wade
Robert Wade recently published a piece in Challenge magazine detailing his take on what brought Iceland down. I found it to be a decent read. I like his discussion of economic history, his argument that political corruption was effectively institutionalized by the duopoly of governing parties that ran the country starting in the 1970s, and his retelling of the tale of the Central Bank governor's role in worsening the October 2008 crisis.
On the governing duopoly:
The complex web of state regulations and state-owned firms and banks allowed each of the two governing political parties to divide up the main “rental” opportunities roughly fifty-fifty, and especially the banks. The central bank was run by three governors—the chairman was usually nominated by the Conservative Party, the second governor by the Center Party, and the third was up for grabs. Before they were privatized, the commercial banks were closely aligned with one or another of the main political parties. If you wanted a large loan, especially if in foreign exchange, you had a better chance by going to the bank linked to the political party you and your family belonged to. When the banks were privatized in the late 1990s and early 2000s, they were bought by friends of the main parties, with next to no experience of modern banking. No foreign ownership was sought.
On problems at the Central Bank and with its key figure:
All this raises the question of why the central bank—the key agency on the government side—did not rein in the financial excesses. Part of the answer revolves around the figure of David Oddsson, the most dominant—not to say domineering—politician in Iceland for many
decades. He was prime minister from 1991 to 2004, fourteen years, during which time he was in charge of the privatization of the banks; then foreign minister for a short time; and the chairman of governors of the central bank since then. He was the patron of Prime Minister Geir Haarde, who appointed him governor. (Haarde and his government resigned in late January 2009.) Oddsson’s friends and critics alike attest to his manipulative abilities in interpersonal relations, as though he could out-Machiavelli Machiavelli. His many critics describe him as Iceland’s J. Edgar Hoover, a serial collector of resentments, feuds, and information about the intimate lives of colleagues to be deployed in later negotiations. Throughout his long political career there is no record of his ever agreeing to participate in a debate with another person.
...
He has not lived outside Iceland, has no background in monetary economics, and understands little about international finance. He is his own expert and likes to dispense with real experts, including those in the central bank. If he had listened to them, he would not have announced on Icelandic TV on October 7, 2008, the day after the collapse of Glitnir Bank [sic, actually Landsbanki], that “The government will not repay debts of people [meaning, given the context of the question, depositors in Icelandic bank branches abroad] who have not exercised due diligence about where they put their money.” This sentence was repeated again and again on CNN news broadcasts around the world, and sparked even more panic. He then announced that Russia would provide a large loan, which the Russian government promptly denied. He then announced a peg of the ISK against the euro at a time when Iceland had hardly any foreign exchange reserves left, a decision he made himself without consulting even the central bank’s chief economist. It was about the shortest-lived currency peg on record, less than one day. He at first cut interest rates to 12 percent, and thirteen days later raised them to 18 percent. Thanks to his opposition, it was not until many weeks after the IMF team had arrived and two weeks after it had prepared its crisis-management program that the central bank requested IMF assistance.
On membership in the EU:
It is puzzling to an outsider that Iceland is already deeply integrated into European and other international treaties and organizations (including the European Economic Area, the Schengen border-control agreement, the Council of Europe [consisting of parliamentarians from more than forty European countries], NATO, the Nordic Council, the Arctic Council, the Organization for Economic Cooperation and Development, the World Trade Organization, and the United Nations) and has accepted the “sovereignty” constraints implied by these memberships. But a strong political consensus has united groups across the political spectrum against membership in the European Union. Whereas most other nations have modified their implicit concept of sovereignty to include as an important component the right to participate in international organizations and sit at the table where regional and global decisions are being made, a majority of Icelanders have stuck to an older notion of sovereignty as freedom from outside influence—freedom to remain “special” in the ranks of nations. [All the more so puzzling that, as part of the European Economic Area, Iceland must already adopt all European legislation on social policy, consumer protection, environmental, and corporate law, but as things stand has zero say in crafting this legislation.]
On the challenge today:
In a sense, the problem of Iceland is not the current crisis. The problem is how to scale down from the unsustainable consumption standards of the past decade to sustainable living standards for the next decade. Icelanders have been enjoying a nearly free lunch, and at the end of the day, as Milton Friedman said, there is no free lunch.
On the governing duopoly:
The complex web of state regulations and state-owned firms and banks allowed each of the two governing political parties to divide up the main “rental” opportunities roughly fifty-fifty, and especially the banks. The central bank was run by three governors—the chairman was usually nominated by the Conservative Party, the second governor by the Center Party, and the third was up for grabs. Before they were privatized, the commercial banks were closely aligned with one or another of the main political parties. If you wanted a large loan, especially if in foreign exchange, you had a better chance by going to the bank linked to the political party you and your family belonged to. When the banks were privatized in the late 1990s and early 2000s, they were bought by friends of the main parties, with next to no experience of modern banking. No foreign ownership was sought.
On problems at the Central Bank and with its key figure:
All this raises the question of why the central bank—the key agency on the government side—did not rein in the financial excesses. Part of the answer revolves around the figure of David Oddsson, the most dominant—not to say domineering—politician in Iceland for many
decades. He was prime minister from 1991 to 2004, fourteen years, during which time he was in charge of the privatization of the banks; then foreign minister for a short time; and the chairman of governors of the central bank since then. He was the patron of Prime Minister Geir Haarde, who appointed him governor. (Haarde and his government resigned in late January 2009.) Oddsson’s friends and critics alike attest to his manipulative abilities in interpersonal relations, as though he could out-Machiavelli Machiavelli. His many critics describe him as Iceland’s J. Edgar Hoover, a serial collector of resentments, feuds, and information about the intimate lives of colleagues to be deployed in later negotiations. Throughout his long political career there is no record of his ever agreeing to participate in a debate with another person.
...
He has not lived outside Iceland, has no background in monetary economics, and understands little about international finance. He is his own expert and likes to dispense with real experts, including those in the central bank. If he had listened to them, he would not have announced on Icelandic TV on October 7, 2008, the day after the collapse of Glitnir Bank [sic, actually Landsbanki], that “The government will not repay debts of people [meaning, given the context of the question, depositors in Icelandic bank branches abroad] who have not exercised due diligence about where they put their money.” This sentence was repeated again and again on CNN news broadcasts around the world, and sparked even more panic. He then announced that Russia would provide a large loan, which the Russian government promptly denied. He then announced a peg of the ISK against the euro at a time when Iceland had hardly any foreign exchange reserves left, a decision he made himself without consulting even the central bank’s chief economist. It was about the shortest-lived currency peg on record, less than one day. He at first cut interest rates to 12 percent, and thirteen days later raised them to 18 percent. Thanks to his opposition, it was not until many weeks after the IMF team had arrived and two weeks after it had prepared its crisis-management program that the central bank requested IMF assistance.
On membership in the EU:
It is puzzling to an outsider that Iceland is already deeply integrated into European and other international treaties and organizations (including the European Economic Area, the Schengen border-control agreement, the Council of Europe [consisting of parliamentarians from more than forty European countries], NATO, the Nordic Council, the Arctic Council, the Organization for Economic Cooperation and Development, the World Trade Organization, and the United Nations) and has accepted the “sovereignty” constraints implied by these memberships. But a strong political consensus has united groups across the political spectrum against membership in the European Union. Whereas most other nations have modified their implicit concept of sovereignty to include as an important component the right to participate in international organizations and sit at the table where regional and global decisions are being made, a majority of Icelanders have stuck to an older notion of sovereignty as freedom from outside influence—freedom to remain “special” in the ranks of nations. [All the more so puzzling that, as part of the European Economic Area, Iceland must already adopt all European legislation on social policy, consumer protection, environmental, and corporate law, but as things stand has zero say in crafting this legislation.]
On the challenge today:
In a sense, the problem of Iceland is not the current crisis. The problem is how to scale down from the unsustainable consumption standards of the past decade to sustainable living standards for the next decade. Icelanders have been enjoying a nearly free lunch, and at the end of the day, as Milton Friedman said, there is no free lunch.
posted by JB at 17.6.09
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