volcker and iceland

Former Fed chairman Paul Volcker recently gave a speech in Toronto where he talked about what kind of banking system the U.S. should be aiming for post-crisis. I think a lot of what he said is directly relevant to Iceland as well, so I'll excerpt that part of the speech here and then follow with some comments.

I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions. The system is broken. I’m not going to linger over what to do about it. It is very difficult. It is going to take a lot of money and a lot of losses in the banking system. It is not unique to the United States. It is probably worse in the UK and it is just about as bad in Europe and it has infected other economies as well. Canada is relatively less infected, for reasons that are consistent with the direction in which I think the financial markets and financial institutions should go.

So I’ll jump over the short-term process, which is how we get out of the mess, and consider what we should be aiming for when we get out of the mess. That, in turn, might help instruct the kind of action we should be taking in the interim to get out of it.

[...]

So what are we aiming for? I mention this because I recently chaired a report on this. It was part of the so-called Group of 30, which has got some attention. It’s a long and rather turgid report but let me simplify what the conclusion is, which I will state more boldly than the report itself does.

In the future, we are going to need a financial system which is not going to be so prone to crisis and certainly will not be prone to the severity of a crisis of this sort. Financial systems always fluctuate and go up and down and have crises, but let’s not have a big crisis that undermines the whole economy. And if that’s the kind of financial system we want and should have, it’s going to be different from the financial system that has developed in the last 20 years.

What do I mean by different? I think a primary characteristic of the system ought to be a strong, traditional, commercial banking-type system. Probably we ought to have some very large institutions – or at least that’s the way the market is going – whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the credit and financial system.

This kind of system was in place in the United States thirty years ago and is still in place in Canada, and may have provided support for the Canadian system during this particularly difficult time. I’m not arguing that you need an oligopoly to the extent you have one in Canada, but you do know by experience that these big commercial banking institutions will be protected by the government, de facto. No government has been willing to permit these institutions, or the creditors and depositors to these institutions, to be damaged. They recognize that the damage to the economy would be too great.

What has happened recently just underscores that. And I think we’re at the point where we can no longer fool ourselves by saying that is not the case. The government will support these institutions, which in turn implies a closer supervision and regulation of those institutions, a more effective regulation than we’ve had, at least in the United States, in the recent past. And that may involve a lot of different agencies and so forth. I won’t get into that.

But I think it does say that those institutions should not engage in highly risky entrepreneurial activity. That’s not their job because it brings into question the stability of the institution. They may make a lot of money and they may have a lot of fun, in the short run. It may encourage pursuit of a profit in the short run. But it is not consistent with the stability that those institutions should be about. It’s not consistent at all with avoiding conflict of interest.

These institutions that have arisen in the United States and the UK that combine hedge funds, equity funds, large proprietary trading with commercial banks, have enormous conflicts of interest. And I think the conflicts of interest contribute to their instability. So I would say let’s get rid of that. Let’s have big and small commercial banks and protect them – it’s the service part of the financial system.

***

Funny, if you go back through those paragraphs and replace "United States" with "Iceland" you'd have a good description of what the three Icelandic banks (Landsbanki, Kaupþing, and Íslandsbanki (née Glitnir (née Íslandsbanki))) were and what they became.

All three started out (or had component pieces that started out) as good old fashioned banks. Banks that took customers' deposits and made loans to Icelandic enterprise with those deposits. Staid, boring, and with low profit margins. Then with the advent of the Roaring 00s and the globalization of Iceland's financial sector the three transformed themselves into multi-headed high-profit high-leverage monsters. They expanded internationally, making all kinds of fancy loans (to markets they maybe didn't understand all that well) in Europe and North America. They started their own equity hedge funds and currency speculation funds and private equity vehicles. They had their own proprietary trading shops that risked the bank balance sheet on equity deals, real estate deals, and foreign investments of all kinds.

And all this time, they each maintained extensive Icelandic branch networks, offered savings accounts and ATMs, issued credit cards, made small-business loans, and supported things like local soccer leagues. It was a strange juxtaposition: hedge funds on one side of the wall and take-a-number teller lines on the other. But in this they were miniature versions of international institutions like Citibank and HSBC.

This is why I feel Volcker's proposal here may also make some sense as a way forward for Iceland. Currently all three banks are in an ill-defined form of government receivership. There is ample scope for restructuring them now, in the way that makes the most sense for the future.

It would make sense to reconstitute the three of them as traditional commercial banks. These banks would be limited in their activities, and strictly regulated, to taking deposits and making loans to consumers and businesses. They would provide the kind of basic credit that is necessary to keep the economy moving. The parts of the old banks (now likely mostly worthless) that engaged in what Volcker terms "highly risky entrepreneurial activity" could be either shut down or sold off to domestic or foreign buyers.

In the interests of the Icelandic consumer (remember them?) I think it would then make sense to look for a stable foreign bank or banks to buy up one or two of the new "pure" commercial banks. In almost every industry, Iceland could benefit from competition, and banking is no exception. Foreign ownership by an experienced commercial bank would bring economies of scale to bear on the local market, providing cheaper banking services and better financing options, as well as bringing international standards of operation.

It's not too soon to begin looking forward to the future here, and to what kind of banking system would best benefit the Land. Applying Paul Volcker's proposal would be a good start.

valdi the music man

One place that I bet has already seen a pick-up in biz in these difficult times is Geisladiskabúð Valda (Valdi's CD Store) at Laugavegur 64 in downtown Reykjavík. This is a place that has long been one of my favorite stops on a chilly weekend stroll down the 101 Strip. For one thing, it's probably the only reliable source for classic rock CDs in the vast expanses of the Land. Steely Dan Greatest Hits? Check. Fleetwood Mac Rumors - Two Disc Special Edition? Check.

But, true to Iceland's "heavier edge", it's also got a whole wall of grubby jewel boxes of metal. Dimmu Borgir?* Check.

The real star of the show, however, is Valdi himself. He has that Icelandic country-farmer gift, a photographic memory for faces. He always remembers me, and picks up the last conversation I had with him where we left off, often a year or more before. It's as though I had never left the store. Not only that, he carries around a 1:1 scale exact mental replica map of each and every one of the probably 50,000 CDs jammed into every nook and cranny of the rabbit's warren of his store. Looking for that seminal Dimmu Borgir masterwork? He's got 3 filed under "D" in the metal section, another 2 filed in the "Norwegian giants" section, and a sixth filed next to a tourist CD called "Mývatn Inspirations". And 3-2-1, he plucks them out and bam-bam-bam stacks them up, rattling off the titles and then a package price for the whole lot.

*Norwegian heavy metal Icelandic lava formation tribute band

nobody's smilin'

Back at the end of last year, I wrote my first serious piece on "the Troubles" in Iceland. I had been saying since 2005 that there seemed to be too many new neighborhoods under construction around Reykjavík, and then there was some back-and-forth in the comments on whether or not that was so. Yesterday in Fréttablaðið (link PDF) , an economist at Landsbanki, Ari Skúlason, revealed the results of a summer 2008 survey the bank did of new construction in the area. The survey covers construction of apartment buildings and multi-family dwellings, but excludes single-family houses.

In the Reykjavík area (including the bedroom communities of Reykjanes, Selfoss/Hveragerði, and Akranes), there are 1,173 vacant, finished new apartments. Add to that 509 that are roofed and closed in (but not finished on the inside). And another 1,250 under construction and lots for another 4,403 reserved and/or prepared (some of them with digging for the foundation completed).

So the number of vacant finished apartments ain't all that bad for the area as a whole: just under 2% of the total number available today. But the number including "partially completed Death Stars" jumps to 8.4% of the total. That's a lot of ugly windowless concrete and half-dug lots.

The numbers get even scarier on an individual community level. The City of Reykjavík doesn't have proportionally all that many unfinished buildings, so it brings the averages down. But if you look at Kópavogur, where I live, more than 10% of total capacity is new/vacant or partially built. In nearby Garðabær and Hafnarfjörður, the numbers jump to over 18%! And up the street in the Mosó Ghett-ó a whopping 37.9% of the town is now empty or unbuilt construction.

I would like to see these numbers compared with vacancy rates on existing properties as well as rentals, to get a better overall picture. But I think it is safe to say that this vast unused capacity will pull aggregate house prices quite far off their pedestal, and keep them low for years to come.

the hierarchy

One of the most-Googled phrases by which new readers land on the IR is "iceland racism" and it lands readers here. (Interestingly, I didn't use the word "racism" in the original post, but one of the commenters threw it out there.) This Google search has been popular for a long time, and it always surprises me how many out in the world are searching for that phrase or variants on it: around 5% of all Google hits to this site involve the word "racism". That's more than "puffin meat" and "starbucks in iceland" combined!

But then a friend of mine and I were discussing the topic of racism the other day and she explained for me that Icelanders think of themselves and their relation to the outside world in a series of ordered tranches. They go like this:

1. "us": The population of native-born Icelanders. (This the reason why some people I have met here will never consider me a full member of Icelandic society, though I live here, work here, speak the language here, vote, pay taxes, o.fl, o.fl.)

2. "our cousins": Norwegians, Danes, Swedes, and Finns. Newscasters here often use the word "cousins" to introduce a story taking place in one of these countries. (Interestingly, although around 10% of the gene pool here is Celtic/Irish, due to the Vikings taking slaves, the Irish aren't cousins. Icelandair doesn't even fly there.)

3. Western Europeans and Americans (The fact that I am originally from the United States doesn't make me a "real" immigrant here, either, as one or two have explained to me. The "real" immigrants are from Poland, Thailand, and the Philippines, and come further down the hierarchy.)

4. Eastern Europeans and Russians

5. Latin Americans

6. Asians

7. Muslims

8. "Blacks"

I was sort of amazed that she had all of this worked out so clearly.* This is a person who has lived and studied on several continents, and attained a Ph.D. in the process. But I had previously gotten a whiff of this sense of human hierarchy from other Icelanders. Granted this is a land that was until just a few decades ago basically cut off from the world. But these days everyone has TV channels up the wazoo, tourists come through in droves, some from as far away as the "6th circle", and Iceland has a fair-sized immigrant population, including yours truly.

So I put it to the "real" Icelandic readers: How accurate is this sense of hierarchy? And if this is how you were brought up, how was this information conveyed to you, and what do you plan to tell your kids?

*And it also raises some interesting questions and paradoxes: What about Mexican-Americans: are they 3rd circle or 5th circle? African-Americans, like the new President? Where does the Indian subcontinent fit in? How about the large Muslim population in Sweden? Are they "cousins"?

ís-land

I went to Skálafell, one of the local barebones Reykjavík ski areas, for a few runs this past weekend. As the slow two-man lift crested the last rise at around 10:15 a.m., the sun was just breaking over the southern mountains and through the clouds, casting an orange sideways glow on a vast plateau of snow below. Ringing the plateau on all sides were the blacks and whites of snow-covered charcoal mountains. Þingvallavatn, a giant lake speckled with snow-covered islands, stood silently in the distance. From the top of Skálafell, the ugly sprawl of Reykjavík and suburbs was an afterthought, dwarfed by the true scale and majesty of boundless, cold, white Icelandic winter. Looking off over this beautiful and inhospitable landscape, I could see how a Norse settler from the 9th century, one who lost all of his cattle during his first harsh winter, had it right. Sometimes the name "ice land" fits just about perfectly.

daníelsson and zoega

Two respected Icelandic economists, one based here at the University of Iceland (Gylfi Zoega), and one based at the London School of Economics (Jón Daníelsson), have just published an excellent post-mortem of the Icelandic bubble and systemic collapse. (The full paper, "Collapse of a Country", is available here, einnig á íslensku.) The paper begins with an excellent, readable history of how the Icelandic economy evolved from a fishing-driven command economy to the Manhattan-on-Faxaflói of the past decade. It then gets into the run-up and collapse itself, including the effects of speculators, external warnings, and the shockingly incompetent response of the government here. Finally, the IMF "rescue" and some idea of where we might go from here. I recommend this paper highly.

This thing is so chock-full of good quotes, I had a hard time paring them down. So here are a few. And then a few more:

• On the government response: "By not addressing the pending failure of the banking system, perhaps in the hope that the instability would disappear, we cannot escape the feeling that the Icelandic authorities gambled for resurrection and failed."
• On the flood of money: "For most of the 2000s the monetary policy was inflation targeting, which failed in lowering inflation, but the resulting interest rate rise both motivated domestic households and firms in order in order to borrow in foreign currency and attracted foreign speculative capital - carry traders. The amount of hot money inflows is not publicly known, but it appears to have exceeded 50% of GDP."
• On banking-sector corruption in days of yore, with just a whiff of what lingers today: "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."
• On verðtrygging (indexation), the insane Icelandic system of ever-increasing mortgage principal, and how it only feeds the inflation beast: "Widespread inflation indexation of lending was adopted, particularly at longer maturities. Indexation persists to this day, hampering efforts to control inflation."
• More on the flood of cash: "The Icelandic banking system was deregulated and privatized in the 1990s and early 2000s. At that time, 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."
• On the rise of banking: "Banking quickly became a large part of the economy. This happened in an economy where there is little evidence that either the government or the private sector had a sufficient understanding of the necessary risk management processes and banking supervision needed when a banking sector becomes such a large part of the economy."
• The rising flood of cash lifts all boats: "The banking expansion was the source of the rapid economic growth that took place between 2003 and 2007. It enabled households and enterprises to take advantage of the abundance of low-interest funds in international capital markets to finance domestic investment and consumption, as well as the acquisition of domestic and foreign firms. Because the banks got funds in the international wholesale market – this was an externally-financed boom – the inflow of credit had a predictable effect on the exchange rate, the stock market and the current account."
• Endless cycle of high interest rates drawing yet more foreign dollars: "The reasons for the failure of inflation targeting are not completely clear, but a key factor seems to be that the massive currency inflows effectively became a part of the local money supply, with interest rate increases further stimulating the growth of currency inflows by encouraging speculative inflows of currency and motivating households and firms to borrow in foreign currency."
• "We're rich!": "...large foreign-currency inflows and an exchange rate appreciation that gave Icelanders an illusion of wealth and rewarded the carry traders."
• The blame lies at home: "A part of the blame for the collapse of the banking system is due to the global crisis. However, by and large the blame lies more at home than internationally ... we suspect that even if the world had not entered into a serious financial crisis, the Icelandic banks would have failed."
• The octopus: "A handful of large shareholders seem to have controlled both the banks and a significant number of non-bank firms, running them jointly as highly leveraged holding companies with apparent scant regard to minority shareholders rights or prudential regulations."
• Central banks need to be credible institutions, not handouts to political hacks: "But perhaps the biggest failure of the Central Bank lies in the lack of leadership. It falls on the Central Bank as a guardian of financial stability to take a leading role in tackling financial crises. For that it is essential that the central bank is independent, impartial and competent. Given the high degree of politicization of the Central Bank, it has been unable to assume the necessary leadership role."
• "We're rich! Rich = smart": "At this stage a myth emerged about the business acumen of Icelanders, and universities initiated research programs on the nature of their business success."
• The whole thing was an illusion: "Ultimately, the superstructure of the Icelandic economy was built on sand."
• Groupthink to inaction: "We therefore cannot escape the feeling that the board and directors of the Central Bank and the financial services authority, along with senior officials there knew what was happening. Similarly, all government ministers, along with senior bureaucrats in the ministries of finance, commerce, foreign affairs, and office of the prime minister had to have known. Still the government failed to act."
• This didn't have to happen: "[The government] could have at any point taken decisions that would have alleviated the eventual outcome. If the Government had acted prudently the economy would have been left in a much better shape."
• Don't I know it: "These events have an immediate impact on the Icelandic society. The closing of the international part of the payment system immediately affected foreign trade, importers could not pay suppliers and exporters could not transfer funds to Iceland to meet domestic costs. Cash in Iceland was temporarily rationed and it became almost impossible to obtain foreign currency.
• Never even read the book Central Banking for Dummmies: "The Central Bank’s lack of understanding of the situation is evidenced by some of its measures taken during the crisis. Examples include an announcement from the central bank October 7th of a pending loan from Russia in the amount of €4 billion, which later turned out to be illusionary. It then pegged the exchange rate to the euro, an operation that lasted only a couple of hours. On October 15 the governors lowered interest rates by 3.5% to 12%, only to raise them to 18% on October 28."
• Looking for a new gig: "The fact that the main driver of economic growth in the recent years, banking, is unlikely to play a big role in the near future means that unless some new industry emerges, recovery is likely to be slow."
• Can someone who actually knows how to run a bank come open a branch?: "The speedy restructuring of the existing banking system as well as the introduction of subsidiaries of foreign banks is important."

But, as I said, this is a great paper. Go read it.

meginlandssjón

American readers, stop reading right here. You won't understand this. Stick to the things you do best (and nobody else really cares about), like what you call "football", 8-1/2 x 11" paper, and the Farenheit temperature scale.

Icelanders. At long last I wade into the Eurovision morass. Being American, I had never even heard of this contest/gay lifestyle before somewhere like 2003. But now that I am a card-carrying Citizen of the Republic, I can't sit on the sidelines (football metaphor for those Americans still reading) any longer. I have been through 4 or 5 Eurovision seasons here and my lifelong Red Sox fandom did a good job of preparing me for the emotional roller-coaster that is E-vision on our beloved island. And to my own surprise I've developed some strong thoughts on the contest. So, here are my must-do points for a re-orientation of Eurovision attitude here on the Land.

1. Don't take the contest too seriously. This is Eurovision. Stop the focus on winning. We'll never win, as long as we pour 12 points onto whatever weakass crap Denmark halfheartedly cranks out and get 0 in return every year. We don't have enough friends to win, and we don't control a pipeline, so stop thinking about winning. We're not going to win. In Söngvakeppni Sjónvarpsins, stop voting for the acts you think might "win". That kind of thinking allows only the lowest common denominator acts to advance. Vote for the acts you truly enjoy. In the words of coked-up David Coverdale when he visited us last summer in Laugardalshöll, "Let's have some fuckin' fun!" Eurovision is about having fun.

2. Be genuine. Show something of Iceland with the act we send to Eurovision. Silvía Nótt, she was Iceland. Or Dr. Spock last year. They were Iceland. (But we sent some jackasses instead.) Both Silvía and Óttarr had some renown here before they even tried out for Eurovision. Selma/Regina/whoever belting out moronic lyrics in English and dancing around in shiny costumes: not Iceland. Nothing to do with Iceland. Remember the Moldovan gypsy grandma banging on a bass drum from her rocking chair in 2005? So do I. The Moldovans didn't win but they played themselves in their own movie. They were entertaining. They put their fringe-of-Europe country on the map.

Speaking of languages, 3. Don't be afraid to sing in Icelandic. What the hell, we're not going to win anyway. We might as well be ourselves. Show the world (sans America) the lovely sound of innlenska. News for you: your English just isn't that good. Those things you think are clever in English are jokes we told in 8th grade. What you think are "good lyrics" could probably be written by a sappy American 12-year-old. Don't join the parade of other European countries singing amateurish lyrics in bad, broken English. I speak Icelandic like an 8-year-old, but I write the blog in English. Take the same approach.

Undir regnbogann með Ingó. There's Iceland in that act. It's corny, it's sveitaball, little kids can sing it all summer. It's got a cute chick with a tuba. That's our act this year. Now let's have some fun.

smáraportið

I just got back from Smáralind, Iceland's largest and ugliest shopping mall. ("Is there anything they don't have?") Turned out what they don't have is a replacement ignition key for a 1997 Toyota RAV4. Also, they were very low on Icelandic microbrews. (I picked up the last 6-pack of Jökull, my new fave. This one is brewed in Stykkishólmur and based on a Cherman recipe.*)

The mall walkways were almost impassable in places, due to clothing racks that had been rolled out of nearly all of the stores, impeding foot traffic and creating a fire marshal's nightmare. The normal spare/clean aesthetic of Icelandic commerce had been turned inside-out and become a cluttered sort of flea market. I had never witnessed this before. It looked to me as though, in a desperate gambit for sales and attention from a public that has ceased to consume, every store manager had put half of her store out on the tiles. It felt like a Tunisian town market, minus the mullahs. Or Boston's Haymarket, minus the guy yelling, "Threeforfifty, sevenforadallah, sevenforadallah, sevenforadallah!" Even the pharmacy had wheeled out a table of prescription meds, all for sale at 70-80% off. (I'm joking, of course. They were perfumes.)

Word on the street is that half or more of the stores in that mall will be shuttered within the year, including the anchor stores Hagkaup and Debenham's. It's probably going to be a very different kind of place come next Christmas: a mall full of empty stores, with a half-completed eyesore of an office building parking structure holding down one end. Hey, wait! This is beginning to sound familiar, like something I know quite well from another place and time... Billerica Mall, anyone?

*Icelandic microbrew seems to be selling quite well these days, based on my own observations. There's the local-pride buy-Icelandic factor, the ever-increasing quality of the brews, plus these days the cost differential between them and Sam Adams Winter is substantial. Veljum íslenskt!

grand unified theory

I was listening to the BBC's "World Have Your Say" program tonight. It was broadcast live from a kitchen table in Reykjavík, where (in a funny, clueless, all-too-common twist on the general lack of surnames in Iceland) the host was interviewing what he called "the Jónsson family" about their dismal experiences post-economic collapse. I have been mulling a grand unified theory about what went down here this decade, and that sad interview made me finally set it onto paper. So here goes:

• Iceland floated its currency, the króna, back in 2001. Suddenly the world had a new floating currency that was the smallest pool of independently controlled money in the world.
• Iceland has a history of high inflation, and so the new currency carried an interest rate higher than other currencies of the West. Some outsiders might say that made it "attractive".
  
• At around the same time, to try to bolster the US economy in a "post 9/11 world", Alan Greenspan's Fed began slashing interest rates on the dollar to some of their lowest levels ever.
• The interest differential between the dollar (with interest rates as low as 1% at one point), the still-ailing Yen (interest rates near 0%), other major currencies such as the Swiss Franc and the ISK was quite large.
• This meant one or two worldly American savers might say to themselves, "Hey, I'm sick of this CD paying me 1%. Why don't I change that into ISK and get 10%? (Or later, 15%)"
• So they did.
• This being a new, shiny globalized world, anyone and everyone who wanted to could put their money in the ISK and get big yields. Japanese housewives could go into their local bank branches and buy ISK savings. Americans could open ISK accounts at Everbank. And they did.
• Not only savings, but people who wanted to take more of a gamble could borrow Yen or dollars for almost free, and turn around and invest those dollars in an ISK account and make big free money. (It's called the "carry trade" but never you mind about that.)
• So they did.
• And what to the world is just a few bucks from a handful of savers, just a couple Japanese housewives and a clown-car full of wacky Americans trolling the Everbank site at 11:00 at night, long after their wives have gone to bed, was, when compared to a tiny economy of 300,000 souls, quite a bit of money in the Land of Fire and Ice.
• And the money poured in. Where did it go?
• It gushed into investment accounts and into the stock market. The stock market posted 60% years for more than one year in a row. Every company was a winner!
• And still the money poured in.
• It filled up money market funds, which doubled, and then tripled, and then sextupled. Some of them were growing by orders of magnitude per year.
• But money market funds have to invest in something. What could they invest in?
• Well, they could buy bonds from the banks. So the banks issued bonds. Every time they issued a new bond, they had a buyer in the money market funds. So they issued more bonds. They issued about as many as they wanted.
  
• "We're rich!" said the banks. "Rich = smart. What do we do with this cash? Let's fit out some longships and go raiding in Europe."
• And they did. And they came back to Iceland with chests full of minor brokerage houses and second-tier banks and mortgage companies.
• [And the banks also said, "Wow, this buying up other banks is great fun! And loans are so cheap in dollars and Euros. Let's do more of this buyin'. Let's set up funding desks and borrow some money and then use that money to buy more foreign subsidiaries. Luxembourg sounds nice!"]
• And every time a dollar, or a Euro, or a Yen came into the Land, it had to be exchanged for a króna. As the money poured in, all that buying of krónur meant the little Icelandic currency just kept getting stronger! It went from 100 to the dollar to 90 and then 80 and then 70 and then 60!
• And still the money poured in. Who else could use it, besides those banks? Why, every company in Iceland!
• So the oligarchs of Iceland got busy doing what they do best: creating shell companies that they bought with other shell companies, that they registered in Ísafjörður and hoped nobody would look. They built castles in the sky, shares in those castles exchanged for other shares, capitalized and re-capped and interlinked like a bad circuit diagram.
• But the money wasn't just for the oligarchs. Every two-bit builder who wanted to throw up a couple ugly concrete apartment blocks in the wilderness of 203 Kópavogur could go in to his local bank branch, fill out a couple of forms, and get his hands on some of that money.
  
• So they did. And they built. All around Reykjavík, ugly neighborhoods sprang up overnight.
• But there was more money still. It had to go somewhere. It filled up the coffers of local self-styled buyout/raider firms like Baugur Group and FL Group, which went on buying sprees. Not in Iceland, because there was nothing left to buy, but in Europe and North America.
• Baugur bought up half of the stores on the British high street, and rubbed the Danes' haughty noses in the purchase of their local Macy's equivalent. FL Group bought 10% of American Airlines and bought and sold Danish airline Sterling a handful of times, just because they could.
• All this money coming in meant there was plenty of money to go around. And when there is plenty of money to go around, well, there's usually plenty of inflation.
• So there was.
• Inflation was huge, sometimes 8%, a few years later 14%. The Icelandic Central Bank kept boosting its rate, trying to tame it. But those new, high rates still looked pretty great to the Japanese housewives. So they bought some more!
• And there was still more money coming in. What else to do? Why not lend it out to some consumers?
• And the Icelandic people, with their newfound riches and rapidly increasing salaries, lived out their own little version of the American dream: they bought up the new ugly houses, and expensively jacked-up Land Cruisers they called "jeeps" to park in front of them, and flat-screen TVs to go inside them. Then they bought big stainless grills to go on the decks. And kids' rooms so full of toys, they had to make them other rooms. And with what was left over they chartered airplanes and went on ski vacations and two-week summer trips to Mallorca. And the ones who stayed home went salmon fishing for $1000 a day and hoped to run into their favorite Hollywood celebs in the ice-cold streams.
• Sometimes, though, the people didn't like borrowing at the high interest rates in their own currency. "No problem!" said the shifty advisors at the banks, "We'll lend you some money in another currency! Any one you choose! USD, JPY, CHF? What about a basket of all 3? You'll pay much less interest, and you take all the exchange-rate risk, but what the hell? The króna always goes up!"
• So the Icelandic people took more loans, in all kinds of faraway currencies. They flew 7 hours direct to Minneapolis just to spend two days buying clothes for their kids in the Mall of America. They flew to Boston and ran roughshod over the Cambridgeside Galleria. A sales clerk at the Apple store there said, "Yep, we know all about Icelanders! They buy 5 iPods at a time! They make our month!"
• So with the backdrop of the largest credit expansion in the history of the world, one small population with a free-floating and high-yielding currency saw mind-boggling increases in the cash their country had on hand. And there were plenty of iPods to buy.
  
• But every "largest expansion in history" must eventually stop expanding, if only so it can be measured. This one started to unwind in early 2007. A handful of homeowners in equally ugly southern California suburbs realized they couldn't make their mortgage payments.
• So they stopped.
• Suddenly lending money to anyone, anywhere in the world started to seem like less of a good idea. And thus the great unwinding of lending began.
• The people who had borrowed Yen or dollars decided maybe it was just about time to pay those loans back.
• So they called up their banks and sold their ISK and bought back their dollars and paid off their loans.
• The ISK lost a little bit of power. Fewer people wanted it.
  
• The fianciers who had looked at Icelandic banks and thought, "Yeah! Great business plan!" a year or two before suddenly said, "Hmmmm... not sure about rolling that loan over, pal."
• And so what was first a trickle became a stream. The currency started to lose its value, slowly, steadily. Every day, down a little bit.
• Icelanders felt a little less rich by the day, bought less expensive bottles of wine in their Swiss ski hotels, and still the currency continued to fall.
• The banking system and the stockmarkets of the US and Europe kept having bad months, followed by other bad months. The ISK kept falling.
• Then Lehman Brothers was bankrupt with no bailout on a Monday morning and there was panic. A rush for the exits.
• People with ISK, both inside and outside Iceland, bought back their Euros or dollars, or took refuge in these currencies. The ISK entered free-fall.
• The Icelandic banks, which had been having trouble renewing their loans, now found it impossible to get new ones. The balloon was burst and air was gushing out far faster than it had come in.
• All that money was just racing to get out. The banks, unable to finance themselves for even a day or two ahead, went belly-up. The currency hit levels nobody had imagined just a few months before, then stopped trading.
• The price of everything Iceland imported was suddenly double what it had been. Inflation hit again, even uglier than before.
• And that rush of money out the double doors meant that, for a new economy built for almost a decade on the promise of endless and cheap money, life couldn't go on as before. There suddenly just wasn't enough money to go around.
• And so companies started to fold. And people lost their jobs. And then more companies. And so here we are. And nobody is sure how far there is to fall from here.

Did I leave anything out?