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?