson is named the head of Iceland's Central Bank 2006: i.Economists begin to criticize Icelandic financial developments ii.IMF reports that "the expansion of Iceland's banks' balance sheets was 'staggering'" and that "this pace of growth has exposed the Icelandic financial system to vulnerabilities that could undermine its health." (Wade, 2009, 18) iii.In response to this report, outsiders that had bought Icelandic bonds in large numbers hesitated to buy more (Wade, 2009) Icelandic banks responded by entering the retail money market and selling internet banking accounts to customers in the UK and the Netherlands. (Wade, 2009) 2007: i.Icelandic Chamber of Commerce commissions various economists to write papers celebrating the health of Iceland's financial system ii.International and Icelandic economists continue to write critiques of Iceland's financial system, though they are criticized by aforementioned economists and the Icelandic Central Bank iii.Iceland's Bank Asset to GDP ratio falls just under 9, making it the second highest in the world behind Switzerland September 2008: i.Fall of Lehman Brothers - Icelandic money markets and interbank lending freeze completely. ii."The Central Bank of Iceland was unable to act as an effective lender of last resort to the Icelandic banks. It simply did not have enough foreign currency to do this." (Sigurjonsson, 2010, 14-15) October 6, 2008: Icelandic government puts Glitnir in receivership and buys 75% of its shares October 7, 2008:
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i.Icelandic government puts Landsbanki into receivership ii.David Oddson says on Icelandic television that "The [Icelandic] government will not repay debts of people ... who have not exercised due diligence about where they put their money." (Wade, 2009, 23) iii.UK seizes "the UK assets of all the Icelandic banks by invoking anti-terrorist laws" (Sigurjonsson, 2010, 15) October 9, 2008: Icelandic government places Kaupthing into receivership October 2008 - January 2009: Icelanders protest in large numbers calling for early elections April 2009: Icelanders elect a new prime minister July 2009: Icelandic parliament votes in favor of joining the EU August 2009: Icelandic parliament votes to enact caps tied to GDP on the amount they will pay back to the UK and the Netherlands September 2009: The UK and Netherlands threaten to block a planned loan by the IMF to Iceland January 2010: Iceland's president refuses to sign a bill authorizing the payment of approximately $5 million to the UK and the Netherlands March 2010: A large majority of Icelanders vote "No" in a referendum on whether Iceland should pay the $5 million demanded by the UK and the Netherlands April and May 2010: Icelandic government prepares to investigate and prosecute the chief actors in the financial system whose activities overleveraged and precipitated the Icelandic financial crisis
III.
Key phenomena of this crisis
I argue that the causes of Iceland's financial crisis can be divided into three broad categories. First, numerous members of the Iceland's government encouraged and authorized policies that deregulated Iceland's financial system and that empowered a small sector of Iceland's population to pursue economic activities that would destabilize Iceland's economy. Next, activity in Iceland's private sector - both the financial sector and the real sector - profoundly destabilized Iceland's economic edifice. Finally, changes within Iceland's class structure are likely to have
contributed to and exacerbated Iceland's economic instability, and the resulting economic calamity. Each of these classes of change created feedbacks that escalated
WORKING PAPER and exacerbated the processes in each sector - so, as the country moved further to the right, liberalized its economic policies more, and saw its richest citizens earn and consume more, those beneficiaries contributed more to the politicians in charge, and took greater advantage of the new economic system in play. the As I describe in the timeline, Iceland's government tacked to the right during
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mid 1980s as the Independence Party, a coalition of Iceland's conservative and centrist political parties that centered about Iceland's "importing, wholesale, transport, insurance, and fishing," industries. (Wade, 2009, 10) This rightward shift paralleled many Western countries' political trends in the 1980s - it was the era of Reagan and Thatcher, after all. (Wade, Danielsson, Zoega, 2009) This political shift was matched with an about-face of many economic policies. As mentioned, Iceland's government decreased corporate tax rates while raising income tax rates for low and middle class Icelanders. (Wade, Danielsson, Zoega, 2009) Though the Icelandic government did not cut its spending, it was able to maintain fiscal surpluses due to the increased income taxation, even after lowering corporate tax rates by a significant percentage. In addition to making its tax code far less progressive, Iceland's government oversaw a dramatic liberalization of Icelandic trade law. Iceland had once been an isolated economic entity that went so far as to develop a significant energy sector to avoid the excessive cost of importing fuel, and Icelanders had once been constrained by laws prohibiting the use of Icelandic credit cards to buy goods abroad - economists Jon Danielsson and Gylfi Zoega argue that
this sudden change plunged Iceland into economic waters that it was ill equipped to
WORKING PAPER navigate, even without considering its subsequent rapid financial privatization and liberalization. The focus of Icelandic monetary policy shifted dramatically from the 1980s through the early 2000s from a goal of stabilization at all costs, to one of simultaneous (and perhaps paradoxical) inflation targeting and financial expansion. As mentioned in the timeline, Iceland's Central Bank concurrently privatized and deregulated the Icelandic financial sector. Danielsson and Zoega write:
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"Until [the 21st century, Iceland's] banking system consisted of relatively large state-owned banks along with smaller private banks. The banking system was heavily regulated and politicized, with politicians represented on banks' boards and loan decisions often made on the basis of political affiliation and connections... The same political structure applied to the Central Bank, with each of its governors representing one of the main political parties... Consequently, the Central Bank of Iceland has always been perceived as being closely tied to the central government, raising doubts about its independence, and reducing its credibility." (Danielsson and Zoega, 2009, 3) Given the institutional coziness of Iceland's Central Bank and ruling parties, it is little wonder that the Independence Party could usher in such radical changes over a fifteen-year period. In this period of time, Iceland's financial sector eventually saw the consolidation of its various commercial banks into three large banks, Landsbanki, Kaupthing, and Glitnir, which, Throstur Sigurjonsson argues, "were neither ordinary commercial banks, nor investment banks, but something in between." (Sigurjonsson, 2010, 10) In the early nineties, Iceland's Central Bank "made real interest rates positive for the first time, eliminating many firms and industries that had depended on subsidized credit." (Danielsson and Zoega, 2009, 3) Then, over the course of the 2000s, the governors of Iceland's Central Bank increased interest rates steadily - as
WORKING PAPER mentioned in the timeline, Icelandic interest rates rose from 5.3% in 2003 to
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15.25% in 2007. This policy was meant to control for inflation, and though inflation in Iceland stayed low by its domestic standards, it was high "compared to its neighbors." (Danielsson and Zoega, 2009, 4) Danielsson and Zoega argue, further, that these inflation-targeting policies encouraged investment by speculators outside of Iceland, and contributed the incredible instability of Iceland's financial system that would foment its eventual crash. Next, activities within Iceland's new and burgeoning financial sector, and interactions between Iceland's financial sector and its real sector played a secular and magnifying role in the destabilization of Iceland's economy. As mentioned in the timeline, Sigurjonsson argues that one consequence of Oddson et al's empowerment of a privatized and liberalized financial sector was a radical change in the Icelandic financial system's incentive structure. Where bankers had once been expected to promote and ensure stability in Iceland's financial system (and economic base as a whole), now a generation of bankers were to be rewarded for risky bets, large transactions, and anything that might increase the three big banks' profits with stock options and bonuses. At the same time, the Icelandic government's decision to privatize to Icelandic agents increased the risk of financial instability. Michael Lewis notes that many of the executives of these newfangled (for Iceland, anyway) banks were men in their late twenties and thirties, with little experience in financial and monetary policy, particularly at the international level, and argues that, further, these men might have been uniquely risk-loving individuals that would be more prone to pushing Iceland's financial system (and economy) to a brink. (Lewis, 2009)
WORKING PAPER Further still, the Icelandic government also encouraged Icelanders at all levels of society to buy shares in these newly privatized banks. Sigurjonsson claims that, consequently, "nearly all the Icelandic public had a stake in the banks, as the government had successfully established incentives for ownership." (Sigurjonsson,
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2010, 13) Depending on how much of the proverbial kool-aid Icelanders had drunk, their economic wellbeing could be tied to the fates of these banks, making the systemic consequences of a crash all the more destabilizing. Once the new generation of Icelandic bankers had established itself at Landsbanki, Kaupthing, and Glitnir, they immediately went to work. Danielsson, Zoega, Lewis, Sigurjonsson, Robert Wade, and anyone else that has written about Iceland's financial boom and bust cite the rapid increase in borrowing and lending that occurred in the late nineties and early 2000s. According to Danielsson and Zoega: "The world was awash in cheap credit and the newly privatized banks experienced little difficulty in raising capital internationally. They used this capital to fund expansion domestically and abroad. This expansion was subject to little regulatory scrutiny, neither in Iceland nor abroad." (Danielsson and Zoega, 2009, 4) Sigurjonsson writes that the rapid consolidation of Iceland's banking system into three chief players, "[supplied] the banks with the necessary instruments and scale for both domestic and international growth." (Sigurjonsson, 2010, 6) At the same time that numerous Icelandic brokers were trying to acquire foreign assets, various foreign interests poured money into these Icelandic banks. According to Wade, by 2007, speculative capital: "was estimated at more than 50% of Iceland's GDP ... The speculators saw it as a one-way bet, because they knew the central bank would be
WORKING PAPER reluctant to lower interest rates in view of the fact that a likely fall in ISK would raise the already heavy burden of foreign currency debt of households and firms." (Wade, 2009, 16) According to Michael Lewis:
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"You didn't need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. U.K. investors, lured by the eye-popping 14% annual returns, forked over $30 billion -$28 billion from companies and individuals, and the rest from pension funds, hospitals, universities, and other public institutions." (Lewis, 2009, 10-11) Further, these banks took advantage of the newly liberalized trade structures in Iceland: "Banks also benefitted from expansion of various other sectors ... The banks were inspired to seek out new customers in their international expansion, many of them being Icelandic firms seeking growth abroad." (Sigurjonsson, 2010, 6) Icelandic bank executives made strong efforts to acquire foreign assets, and in the process, "leveraged their capital base to buy banking assets worth several times the country's GDP. If the value of these assets ... were to be revalued at much lower prices, the financial institutions would become insolvent." (Sigurjonsson, 2010, 8) However, the Icelandic government and any regulatory apparatus that may have survived Oddson's tenure as prime minister had little apparent interest in performing stress tests or any measurement of the stability of the Icelandic financial sector. Sigurjonsson notes that Icelandic bankers were not just pursuing international asset acquisition. Sigurjonsson's descriptions of Icelandic financial players' attempts to raise share prices are reminiscent of Jim Crotty et al's accounts
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of the financialization of the USA's real sector. Wade argues that Icelandic brokers, "expanded their loans much to fast, domestically and abroad, financing a large part of their activities with short-term borrowed money." (Wade, 2009, 15) In a more recent paper, and Wade and co-author Silla Sigurgeirsdottir argue that at times, Icelandic bankers went even further, by promising money when large banks could not afford collateral for loans from international banks. (Wade, Sigurgeirsdottir, 2010) It is possible that the entrepreneurial expansion that occurred in Iceland between the 2000 and 2007 was secular; however, many firms have since gone out of business following Iceland's financial collapse. The rapid and hollow growth of Iceland's financial sector provided an unsteady grounding for what real sector development occurred in that boom period, and the systemic implications of the crash of both Iceland's financial and real sectors are considerable. While these developments were taking place in the private and public sectors, Icelandic household dynamics changed significantly during this period, too. According to Wade and Sigurgeirsdottir, in the mid-nineties, Icelandic income distribution resembled other highly egalitarian Scandinavian countries. However, the process of increasing inequality, which had begun when Iceland's government created a market for fishing quotas in the eighties, accelerated rapidly as Iceland's financial sector grew and grew between 2000 and 2007. (Lewis, 2009, and Wade and Sigurgeirsdottir, 2010) Stefan Olafsson, an economist at the University of Iceland that has done significant research on Iceland's tax rate over history, gave a presentation in January, 2010, titled, "From Neoliberalism to Increasing Income Inequality: Globalization, Politics, and Increasing Income Inequality in Iceland." This
WORKING PAPER presentation tells the story of rapidly increasing inequality from 1995 through 2008, let alone compared to the decades prior to the seventies. According to Olafsson's research, accounting for the difference in financial
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earnings increases the disparity in inequality from the pre-boom time through 2008. No accounting for financial earnings, the Gini coefficient for Icelandic couples increased (according to Olafsson) by 35.8%. If one incorporates financial earnings into the picture, the Gini coefficient increases by 74.8% for Icelandic couples from 1995 — 2008. When Olafsson plots the relationship between income groups and share of Icelandic financial earnings, it appears that the top 15% of Icelandic families earned approximately 80 percent of financial earnings in Iceland during 2007. I have not been able to find any data or analyses that try to link the simultaneous surge in household consumption during Iceland's boom period to the growing inequality that defined Iceland's growth. However, numerous authors cite anecdotal evidence of a large consumption binge that appears to have occurred in Iceland during its economic expansion in the early 2000s. According to Wade: "The combination of high interest rates, capital inflow, and overvalued krona created boom, and from the early 2000s to 2008, it was bliss to be alive in Iceland. Average income rose to near US $70,000, about the highest in the world, on the back of the overvalued ISK. Icelanders joined Norwegians as the only people in the world who found London cheap." (Wade, 2009, 16) This virtual expansion in income was accompanied by an increase in household debt as a percentage of GDP - "household debt reached 103% of GDP by 2007." (Wade, 2009, 16) In addition to consumption of luxury goods from abroad, there appears to
have been a real-estate bubble in Iceland, in which housing prices more than tripled
WORKING PAPER between 1998 (housing cost $57 per square foot) to 2008 (when housing cost $191 per square foot). (Icelandic Property Registry) Wade and Sigurgeirsdottir note that
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one avenue of expansion Iceland's new investment bankers pursued was a reform of the Icelandic mortgage policy, specifically the decrease of the percentage prospective homebuyers needed to pay at the time of signing their mortgages to 10%. (Wade and Sigurgeirsdottir, 2010) Other authors describe a sort of cottage industry in household speculation that grew during this period. Lewis argues that: "Some large numbers of Icelanders engaged in the same disastrous speculation. With the local interest rates at 15.5% and the krona rising, they decided that the smart thing to do, when they wanted to buy something that they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen, and in the bargain made a bundle on the currency trade, as the krona kept rising." (Lewis, 2009, 5) While there is ample anecdotal evidence of grotesquely lavish purchases by Icelandic industrial magnates such as soccer teams and power plants, there is little evidence of which sectors of the Icelandic population were playing the foreign currency market. I think it stands to reason that everyone in Iceland was not borrowing francs with which to purchase Land Rovers, which they would subsequently blow up once the value of the krona plummeted following Iceland's financial crash. (Lewis, 2009) It is important to note the feedback effects that would have arisen during this period between the household sector, private sector, and governmental sector. Wade and Sigurgeirsdottir illustrate the linkages in their 2010 article: the Independence party pursued policy changes that would most benefit members of
Iceland's economic elite (an entity that had the historic name of "the Octopus", per Wade and Sigurgeirsdottir, 2010), particularly those in the fishing and banking
WORKING PAPER industries. These policy changes directly enhanced the short-term profitability of those industrial operations - lower corporate taxes, fewer banking and trade regulations, laxer credit laws that promoted more borrowing at the firm level, and more consumption at the household level. New banking practices that made it easier for households to afford mortgages could have had multiplier effects, and would
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certainly have increased demand for Icelandic financial instruments, and would also have increased the pool of funds that bankers could use to finance different deals that they were pursuing. As the richest individuals took their earnings home, they could consume what they wanted from wherever they wanted, and they could also contribute funds to the political party that had made everything happen for them. Wade and Sigurgeirsdottir note that Iceland is the only Nordic country to allow corporations to donate to political parties, and they argue that the Independence party received windfall donations throughout the boom period. These cycles would perpetuate the political tenure of the conservative and business oriented Independence party, give financial and industrial interests what they wanted, and satisfy Iceland's newly moneyed upper-class, while concurrently undermining the stability of Iceland's economy as a whole, and increasing the vulnerability of the average Icelander in the event of some sudden financial and/or economic collapse. Were there any critics as this rapid financial development, economic growth, and increase in inequality happened? Yes - some economists, outside of Iceland and within Iceland, did write papers critiquing Iceland's sudden financial boom, mostly arguing that the growth masked increasing instability on many fronts. (Wade, 2009) However, the government and private sectors both inhibited a large amount
of
WORKING PAPER internal discussion of the events of the boom through two key avenues. First, Wade and Sigurgeirsdottir argue that Oddson's party's tactics resemble those of "US and
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UK politicians and bankers' [behaviors:] as in Iceland, Clinton, Bush and Greenspan, or Blair, Brown and Mervyn King remained in denial while their policies pumped up the bubbles, year after year." (Wade and Sigurgeirsdottir, 2010, 27) Wade and Sigurgeirsdottir argue further that Oddson's government "undertook an extreme 'privatization' of information, relying primarily on the research departments of the banks themselves for analysis of the economy and its prospects." (Wade and Sigurgeirsdottir, 2010, 27) The authors argue, further, that when independent institutions published reports critical - or merely factual - of Iceland's changing economic milieu, they faced the potential wrath of the Independence party: "[When] Iceland's National Economic Institute ... published unwelcome reports, warning that management of the economy was going haywire, Oddson abolished it in 2002... Statistics Iceland, the public data agency, was notably cowed into suppressing information on soaring income and wealth inequality... The University of Iceland bowed to pressures to make its Economic and Social Research centers self-funding - that is, to rely on finding buyers for commissioned research - with the convenient result that they no longer published big-picture reports with a critical edge." (Wade and Sigurgeirsdottir, 2010, 28) It is ironic, as Wade and Sigurgeirsdottir note in their 2010 article, that one of the chief reasons neoliberal economists like Frederic Mishkin and Richard Portes offered for their glowing reports of Iceland's financial health was Iceland's robust civic institutions and lack of corruption, and a further irony that both economists were paid for their efforts by Iceland's Chamber of Commerce. (Wade and Sigurgeirsdottir, 2010)
WORKING PAPER Given the apparent civic repression of Iceland's independent critics of the boom period, it seems almost quaint to note the involvement of the other proverbial
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watchmen with different economic interests. Sigurjonsson argues that banks made a point early in their expansion of buying shares of Iceland's major media companies (chief among them the newspaper Morgunbladid, which now employs Oddson as its editor in chief), and that the major media companies also bought significant shares in Iceland's banks. The end result was that papers were loath to criticize their shareholders, both out of fear for their bottom lines, and, Sigurjonsson argues, out of a concern for what would happen to the shares of the different banks that the media companies themselves owned. Instead, according to Sigurjonsson and Wade, Iceland's major media companies were quick to criticize any economists that dared criticize or impugn Iceland's rise to financial greatness. (Sigurjonsson, 2010, Wade, 2009) The consequences of Iceland's economic collapse have, of course, been drastic. Immediately following the three-day period in which Iceland's three major banks went into receivership and when the UK invoked terrorism law to seize its assets from Iceland, the value of the Icelandic krona plummeted, ultimately, to less than half of its value prior to the crash. Within Iceland, large volumes of international workers from Eastern Europe have emigrated home, and in 2009, twice as many people emigrated from Iceland as immigrated into Iceland. There are forecasts that Icelanders' pensions will contract by fifteen to twenty percent, and
unemployment rates shot up from 2.3% in 2007 to 7.6% in 2010. In the midst of
WORKING PAPER these socioeconomic and demographic shifts, various Icelandic firms have folded, likely because of the interconnectedness with Iceland's unstable financial sector. Within Iceland, there have been significant political and social responses to
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the crisis. Starting in October, Icelanders began to protest in large numbers against the ruling party and to call for early elections. By the end of January 2009, the_ Independence party had mostly resigned, and Icelanders voted in a coalition government of the Social Democratic Alliance, the Left-Green Movement, and the Centrist-Progressive party that named Johanna Sigurdardottir, a member of the Social Democratic Alliance, to be Prime Minister. Sigurdardottir's parliament subsequently voted to join the EU, only to be faced by opposition from the UK and the Netherlands for assets that they had lost through their investment in different Icelandic banking services. From September 2009 through January 2010, Iceland grappled with UK and Netherlander interests, until the Icelandic president refused to sign the bill committing Iceland to paying the UK and the Netherlands about $5 million dollars. In the vacuum following the crash, Iceland's government has held its ground about not pursuing fiscal austerity until 2011. It has also continued to negotiate - at times, counter to the interests of the Icelandic parliament - to avoid paying British and Netherland financial interests back (or at least to reduce its obligations to pay those parties back). (Wade and Sigurgeirsdottir, 2010) IV. Historical comparisons
The question, then, is how does Iceland's financial development and crisis fit into a global history of financial crises? How is it different? Did economists ignore, or fail to interpret warning signs because of the 'proactive' Icelandic government, their
WORKING PAPER institutional biases, or some combination of the two? I argue that Iceland's boom
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and bust and its attending policies resemble elements of the financial crises of three quite different countries in different 'stages' of development. The Argentina financial crisis of 2001, the Korean financial crisis of the late 1990s, and the US financial crisis all share the roots of activist political and economic policies that enabled the growth of investments, both domestic and international, that created instabilities that would undermine each country's economic structural health when crises erupted. Socioeconomic data in the boom times in each follows certain patterns - rising inequality and increasing consumption among particular socioeconomic strata, and the political influence of people riding the boom - with the similar and depressing pattern of booms that benefit a few followed by crashes that affect many. The Icelandic financial crisis of 2008 resembles Argentina's financial crisis in 2001 in several ways. First, the Argentine government initiated monetary policies approximately a decade before Argentina's crisis that would set the stage for instability. Specifically, the Argentine central bank initiated a convertibility regime, in which Argentines could convert pesos into dollars. Another similarity to Iceland: Argentina's government pursued this policy in the nominal goal of countering inflation, following a decade of turbulent inflation rates. (Frankel, 2007) Daniel Azpiazu et al argue that this policy reflected both an autocratic impulse by the Argentine government to "recreate Argentine society on the basis of new socioeconomic relationships," and a public demand for stable price levels, and that it transformed into a system meant to encourage foreign and Argentine industrial and
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financial interests that would take advantage of relaxed regulations and restrictions. (Azpiazu et al, 1998) Neoliberal critics argue that this policy created a moral hazard problem in which different parties borrowed more than they should have to finance inefficient projects, and that unemployment resulted from this inefficiency. (Feldstein, 2002) In addition to an increase in firm borrowing, households also borrowed more and consumed more imports: as in Iceland, Argentina incurred trade deficits. When Argentina's financial crisis occurred in 2001, the Argentine had already been weakened following numerous global financial crises, particularly the crisis in Brazil, one of Argentina's chief trading partners. (Hornbeck, 2002) Prior to the financial crisis, Argentina saw an increase in its GDP as well as an increase in inequality - while some critics blame this increase on a concurrent increase in unemployment, and while other critics blame this on the inefficiency of Argentina's convertible currency system, few appear to look at the relation between financial activity and inequality. (Damill, Frenkel, and Maurizio, 2007) Yet, the financial crises in Argentina and Iceland are not mirror images. The policies - Iceland's Central Bank's control over interest rates, Argentina's convertible currency - were not the same, and the intentions behind them were not the same. Iceland had not had a history of hyperinflation, and citizens did not necessarily object to letting interest rates rise and rise. Further, external perceptions and biases of economists observing the countries may have been at play. Argentina, as a Latin American country, faced outside perceptions that it was likely to incur some kind of financial or economic crisis; Iceland had no such history. (Damill, Frenkel, and Rapetti, 2005) It is possible that an increase in Icelandic
WORKING PAPER borrowing would not have set off alarm bells that such behavior might for other countries - Wade and others argue that Mishkin criticized economists that compared Iceland's overleveraged financial sectors to developing country stories. (Wade and Sigurgeirsdottir, 2010) Unlike Argentina, Korea's financial liberalization resembled Iceland's given both countries' relative isolation from globalized and neoliberal trade and finance regimes. Crotty and Dymski argue that the Korean government: "came under great pressure to liberalize from the US, its own elites, and the OECD, who made financial liberalization a condition for entry. The Korean government deregulated its hitherto tightly controlled domestic financial markets, removed controls over short-term capital flows, and ended its coordination of domestic investment. Foreign money poured into Korea in this period, fueling over-investment and creating the preconditions for the outbreak of financial crisis in late 1997 and deep recession in 1998." (Crotty, 2000, 12) Again, as in Argentina and as in Iceland, in the lead-up to the Korean financial crisis of 1997, GDP grew, and so did inequality. (Crotty and Dymski, 2000) Another similarity with the Iceland case is the increase in the rentier share of income -
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Gerald Epstein and Dorothy Power estimate the increase in the Korean rentier share of income to be 112 percent - during said build-up to the crisis. It is hard to imagine that there were no linkages between these increases and political opinion, though I have not read any works demonstrating such a dynamic. However, the Icelandic situation again does not perfectly match the Korean experience. Korea may have faced a different sort of prejudice when its government acquiesced to relinquish financial controls as a precondition of entering the OECD. Iceland happens to have been one of the founding members of the OECD - a
development that had a huge amount to do with historical biases and prejudices.
WORKING PAPER Though it is important to note that Korea did not need to join the OECD, the
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institutional benefits of doing so - tangible or otherwise - must have played some role in motivating the Korean government's decision to deregulate its financial sector, even if Korean economic elites and outside financial interests were simultaneously wheedling, cajoling, or urging the government to do so anyway. Iceland had no proverbial gun to its proverbial head. Even if prevailing political and economic opinions in the Western Hemisphere and world motivated David Oddson and the Independence party to pursue pro-market anti-welfare policies, ultimately his party was in charge, and made the decisions to deregulate, and to encourage wild and speculative behavior in a new industry with a steep learning curve and the potential to do great damage. If anything, Iceland's cowboy financial sector resembles the gullible and gung-ho thrift managers that Michael Lewis describes in Liar's Poker when US investment banks moved heavily into trading mortgage and junk bonds, who are so totally enthralled by bond traders' pitches that they incur more risk than even the investment banks mediating their transactions. (Lewis, 1989) Many elements of Iceland's financial crisis resemble elements of the US's financial crisis. Danielsson, Lewis, Sigurgeirsdottir, Sigurjonsson, Wade, and Zoega all paint a picture of arrogant bankers making major deals that were overleveraged and fundamentally unstable while a chorus of inside and outside economists told them all that was exactly what they should be doing. The tacit and explicit support of the media and the Icelandic government for what said financial interests were
doing (and the alleged strong-arm tactics by the government against Icelanders and
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Icelandic agencies that tried to speak the truth about how hollow Iceland's financial system and economy were) created and sustained an environment of irrational exuberance at the best, and outright fraud at the worst. (It is worth noting that Bill Black has consulted the new Icelandic government and given talks about white_ collar fraud in the University of Iceland as recently as last spring, according to Wade and Sigurgeirsdottir, 2010.) An important distinction between the two scenarios with two principle_ consequences remains however: size. Iceland's bankers managed to over-leverage
their system far beyond what the US financial sector did during the same period of time, but the scope of their total transactions could not match what US bankers pulled off. As a consequence, the US was far better able to absorb the damage its financial sector wreaked, despite requiring a gargantuan bailout from the treasure, and despite ushering in the largest recession since the Great Depression. When the time came for Iceland to pay its debts, they were so huge, and so obvious to Iceland's 330,000 citizens that Icelanders were almost physically confronted with the destructive potential of an unregulated financial sector. Even though both Iceland and the US saw large increases in inequality during the rise of their respective financial sectors, and though each country was confronted with significant real sector economic trauma in the form of increasing unemployment, Iceland appears to have a large-scale and effective popular protest against the financial interests responsible for bringing down their economy, while the US has diffuse action _
against what appear to be increasingly organized financial interests and their representatives in the government, whether in Congress, regulatory bodies,
WORKING PAPER economic advisory roles, lobbyists, and so on. How this plays out in the different countries' approaches to fiscal policies and regulation remains to be seen, but it would appear, from Wade and Sigurgeirsdottir's article, that more Iceland may merit more optimism if one hopes for more regulation to prevent such socialized crises that result from such concentrated and short lived gains.
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WORKING PAPER Works Referenced: Arnason, Ragnar. "The Icelandic Individual Transferrable Quota System: A Descriptive Account," Marine Resource Economics, VIII, No. 3 (1993) Azpiazu, Daniel, Eduardo Basualdo, and Hugo Nochteff, "Menem's Great Swindle: Convertibility, Inequality, and the Neoliberal Shock," NACLA Report on the Americas, 10714839, May/June 1998, Vol. 31, Issue 6
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Crotty, James, "Trading State-Led Prosperity for Market-Led Stagnation: From the Golden Age to Global Neoliberalism," from Housing Finance Futures: Housing Policies, Gender Inequality, and Financial Globalization in the Pacific Rim, eds. Gary Dymski and Dorene Isenberg, ME Sharpe, 2000. Crotty, James and Gary Dymski, "Can the Global Neoliberal Regime Survive Victory in Asia? The Political Economy of the Crisis," PERI, 2000 Damill, Mario, Roberto Frenkel, and Martin Rapetti, "The Argentinian Debt: History, Default, and Restructuring," Revistia Economia, December 2005. Damill, Mario, Roberto Frenkel, and Roxana Maurizio, "Macroeconomic Policy Changes in Argentina at the Turn of the Century," CEDES, Buenos Aires, 2007 Danielsson, Jon and Gylfi Zoega, "The Collapse of a Country," RiskResearch, March, 12, 2009 Epstein, Gerald and Dorothy Power, "Rentier Incomes and Financial Crises: An Empirical Examination of Trends and Cycles in Some OECD Countries," PERI, 2003 Feldstein, Martin. "Argentina's Fall: Lessons From the Latest Financial Crisis," Foreign Affairs, Vol. 81, No. 2, March/April, 2002 Frenkel, Roberto and Martin Rapetti, "Monetary and Exchange Rate Policies After the Convertibility Regime Collapse," PERI Publication, September, 2006 Hornbeck, JF, "The Argentine Financial Crisis: A Chronology of Events," CRS Report for Congress, January 2002 Keys, Lisa, "For Sale in... Iceland," The New York Times, June, 30, 2009 (http://www.nytimes.com/2009/07/01/greathomesanddestinations/01 ghsale.html) Laffer, Arthur, "Overheating is Not Dangerous," Morgunbladid, November, 17, 2007 Lewis, Michael, "Wall Street on the Tundra," Vanity Fair, April, 2009 Minsky, Hyman, and Charles Whalen, "Economic Insecurity and the Institutional Prerequisites for Successful Capitalism," Journal of Post Keynesian Economics, Winter 96-97, Vol. 19, No. 2
WORKING PAPER Mishkin, Frederic and Tryggvi Herbertsson, "Financial Stability in Iceland," Iceland Chamber of Commerce Publication, May 2006 Ólafsdóttir, Hildigunnur, "Alcohol Policy Within a Fiscal Frame: The Case of State Alcohol Monopoly in Iceland," Contemporary Drug Problems, 247, Summer, 1993 Ólafsson, Stefán, "From Neoliberalism to Increasing Income Inequality: Globalization, Politics, and Income Inequality in Iceland 1995-2008," REASSESS Steering Group, Oslo, Nova Research Institute, Presentation for 1/25/10 Ólafsson, Stefán and Arnaldur Kristjansson, "Income Inequality in a Bubble Economy: The Case of Iceland, 1992 - 2008," Luxembourg Income Study Conference, June 2010 Sigurjonsson, Throstur, "The Icelandic Bank Collapse: Challenges to Governance and Risk Management," Emerald Group Publishing, 2010 [Working Paper]
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Thordardottir, Ingiborg, "Anger as Iceland Battles to Recover," BBC News, October, 9, 2009 Wade, Robert, "Iceland as Icarus," Challenge, vol. 52, no. 3, May/June, 2009, 5-33 Wade, Robert and Silla Sigurgeirsdottir, "Lessons from Iceland," New Left Review, 65, September/October, 2010, 5 - 29 Wolf, Martin, "How the Icelandic Sage Should End," Financial Times, January 10, 2010 "Mishkin Resigns: A Look Back," Wall Street Journal, May 28, 2008 "Iceland Applies to Join the European Union," CNN/Europe, July, 17, 2009, http://www.cnn.com/2009/WORLD/europe/07/17/iceland.eu.application/i ndex.h tml?iref=newssearch "British and Dutch Stance on IceSave Hardening," IceNews, September, 28, 2009, http://www.icenews.is/index.php/2009/09/28/british-and-dutch-stance-onicesave-hardening/ "FT Editor Says British Public Supports Iceland," IceSave, January, 20, 2010 "UK Moves to Soften IceSave Deal," IceNews, February, 18, 2010 "Iceland on Track for Joining EU," The Guardian, February, 24, 2010 "IceSave Referendum Ends, First Results Released," IceNews, March, 6, 2010 "Darling: Pointless to Push Iceland too Hard," IceNews, March, 8, 2010
"Norway Pushing to Break IMF-Iceland Deadlock Over IceSave," IceNews, March, 22, 2010
WORKING PAPER "IMF Approves Icelandic Credit Review," IceNews, April 16, 2010 "Thank God and the Krona Iceland Isn't in Greece's Position," IceNews, May, 3, 2010 Statistics Iceland, www.statice.is World Bank, Iceland, http://data.worldbank.org/country/Iceland Trading Economics, www.tradingeconomics.com GoogleFinance, www.google.com/finance Central Bank of Iceland, http://www.sedlabanki.is
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doc_830269540.docx
The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics.
Case Study on Financial Crisis in Global: Iceland
Some Things Old and Some Things New: Beginning to Place Iceland's Financial Crisis in Global and Historical Context Abstract: In 2008, Iceland's financial economy exploded after more than a decade of fast and expansive growth. This paper charts the historical origins of that financial boom and eventual bust. It situates Iceland's financial bubble and burst in a broader history of financial crises. The author surveys Icelandic economic history and macroeconomic data from the mid 1990s through the aftermath of the crisis, and finds that it shares some characteristics of other regional financial crises in the late 20th century and late 2000s while differing in others. The scale and scope of Iceland's financial crisis reveals the inherent risk of financial service led growth strategies, serves as a cautionary tale about the importance of oversight, and presents one example of post-crisis recovery paths. I. Introduction
Prior to the 1980s and 1990s, Iceland's economy was highly insular and nationalized. Banks were largely government owned, and Iceland's legal system strictly governed credit and discouraged trade. In less than twenty years, Iceland's financial sector transformed into a 'wild frontier' zone of investment banking, and fomented an economic crisis of epic proportion when its three major banks defaulted over three days in 2008. (Lewis, 2009) This paper investigates how Iceland's rise and fall compares to other nations' financial crises in the late 20th century and early 21st century. It grounds comparatively recent phenomena in economic events that may seem to be the distant past; however, the roots of the Icelandic crisis resemble the roots of the US financial crisis in what they owe to developments and changes in the relations between the government, industry, financial interests, and increasing inequality among the nation's population. The phenomena that attended Iceland's crisis
resemble situations in other countries, but the combination of 'first world' and 'third
WORKING PAPER world' trends in financial crises (in terms of causes and consequences) indicate a new direction in financial crisis that may reflect a changing global financial landscape. II. A Brief and Annotated Timeline of Iceland's Economic Development and Financial Crisis (Financial Crisis events are italicized):
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a.1918: Iceland gains independence from Denmark (after a history of being part of various Scandinavian empires) b.1918 - 1960s: Iceland's highly regulated economy centers around fishing (highly competitive) and farming with a nationalized banking sector c.1976: Icelandic government introduces a quota system for fishers d.1984: Icelandic government allows fishers to trade their quotas; suddenly, fishers begin to accumulate profits. As the price of fish goes up, inequality increases, and GDP increases. e.Mid 1980: Icelandic government begins to shift - politically and philosophically - to the right. The government: i.Drops trade restrictions ii.Relaxes control of the exchange rate iii.Deregulates Icelandic industries, particularly the banking sector iv.Joins the European Economic Arena f.1990s: Daniel Oddson becomes prime minister. Under his tenure, the Icelandic government: i.Cuts the corporate tax rate from 33% to 18% ii.Raises "taxes on low and average income earners by enough to raise tax revenues from 39% to 49% of GDP" (Wade, 2009, 11) iii.Does not cut public spending g.Mid 1990s: Daniel Oddson oversees various significant changes in the Icelandic banking sector. Among these: i.Iceland's real interest rates become positive ii.Iceland's banking sector changes from having "relatively large state-owned banks" to a highly concentrated system with 3 banks - Landsbanki, Kaupthing, and Glitnir - that "were some hybrid of commercial and investment banks" (Sigurjonsson, 2010, 10) iii.New incentive structures emerge in newly privatized banks, including, "aggressive compensation schemes, stock options for employees and flat organizational structures." (Sigurjonsson, 2010, 9) iv.Government decides to privatize banks to Icelandic Agents only (Sigurjonsson, 2010, 12) h.Mid to Late 1990s:
WORKING PAPER i.Icelandic government promotes the purchase of shares in newly privatized banks, particularly by Icelandic citizens (Sigurjonsson) ii.Investment bankers begin borrowing and lending significant amounts, with little scrutiny (Sigurjonsson) 2001: Iceland's Central Bank pursues an inflation targeting policy. Early 2000s: i.Iceland's interest rates rise significantly, from 5.3% in 2001 through 15.25% in 2007 ii.Simultaneously, Icelandic inequality increases (Gini coefficient rises from 0.26 to 0.42) iii.Housing prices triple from 1998 through 2008 iv.Many countries invest in Icelandic banks v.Icelandic banks buy shares of Iceland's main media companies, while Icelandic media companies simultaneously buy shares of banks vi.David Oddson is named the head of Iceland's Central Bank 2006: i.Economists begin to criticize Icelandic financial developments ii.IMF reports that "the expansion of Iceland's banks' balance sheets was 'staggering'" and that "this pace of growth has exposed the Icelandic financial system to vulnerabilities that could undermine its health." (Wade, 2009, 18) iii.In response to this report, outsiders that had bought Icelandic bonds in large numbers hesitated to buy more (Wade, 2009) Icelandic banks responded by entering the retail money market and selling internet banking accounts to customers in the UK and the Netherlands. (Wade, 2009) 2007: i.Icelandic Chamber of Commerce commissions various economists to write papers celebrating the health of Iceland's financial system ii.International and Icelandic economists continue to write critiques of Iceland's financial system, though they are criticized by aforementioned economists and the Icelandic Central Bank iii.Iceland's Bank Asset to GDP ratio falls just under 9, making it the second highest in the world behind Switzerland September 2008: i.Fall of Lehman Brothers - Icelandic money markets and interbank lending freeze completely. ii."The Central Bank of Iceland was unable to act as an effective lender of last resort to the Icelandic banks. It simply did not have enough foreign currency to do this." (Sigurjonsson, 2010, 14-15) October 6, 2008: Icelandic government puts Glitnir in receivership and buys 75% of its shares October 7, 2008:
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p. q. r. s. t. u. v. w. x.
i.Icelandic government puts Landsbanki into receivership ii.David Oddson says on Icelandic television that "The [Icelandic] government will not repay debts of people ... who have not exercised due diligence about where they put their money." (Wade, 2009, 23) iii.UK seizes "the UK assets of all the Icelandic banks by invoking anti-terrorist laws" (Sigurjonsson, 2010, 15) October 9, 2008: Icelandic government places Kaupthing into receivership October 2008 - January 2009: Icelanders protest in large numbers calling for early elections April 2009: Icelanders elect a new prime minister July 2009: Icelandic parliament votes in favor of joining the EU August 2009: Icelandic parliament votes to enact caps tied to GDP on the amount they will pay back to the UK and the Netherlands September 2009: The UK and Netherlands threaten to block a planned loan by the IMF to Iceland January 2010: Iceland's president refuses to sign a bill authorizing the payment of approximately $5 million to the UK and the Netherlands March 2010: A large majority of Icelanders vote "No" in a referendum on whether Iceland should pay the $5 million demanded by the UK and the Netherlands April and May 2010: Icelandic government prepares to investigate and prosecute the chief actors in the financial system whose activities overleveraged and precipitated the Icelandic financial crisis
III.
Key phenomena of this crisis
I argue that the causes of Iceland's financial crisis can be divided into three broad categories. First, numerous members of the Iceland's government encouraged and authorized policies that deregulated Iceland's financial system and that empowered a small sector of Iceland's population to pursue economic activities that would destabilize Iceland's economy. Next, activity in Iceland's private sector - both the financial sector and the real sector - profoundly destabilized Iceland's economic edifice. Finally, changes within Iceland's class structure are likely to have
contributed to and exacerbated Iceland's economic instability, and the resulting economic calamity. Each of these classes of change created feedbacks that escalated
WORKING PAPER and exacerbated the processes in each sector - so, as the country moved further to the right, liberalized its economic policies more, and saw its richest citizens earn and consume more, those beneficiaries contributed more to the politicians in charge, and took greater advantage of the new economic system in play. the As I describe in the timeline, Iceland's government tacked to the right during
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mid 1980s as the Independence Party, a coalition of Iceland's conservative and centrist political parties that centered about Iceland's "importing, wholesale, transport, insurance, and fishing," industries. (Wade, 2009, 10) This rightward shift paralleled many Western countries' political trends in the 1980s - it was the era of Reagan and Thatcher, after all. (Wade, Danielsson, Zoega, 2009) This political shift was matched with an about-face of many economic policies. As mentioned, Iceland's government decreased corporate tax rates while raising income tax rates for low and middle class Icelanders. (Wade, Danielsson, Zoega, 2009) Though the Icelandic government did not cut its spending, it was able to maintain fiscal surpluses due to the increased income taxation, even after lowering corporate tax rates by a significant percentage. In addition to making its tax code far less progressive, Iceland's government oversaw a dramatic liberalization of Icelandic trade law. Iceland had once been an isolated economic entity that went so far as to develop a significant energy sector to avoid the excessive cost of importing fuel, and Icelanders had once been constrained by laws prohibiting the use of Icelandic credit cards to buy goods abroad - economists Jon Danielsson and Gylfi Zoega argue that
this sudden change plunged Iceland into economic waters that it was ill equipped to
WORKING PAPER navigate, even without considering its subsequent rapid financial privatization and liberalization. The focus of Icelandic monetary policy shifted dramatically from the 1980s through the early 2000s from a goal of stabilization at all costs, to one of simultaneous (and perhaps paradoxical) inflation targeting and financial expansion. As mentioned in the timeline, Iceland's Central Bank concurrently privatized and deregulated the Icelandic financial sector. Danielsson and Zoega write:
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"Until [the 21st century, Iceland's] banking system consisted of relatively large state-owned banks along with smaller private banks. The banking system was heavily regulated and politicized, with politicians represented on banks' boards and loan decisions often made on the basis of political affiliation and connections... The same political structure applied to the Central Bank, with each of its governors representing one of the main political parties... Consequently, the Central Bank of Iceland has always been perceived as being closely tied to the central government, raising doubts about its independence, and reducing its credibility." (Danielsson and Zoega, 2009, 3) Given the institutional coziness of Iceland's Central Bank and ruling parties, it is little wonder that the Independence Party could usher in such radical changes over a fifteen-year period. In this period of time, Iceland's financial sector eventually saw the consolidation of its various commercial banks into three large banks, Landsbanki, Kaupthing, and Glitnir, which, Throstur Sigurjonsson argues, "were neither ordinary commercial banks, nor investment banks, but something in between." (Sigurjonsson, 2010, 10) In the early nineties, Iceland's Central Bank "made real interest rates positive for the first time, eliminating many firms and industries that had depended on subsidized credit." (Danielsson and Zoega, 2009, 3) Then, over the course of the 2000s, the governors of Iceland's Central Bank increased interest rates steadily - as
WORKING PAPER mentioned in the timeline, Icelandic interest rates rose from 5.3% in 2003 to
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15.25% in 2007. This policy was meant to control for inflation, and though inflation in Iceland stayed low by its domestic standards, it was high "compared to its neighbors." (Danielsson and Zoega, 2009, 4) Danielsson and Zoega argue, further, that these inflation-targeting policies encouraged investment by speculators outside of Iceland, and contributed the incredible instability of Iceland's financial system that would foment its eventual crash. Next, activities within Iceland's new and burgeoning financial sector, and interactions between Iceland's financial sector and its real sector played a secular and magnifying role in the destabilization of Iceland's economy. As mentioned in the timeline, Sigurjonsson argues that one consequence of Oddson et al's empowerment of a privatized and liberalized financial sector was a radical change in the Icelandic financial system's incentive structure. Where bankers had once been expected to promote and ensure stability in Iceland's financial system (and economic base as a whole), now a generation of bankers were to be rewarded for risky bets, large transactions, and anything that might increase the three big banks' profits with stock options and bonuses. At the same time, the Icelandic government's decision to privatize to Icelandic agents increased the risk of financial instability. Michael Lewis notes that many of the executives of these newfangled (for Iceland, anyway) banks were men in their late twenties and thirties, with little experience in financial and monetary policy, particularly at the international level, and argues that, further, these men might have been uniquely risk-loving individuals that would be more prone to pushing Iceland's financial system (and economy) to a brink. (Lewis, 2009)
WORKING PAPER Further still, the Icelandic government also encouraged Icelanders at all levels of society to buy shares in these newly privatized banks. Sigurjonsson claims that, consequently, "nearly all the Icelandic public had a stake in the banks, as the government had successfully established incentives for ownership." (Sigurjonsson,
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2010, 13) Depending on how much of the proverbial kool-aid Icelanders had drunk, their economic wellbeing could be tied to the fates of these banks, making the systemic consequences of a crash all the more destabilizing. Once the new generation of Icelandic bankers had established itself at Landsbanki, Kaupthing, and Glitnir, they immediately went to work. Danielsson, Zoega, Lewis, Sigurjonsson, Robert Wade, and anyone else that has written about Iceland's financial boom and bust cite the rapid increase in borrowing and lending that occurred in the late nineties and early 2000s. According to Danielsson and Zoega: "The world was awash in cheap credit and the newly privatized banks experienced little difficulty in raising capital internationally. They used this capital to fund expansion domestically and abroad. This expansion was subject to little regulatory scrutiny, neither in Iceland nor abroad." (Danielsson and Zoega, 2009, 4) Sigurjonsson writes that the rapid consolidation of Iceland's banking system into three chief players, "[supplied] the banks with the necessary instruments and scale for both domestic and international growth." (Sigurjonsson, 2010, 6) At the same time that numerous Icelandic brokers were trying to acquire foreign assets, various foreign interests poured money into these Icelandic banks. According to Wade, by 2007, speculative capital: "was estimated at more than 50% of Iceland's GDP ... The speculators saw it as a one-way bet, because they knew the central bank would be
WORKING PAPER reluctant to lower interest rates in view of the fact that a likely fall in ISK would raise the already heavy burden of foreign currency debt of households and firms." (Wade, 2009, 16) According to Michael Lewis:
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"You didn't need to be Icelandic to join the cult of the Icelandic banker. German banks put $21 billion into Icelandic banks. The Netherlands gave them $305 million, and Sweden kicked in $400 million. U.K. investors, lured by the eye-popping 14% annual returns, forked over $30 billion -$28 billion from companies and individuals, and the rest from pension funds, hospitals, universities, and other public institutions." (Lewis, 2009, 10-11) Further, these banks took advantage of the newly liberalized trade structures in Iceland: "Banks also benefitted from expansion of various other sectors ... The banks were inspired to seek out new customers in their international expansion, many of them being Icelandic firms seeking growth abroad." (Sigurjonsson, 2010, 6) Icelandic bank executives made strong efforts to acquire foreign assets, and in the process, "leveraged their capital base to buy banking assets worth several times the country's GDP. If the value of these assets ... were to be revalued at much lower prices, the financial institutions would become insolvent." (Sigurjonsson, 2010, 8) However, the Icelandic government and any regulatory apparatus that may have survived Oddson's tenure as prime minister had little apparent interest in performing stress tests or any measurement of the stability of the Icelandic financial sector. Sigurjonsson notes that Icelandic bankers were not just pursuing international asset acquisition. Sigurjonsson's descriptions of Icelandic financial players' attempts to raise share prices are reminiscent of Jim Crotty et al's accounts
WORKING PAPER
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of the financialization of the USA's real sector. Wade argues that Icelandic brokers, "expanded their loans much to fast, domestically and abroad, financing a large part of their activities with short-term borrowed money." (Wade, 2009, 15) In a more recent paper, and Wade and co-author Silla Sigurgeirsdottir argue that at times, Icelandic bankers went even further, by promising money when large banks could not afford collateral for loans from international banks. (Wade, Sigurgeirsdottir, 2010) It is possible that the entrepreneurial expansion that occurred in Iceland between the 2000 and 2007 was secular; however, many firms have since gone out of business following Iceland's financial collapse. The rapid and hollow growth of Iceland's financial sector provided an unsteady grounding for what real sector development occurred in that boom period, and the systemic implications of the crash of both Iceland's financial and real sectors are considerable. While these developments were taking place in the private and public sectors, Icelandic household dynamics changed significantly during this period, too. According to Wade and Sigurgeirsdottir, in the mid-nineties, Icelandic income distribution resembled other highly egalitarian Scandinavian countries. However, the process of increasing inequality, which had begun when Iceland's government created a market for fishing quotas in the eighties, accelerated rapidly as Iceland's financial sector grew and grew between 2000 and 2007. (Lewis, 2009, and Wade and Sigurgeirsdottir, 2010) Stefan Olafsson, an economist at the University of Iceland that has done significant research on Iceland's tax rate over history, gave a presentation in January, 2010, titled, "From Neoliberalism to Increasing Income Inequality: Globalization, Politics, and Increasing Income Inequality in Iceland." This
WORKING PAPER presentation tells the story of rapidly increasing inequality from 1995 through 2008, let alone compared to the decades prior to the seventies. According to Olafsson's research, accounting for the difference in financial
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earnings increases the disparity in inequality from the pre-boom time through 2008. No accounting for financial earnings, the Gini coefficient for Icelandic couples increased (according to Olafsson) by 35.8%. If one incorporates financial earnings into the picture, the Gini coefficient increases by 74.8% for Icelandic couples from 1995 — 2008. When Olafsson plots the relationship between income groups and share of Icelandic financial earnings, it appears that the top 15% of Icelandic families earned approximately 80 percent of financial earnings in Iceland during 2007. I have not been able to find any data or analyses that try to link the simultaneous surge in household consumption during Iceland's boom period to the growing inequality that defined Iceland's growth. However, numerous authors cite anecdotal evidence of a large consumption binge that appears to have occurred in Iceland during its economic expansion in the early 2000s. According to Wade: "The combination of high interest rates, capital inflow, and overvalued krona created boom, and from the early 2000s to 2008, it was bliss to be alive in Iceland. Average income rose to near US $70,000, about the highest in the world, on the back of the overvalued ISK. Icelanders joined Norwegians as the only people in the world who found London cheap." (Wade, 2009, 16) This virtual expansion in income was accompanied by an increase in household debt as a percentage of GDP - "household debt reached 103% of GDP by 2007." (Wade, 2009, 16) In addition to consumption of luxury goods from abroad, there appears to
have been a real-estate bubble in Iceland, in which housing prices more than tripled
WORKING PAPER between 1998 (housing cost $57 per square foot) to 2008 (when housing cost $191 per square foot). (Icelandic Property Registry) Wade and Sigurgeirsdottir note that
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one avenue of expansion Iceland's new investment bankers pursued was a reform of the Icelandic mortgage policy, specifically the decrease of the percentage prospective homebuyers needed to pay at the time of signing their mortgages to 10%. (Wade and Sigurgeirsdottir, 2010) Other authors describe a sort of cottage industry in household speculation that grew during this period. Lewis argues that: "Some large numbers of Icelanders engaged in the same disastrous speculation. With the local interest rates at 15.5% and the krona rising, they decided that the smart thing to do, when they wanted to buy something that they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen, and in the bargain made a bundle on the currency trade, as the krona kept rising." (Lewis, 2009, 5) While there is ample anecdotal evidence of grotesquely lavish purchases by Icelandic industrial magnates such as soccer teams and power plants, there is little evidence of which sectors of the Icelandic population were playing the foreign currency market. I think it stands to reason that everyone in Iceland was not borrowing francs with which to purchase Land Rovers, which they would subsequently blow up once the value of the krona plummeted following Iceland's financial crash. (Lewis, 2009) It is important to note the feedback effects that would have arisen during this period between the household sector, private sector, and governmental sector. Wade and Sigurgeirsdottir illustrate the linkages in their 2010 article: the Independence party pursued policy changes that would most benefit members of
Iceland's economic elite (an entity that had the historic name of "the Octopus", per Wade and Sigurgeirsdottir, 2010), particularly those in the fishing and banking
WORKING PAPER industries. These policy changes directly enhanced the short-term profitability of those industrial operations - lower corporate taxes, fewer banking and trade regulations, laxer credit laws that promoted more borrowing at the firm level, and more consumption at the household level. New banking practices that made it easier for households to afford mortgages could have had multiplier effects, and would
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certainly have increased demand for Icelandic financial instruments, and would also have increased the pool of funds that bankers could use to finance different deals that they were pursuing. As the richest individuals took their earnings home, they could consume what they wanted from wherever they wanted, and they could also contribute funds to the political party that had made everything happen for them. Wade and Sigurgeirsdottir note that Iceland is the only Nordic country to allow corporations to donate to political parties, and they argue that the Independence party received windfall donations throughout the boom period. These cycles would perpetuate the political tenure of the conservative and business oriented Independence party, give financial and industrial interests what they wanted, and satisfy Iceland's newly moneyed upper-class, while concurrently undermining the stability of Iceland's economy as a whole, and increasing the vulnerability of the average Icelander in the event of some sudden financial and/or economic collapse. Were there any critics as this rapid financial development, economic growth, and increase in inequality happened? Yes - some economists, outside of Iceland and within Iceland, did write papers critiquing Iceland's sudden financial boom, mostly arguing that the growth masked increasing instability on many fronts. (Wade, 2009) However, the government and private sectors both inhibited a large amount
of
WORKING PAPER internal discussion of the events of the boom through two key avenues. First, Wade and Sigurgeirsdottir argue that Oddson's party's tactics resemble those of "US and
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UK politicians and bankers' [behaviors:] as in Iceland, Clinton, Bush and Greenspan, or Blair, Brown and Mervyn King remained in denial while their policies pumped up the bubbles, year after year." (Wade and Sigurgeirsdottir, 2010, 27) Wade and Sigurgeirsdottir argue further that Oddson's government "undertook an extreme 'privatization' of information, relying primarily on the research departments of the banks themselves for analysis of the economy and its prospects." (Wade and Sigurgeirsdottir, 2010, 27) The authors argue, further, that when independent institutions published reports critical - or merely factual - of Iceland's changing economic milieu, they faced the potential wrath of the Independence party: "[When] Iceland's National Economic Institute ... published unwelcome reports, warning that management of the economy was going haywire, Oddson abolished it in 2002... Statistics Iceland, the public data agency, was notably cowed into suppressing information on soaring income and wealth inequality... The University of Iceland bowed to pressures to make its Economic and Social Research centers self-funding - that is, to rely on finding buyers for commissioned research - with the convenient result that they no longer published big-picture reports with a critical edge." (Wade and Sigurgeirsdottir, 2010, 28) It is ironic, as Wade and Sigurgeirsdottir note in their 2010 article, that one of the chief reasons neoliberal economists like Frederic Mishkin and Richard Portes offered for their glowing reports of Iceland's financial health was Iceland's robust civic institutions and lack of corruption, and a further irony that both economists were paid for their efforts by Iceland's Chamber of Commerce. (Wade and Sigurgeirsdottir, 2010)
WORKING PAPER Given the apparent civic repression of Iceland's independent critics of the boom period, it seems almost quaint to note the involvement of the other proverbial
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watchmen with different economic interests. Sigurjonsson argues that banks made a point early in their expansion of buying shares of Iceland's major media companies (chief among them the newspaper Morgunbladid, which now employs Oddson as its editor in chief), and that the major media companies also bought significant shares in Iceland's banks. The end result was that papers were loath to criticize their shareholders, both out of fear for their bottom lines, and, Sigurjonsson argues, out of a concern for what would happen to the shares of the different banks that the media companies themselves owned. Instead, according to Sigurjonsson and Wade, Iceland's major media companies were quick to criticize any economists that dared criticize or impugn Iceland's rise to financial greatness. (Sigurjonsson, 2010, Wade, 2009) The consequences of Iceland's economic collapse have, of course, been drastic. Immediately following the three-day period in which Iceland's three major banks went into receivership and when the UK invoked terrorism law to seize its assets from Iceland, the value of the Icelandic krona plummeted, ultimately, to less than half of its value prior to the crash. Within Iceland, large volumes of international workers from Eastern Europe have emigrated home, and in 2009, twice as many people emigrated from Iceland as immigrated into Iceland. There are forecasts that Icelanders' pensions will contract by fifteen to twenty percent, and
unemployment rates shot up from 2.3% in 2007 to 7.6% in 2010. In the midst of
WORKING PAPER these socioeconomic and demographic shifts, various Icelandic firms have folded, likely because of the interconnectedness with Iceland's unstable financial sector. Within Iceland, there have been significant political and social responses to
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the crisis. Starting in October, Icelanders began to protest in large numbers against the ruling party and to call for early elections. By the end of January 2009, the_ Independence party had mostly resigned, and Icelanders voted in a coalition government of the Social Democratic Alliance, the Left-Green Movement, and the Centrist-Progressive party that named Johanna Sigurdardottir, a member of the Social Democratic Alliance, to be Prime Minister. Sigurdardottir's parliament subsequently voted to join the EU, only to be faced by opposition from the UK and the Netherlands for assets that they had lost through their investment in different Icelandic banking services. From September 2009 through January 2010, Iceland grappled with UK and Netherlander interests, until the Icelandic president refused to sign the bill committing Iceland to paying the UK and the Netherlands about $5 million dollars. In the vacuum following the crash, Iceland's government has held its ground about not pursuing fiscal austerity until 2011. It has also continued to negotiate - at times, counter to the interests of the Icelandic parliament - to avoid paying British and Netherland financial interests back (or at least to reduce its obligations to pay those parties back). (Wade and Sigurgeirsdottir, 2010) IV. Historical comparisons
The question, then, is how does Iceland's financial development and crisis fit into a global history of financial crises? How is it different? Did economists ignore, or fail to interpret warning signs because of the 'proactive' Icelandic government, their
WORKING PAPER institutional biases, or some combination of the two? I argue that Iceland's boom
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and bust and its attending policies resemble elements of the financial crises of three quite different countries in different 'stages' of development. The Argentina financial crisis of 2001, the Korean financial crisis of the late 1990s, and the US financial crisis all share the roots of activist political and economic policies that enabled the growth of investments, both domestic and international, that created instabilities that would undermine each country's economic structural health when crises erupted. Socioeconomic data in the boom times in each follows certain patterns - rising inequality and increasing consumption among particular socioeconomic strata, and the political influence of people riding the boom - with the similar and depressing pattern of booms that benefit a few followed by crashes that affect many. The Icelandic financial crisis of 2008 resembles Argentina's financial crisis in 2001 in several ways. First, the Argentine government initiated monetary policies approximately a decade before Argentina's crisis that would set the stage for instability. Specifically, the Argentine central bank initiated a convertibility regime, in which Argentines could convert pesos into dollars. Another similarity to Iceland: Argentina's government pursued this policy in the nominal goal of countering inflation, following a decade of turbulent inflation rates. (Frankel, 2007) Daniel Azpiazu et al argue that this policy reflected both an autocratic impulse by the Argentine government to "recreate Argentine society on the basis of new socioeconomic relationships," and a public demand for stable price levels, and that it transformed into a system meant to encourage foreign and Argentine industrial and
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financial interests that would take advantage of relaxed regulations and restrictions. (Azpiazu et al, 1998) Neoliberal critics argue that this policy created a moral hazard problem in which different parties borrowed more than they should have to finance inefficient projects, and that unemployment resulted from this inefficiency. (Feldstein, 2002) In addition to an increase in firm borrowing, households also borrowed more and consumed more imports: as in Iceland, Argentina incurred trade deficits. When Argentina's financial crisis occurred in 2001, the Argentine had already been weakened following numerous global financial crises, particularly the crisis in Brazil, one of Argentina's chief trading partners. (Hornbeck, 2002) Prior to the financial crisis, Argentina saw an increase in its GDP as well as an increase in inequality - while some critics blame this increase on a concurrent increase in unemployment, and while other critics blame this on the inefficiency of Argentina's convertible currency system, few appear to look at the relation between financial activity and inequality. (Damill, Frenkel, and Maurizio, 2007) Yet, the financial crises in Argentina and Iceland are not mirror images. The policies - Iceland's Central Bank's control over interest rates, Argentina's convertible currency - were not the same, and the intentions behind them were not the same. Iceland had not had a history of hyperinflation, and citizens did not necessarily object to letting interest rates rise and rise. Further, external perceptions and biases of economists observing the countries may have been at play. Argentina, as a Latin American country, faced outside perceptions that it was likely to incur some kind of financial or economic crisis; Iceland had no such history. (Damill, Frenkel, and Rapetti, 2005) It is possible that an increase in Icelandic
WORKING PAPER borrowing would not have set off alarm bells that such behavior might for other countries - Wade and others argue that Mishkin criticized economists that compared Iceland's overleveraged financial sectors to developing country stories. (Wade and Sigurgeirsdottir, 2010) Unlike Argentina, Korea's financial liberalization resembled Iceland's given both countries' relative isolation from globalized and neoliberal trade and finance regimes. Crotty and Dymski argue that the Korean government: "came under great pressure to liberalize from the US, its own elites, and the OECD, who made financial liberalization a condition for entry. The Korean government deregulated its hitherto tightly controlled domestic financial markets, removed controls over short-term capital flows, and ended its coordination of domestic investment. Foreign money poured into Korea in this period, fueling over-investment and creating the preconditions for the outbreak of financial crisis in late 1997 and deep recession in 1998." (Crotty, 2000, 12) Again, as in Argentina and as in Iceland, in the lead-up to the Korean financial crisis of 1997, GDP grew, and so did inequality. (Crotty and Dymski, 2000) Another similarity with the Iceland case is the increase in the rentier share of income -
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Gerald Epstein and Dorothy Power estimate the increase in the Korean rentier share of income to be 112 percent - during said build-up to the crisis. It is hard to imagine that there were no linkages between these increases and political opinion, though I have not read any works demonstrating such a dynamic. However, the Icelandic situation again does not perfectly match the Korean experience. Korea may have faced a different sort of prejudice when its government acquiesced to relinquish financial controls as a precondition of entering the OECD. Iceland happens to have been one of the founding members of the OECD - a
development that had a huge amount to do with historical biases and prejudices.
WORKING PAPER Though it is important to note that Korea did not need to join the OECD, the
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institutional benefits of doing so - tangible or otherwise - must have played some role in motivating the Korean government's decision to deregulate its financial sector, even if Korean economic elites and outside financial interests were simultaneously wheedling, cajoling, or urging the government to do so anyway. Iceland had no proverbial gun to its proverbial head. Even if prevailing political and economic opinions in the Western Hemisphere and world motivated David Oddson and the Independence party to pursue pro-market anti-welfare policies, ultimately his party was in charge, and made the decisions to deregulate, and to encourage wild and speculative behavior in a new industry with a steep learning curve and the potential to do great damage. If anything, Iceland's cowboy financial sector resembles the gullible and gung-ho thrift managers that Michael Lewis describes in Liar's Poker when US investment banks moved heavily into trading mortgage and junk bonds, who are so totally enthralled by bond traders' pitches that they incur more risk than even the investment banks mediating their transactions. (Lewis, 1989) Many elements of Iceland's financial crisis resemble elements of the US's financial crisis. Danielsson, Lewis, Sigurgeirsdottir, Sigurjonsson, Wade, and Zoega all paint a picture of arrogant bankers making major deals that were overleveraged and fundamentally unstable while a chorus of inside and outside economists told them all that was exactly what they should be doing. The tacit and explicit support of the media and the Icelandic government for what said financial interests were
doing (and the alleged strong-arm tactics by the government against Icelanders and
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Icelandic agencies that tried to speak the truth about how hollow Iceland's financial system and economy were) created and sustained an environment of irrational exuberance at the best, and outright fraud at the worst. (It is worth noting that Bill Black has consulted the new Icelandic government and given talks about white_ collar fraud in the University of Iceland as recently as last spring, according to Wade and Sigurgeirsdottir, 2010.) An important distinction between the two scenarios with two principle_ consequences remains however: size. Iceland's bankers managed to over-leverage
their system far beyond what the US financial sector did during the same period of time, but the scope of their total transactions could not match what US bankers pulled off. As a consequence, the US was far better able to absorb the damage its financial sector wreaked, despite requiring a gargantuan bailout from the treasure, and despite ushering in the largest recession since the Great Depression. When the time came for Iceland to pay its debts, they were so huge, and so obvious to Iceland's 330,000 citizens that Icelanders were almost physically confronted with the destructive potential of an unregulated financial sector. Even though both Iceland and the US saw large increases in inequality during the rise of their respective financial sectors, and though each country was confronted with significant real sector economic trauma in the form of increasing unemployment, Iceland appears to have a large-scale and effective popular protest against the financial interests responsible for bringing down their economy, while the US has diffuse action _
against what appear to be increasingly organized financial interests and their representatives in the government, whether in Congress, regulatory bodies,
WORKING PAPER economic advisory roles, lobbyists, and so on. How this plays out in the different countries' approaches to fiscal policies and regulation remains to be seen, but it would appear, from Wade and Sigurgeirsdottir's article, that more Iceland may merit more optimism if one hopes for more regulation to prevent such socialized crises that result from such concentrated and short lived gains.
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WORKING PAPER Works Referenced: Arnason, Ragnar. "The Icelandic Individual Transferrable Quota System: A Descriptive Account," Marine Resource Economics, VIII, No. 3 (1993) Azpiazu, Daniel, Eduardo Basualdo, and Hugo Nochteff, "Menem's Great Swindle: Convertibility, Inequality, and the Neoliberal Shock," NACLA Report on the Americas, 10714839, May/June 1998, Vol. 31, Issue 6
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Crotty, James, "Trading State-Led Prosperity for Market-Led Stagnation: From the Golden Age to Global Neoliberalism," from Housing Finance Futures: Housing Policies, Gender Inequality, and Financial Globalization in the Pacific Rim, eds. Gary Dymski and Dorene Isenberg, ME Sharpe, 2000. Crotty, James and Gary Dymski, "Can the Global Neoliberal Regime Survive Victory in Asia? The Political Economy of the Crisis," PERI, 2000 Damill, Mario, Roberto Frenkel, and Martin Rapetti, "The Argentinian Debt: History, Default, and Restructuring," Revistia Economia, December 2005. Damill, Mario, Roberto Frenkel, and Roxana Maurizio, "Macroeconomic Policy Changes in Argentina at the Turn of the Century," CEDES, Buenos Aires, 2007 Danielsson, Jon and Gylfi Zoega, "The Collapse of a Country," RiskResearch, March, 12, 2009 Epstein, Gerald and Dorothy Power, "Rentier Incomes and Financial Crises: An Empirical Examination of Trends and Cycles in Some OECD Countries," PERI, 2003 Feldstein, Martin. "Argentina's Fall: Lessons From the Latest Financial Crisis," Foreign Affairs, Vol. 81, No. 2, March/April, 2002 Frenkel, Roberto and Martin Rapetti, "Monetary and Exchange Rate Policies After the Convertibility Regime Collapse," PERI Publication, September, 2006 Hornbeck, JF, "The Argentine Financial Crisis: A Chronology of Events," CRS Report for Congress, January 2002 Keys, Lisa, "For Sale in... Iceland," The New York Times, June, 30, 2009 (http://www.nytimes.com/2009/07/01/greathomesanddestinations/01 ghsale.html) Laffer, Arthur, "Overheating is Not Dangerous," Morgunbladid, November, 17, 2007 Lewis, Michael, "Wall Street on the Tundra," Vanity Fair, April, 2009 Minsky, Hyman, and Charles Whalen, "Economic Insecurity and the Institutional Prerequisites for Successful Capitalism," Journal of Post Keynesian Economics, Winter 96-97, Vol. 19, No. 2
WORKING PAPER Mishkin, Frederic and Tryggvi Herbertsson, "Financial Stability in Iceland," Iceland Chamber of Commerce Publication, May 2006 Ólafsdóttir, Hildigunnur, "Alcohol Policy Within a Fiscal Frame: The Case of State Alcohol Monopoly in Iceland," Contemporary Drug Problems, 247, Summer, 1993 Ólafsson, Stefán, "From Neoliberalism to Increasing Income Inequality: Globalization, Politics, and Income Inequality in Iceland 1995-2008," REASSESS Steering Group, Oslo, Nova Research Institute, Presentation for 1/25/10 Ólafsson, Stefán and Arnaldur Kristjansson, "Income Inequality in a Bubble Economy: The Case of Iceland, 1992 - 2008," Luxembourg Income Study Conference, June 2010 Sigurjonsson, Throstur, "The Icelandic Bank Collapse: Challenges to Governance and Risk Management," Emerald Group Publishing, 2010 [Working Paper]
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Thordardottir, Ingiborg, "Anger as Iceland Battles to Recover," BBC News, October, 9, 2009 Wade, Robert, "Iceland as Icarus," Challenge, vol. 52, no. 3, May/June, 2009, 5-33 Wade, Robert and Silla Sigurgeirsdottir, "Lessons from Iceland," New Left Review, 65, September/October, 2010, 5 - 29 Wolf, Martin, "How the Icelandic Sage Should End," Financial Times, January 10, 2010 "Mishkin Resigns: A Look Back," Wall Street Journal, May 28, 2008 "Iceland Applies to Join the European Union," CNN/Europe, July, 17, 2009, http://www.cnn.com/2009/WORLD/europe/07/17/iceland.eu.application/i ndex.h tml?iref=newssearch "British and Dutch Stance on IceSave Hardening," IceNews, September, 28, 2009, http://www.icenews.is/index.php/2009/09/28/british-and-dutch-stance-onicesave-hardening/ "FT Editor Says British Public Supports Iceland," IceSave, January, 20, 2010 "UK Moves to Soften IceSave Deal," IceNews, February, 18, 2010 "Iceland on Track for Joining EU," The Guardian, February, 24, 2010 "IceSave Referendum Ends, First Results Released," IceNews, March, 6, 2010 "Darling: Pointless to Push Iceland too Hard," IceNews, March, 8, 2010
"Norway Pushing to Break IMF-Iceland Deadlock Over IceSave," IceNews, March, 22, 2010
WORKING PAPER "IMF Approves Icelandic Credit Review," IceNews, April 16, 2010 "Thank God and the Krona Iceland Isn't in Greece's Position," IceNews, May, 3, 2010 Statistics Iceland, www.statice.is World Bank, Iceland, http://data.worldbank.org/country/Iceland Trading Economics, www.tradingeconomics.com GoogleFinance, www.google.com/finance Central Bank of Iceland, http://www.sedlabanki.is
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