Time Magazine’s Jonas Moody reported on January 26, 2009 how the people of Reykjavik pelted the Iceland’s parliament building with eggs and yoghurt, they broke windows, banged pots and pans, and tussled with riot police. A couple of thousand normally peaceful Icelanders gathered to tell their government how they felt about its economic policies.
They had reason to be angry because Iceland had gone bankrupt. The collapse was sudden; just a few months earlier the 2008 United Nations Human Development Index had picked Iceland as the best country in the world in which to live; it had one of the highest levels of Gross Domestic Product per person in the world at more than $35,000.
Iceland’s Right Wing Free Enterprise Policies
Things started to come unstuck for this happy nation of 320,000 people in the fall of 2008. However, the conditions for the collapse were created in 2002.
That’s when Iceland’s Prime Minister David Oddsson, a follower of the economic theories of Milton Friedman, privatized the banks. He also decided the country ought to become an international banking centre instead of a fishing nation. Mr. Oddsson, a poet before he became a politician, encouraged this switch in a nation that had lots of fishers but almost no international bankers.
Spectacular Economic Growth Built on Speculation
In 2002, Iceland had three banks that were small by global standards with just a few billion dollars in assets among them. Michael Lewis, writing in the April 2009 issue of Vanity Fair says that, “Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s GDP that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, ‘the most rapid expansion of a banking system in the history of mankind.’ ”
Icelanders started borrowing huge amounts of money to buy stocks whose value rocketed upwards, as did the value of housing and land in Reykjavik, the capital. Also, they started speculating in foreign currencies.
Lewis wrote that, “By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was in one way or another tied to the new investment-banking industry.”
Icelandic Financial Bubble Bursts
The government took a hands off approach. Icelanders were making so much money at the financial roulette table that any attempt at regulation would have been extremely unpopular.
In October 2008, the end came swiftly and painfully. The global financial squeeze exposed Iceland’s banking system; it was built on a pile of debt it couldn’t pay back. The banks collapsed, nobody would accept Iceland’s currency at any price, and the value of stocks on the Icelandic exchange plunged 85 percent. In January 2009, the government fell.
The BBC reported (January 26, 2209): “Both households and firms had borrowed extensively in foreign currency and with the collapse of the exchange rate were seeing the value of their debt explode. Iceland imports most goods, so when the exchange rate collapsed, the cost of essentials shot up.”
The International Monetary Fund says Iceland’s economy will shrink by 10 percent in 2009 and the country’s prospects won’t start improving until 2011. The BBC describes its future as "murky."
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