Iceland and the economic crisis

At Vanity Fair I found this Michael Lewis article about the events that overtook Iceland.

Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”

What made these rational people ‘irrationally exuberant’ to purloin a phrase. How does a whole nation, albeit a small one, become so embroiled in disaster.

Why were warning signs not heeded?

Yet the same question or questions could be asked of the UK, the USA.

It is almost as if the world’s bankers, investors, politicians and many ordinary citizens got caught up in a lemming like rush to jump off the precipice. Bizarre.

Lewis notes some of this in his article:-

In retrospect, there are some obvious questions an Icelander living through the past five years might have asked himself. For example: Why should Iceland suddenly be so seemingly essential to global finance? Or: Why do giant countries that invented modern banking suddenly need Icelandic banks to stand between their depositors and their borrowers—to decide who gets capital and who does not? And: If Icelanders have this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years? At the very least, in a place where everyone knows everyone else, or his sister, you might have thought that the moment Stefan Alfsson walked into Landsbanki 10 people would have said, “Stefan, you’re a fisherman!” But they didn’t. To a shocking degree, they still don’t. “If I went back to banking,” he says, with an entirely straight face, “I would be a private-banking guy.

As I wrote above – Bizarre.

Yet one has to wonder as well about those who invested funds in Icelandic banks, for example many UK councils and those whom recommended them to invest. What happened to informed decision making? Where was risk management and governance?


3 responses to “Iceland and the economic crisis

  1. Hi Peter,
    The whole Iceland saga is very interesting. We were in the UK when it all blew up last year, so read screeds of material in the papers about it. As an exercise in use of the law, classifying Iceland as a Terrorist state was a stroke of genius by the UK Govt. – which demonstrates how far UK Anti-Terror legislation has gone beyond what is sensible. That’s a whole different ‘good Governance’ topic though.

    The interesting thing is that Iceland is considered, economically, to be very similar to New Zealand. An independant currency, with significant volatility on the international currency markets, a high dependancy on tourism. Only a few native banks, who borrow heavily from foreign banks to provide loans in country. Plus the (relative) isolation of both countries (i.e. surrounded by water with the nearest neighbours 3 hours away by plane), so no land borders to encourage the flow of goods & services, food and products, with similar levels of imports for consumer goods – all adds up to a lot of very interesting lessons for NZ.

    NZ has experienced a similarly large rise in house prices and investments. Where has the money come from? And where’s it going to??

    Now – the whole grumble about Councils and other bodies (fire brigades etc.) investing ‘spare’ money in the Icelandic banks is another triumph of greed over common sense. The warning signs were indeed there, and a number of UK local councils took their money out of the Icelandic banks at the beginning of 2008 – because they did get risk reports which said something wasn’t right and their deposits were at risk.
    So why did other bodies ignore those risk reports? Well just like the average Kiwi who invested their lifetime savings into BlueChip & all those other NZ finance companies, they were attracted by the allure of an extra 1% return on their money. They felt there wasn’t much extra risk for the (significant in % terms) extra return on their deposits..

    Again – how does anyone think NZ finance companies can outperform the rest of the industrialised worlds financial expertise?

  2. Sorry, first comment was getting a bit long.

    On the good side of Governance – seen any Canadian banks or financial institutions fail recently? Need cash injections from the Govt., or frozen investment assetts and decline to pay out to investors? Nope.

    Someone got their Risk Management right.

  3. Pingback: Iceland and the economic crisis « Some Thoughts – Peter Salmon's Blog | Anti-Crisis Invest

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