Iceland case study
Think of Iceland and frown. Up to very recently that large country with a population smaller than Malta's was considered to be the most highly developed place in the world. Its GDP per capita was arguably the highest there was. It has a free market...
Think of Iceland and frown. Up to very recently that large country with a population smaller than Malta's was considered to be the most highly developed place in the world. Its GDP per capita was arguably the highest there was. It has a free market economy and was invariably put forward as the finest current example of modern capitalism in action. Icelandic millionaires sauntered abroad to make savvy purchases of companies and activities they coveted and felt they could afford.
In a few weeks Iceland has almost gone to the dogs. The financial system has all but collapsed. The country went dry of foreign exchange. People and institutions who had invested untold funds with Icelandic banks and other financial there feared they were about to lose all their money. The Prime Minister of the United Kingdom, one of the world's most developed countries, had to intervene personally to try to recover at least part of the British funds that had been attracted to Iceland by its then strong currency and high interest rates.
What happened to bring about a staggering collapse? The collapse was triggered by the contagion of unravelling financial markets, which began in the United States in August of last year. Tumbling prices of derivatives based on weak property security in the US, where regulation had become a joke, were soon accompanied by a savage downturn in collective investment schemes based on property.
The realisation that many banks and other financial institutions had demonstrated very unhealthy risk appetite and had purchased and were holding very dicey assets made banks fearful to lend to each other. As balance sheet values shrunk under the terrible pressure of falling asset prices, a credit crunch developed. The banks were fast becoming illiquid and reluctant or unable to continue to lend to borrowers who needed credit to survive. Credit is the blood that courses through the veins of the capitalist system.
Credit began to grow scarce at a time when various large economies were already moving into recession. Asset prices in free fall, absent credit and a near total loss of confidence and thrust inevitably began spilling over into the real global economy, making an incipient recession much worse than it might have been.
The world has been there before. The Great Slump of 1929, when Wall Street tumbled down, was followed by the Great Depression of the 1930s. Panic prowled remorselessly. Politicians and analysts feared that capitulation was about to happen, a time when far too many people practically gave up.
The result of years of credit excess, ideological deregulation of markets unaccompanied by setting in place of serious regulators of standards and behaviour finally demanded retribution. It all happened when the galloping price of crude oil and its derivatives was terrorising the world. Ironically, that was not the cause of the global failure. Greed and the excesses it breeds were the real causes.
Iceland was one major example of them. Credit had become as easy as pie. Their natural riches were not enough for many of the people of Iceland. They borrowed beyond reason and consumed above what is necessary for total satisfaction. It is not the end of the world for them.
This is what a sober person from Iceland had to say directly to a friend of mine who expressed concern for him about what was happening there. "Thanks for the concern - we really need it at this rather unsure time in our history," the man wrote. "What is happening is that the financial institutions imploded - at least some of them - and the state was not able to bail them out.
"The fact is that they have been riding high in recent years, when credit was both cheap and readily available, but were hit equally hard when the lending sources dried up. Now, the banks owe around 12 times the GNP in Iceland, and it was simply impossible for the state to rescue them.
"The good thing is that the economic foundations in Iceland are strong - we have resources in high demand (energy and fish), and the population is well educated and ready to work hard - and the country is beautiful! So we hope this will only be a temporary hitch, and we will be able to carry on.
"In the end, this will probably mean also that we join you in the EU, because we need a credible currency to compete in the globalised markets."
A brief analysis from the horse's mouth. Other countries will not be so lucky. We should not be among them. Our investors are being hit by the fall in asset prices - who isn't? And our economy will suffer a drop in the demand for its exports - which country won't?
But our financial system is sound. The banks do not depend on inter-bank borrowing - they have a large domestic deposit base underpinning them. Various companies will have lower orders, profits will shrink, and so will the government's tax take.
But we should be spared the worst of the brunt of this moment in history. What we need not to spare ourselves is the lessons from it all, not least from Iceland. Greed and excess lead towards a sure and extremely painful fall.
In a few weeks Iceland has almost gone to the dogs. The financial system has all but collapsed. The country went dry of foreign exchange. People and institutions who had invested untold funds with Icelandic banks and other financial there feared they were about to lose all their money. The Prime Minister of the United Kingdom, one of the world's most developed countries, had to intervene personally to try to recover at least part of the British funds that had been attracted to Iceland by its then strong currency and high interest rates.
What happened to bring about a staggering collapse? The collapse was triggered by the contagion of unravelling financial markets, which began in the United States in August of last year. Tumbling prices of derivatives based on weak property security in the US, where regulation had become a joke, were soon accompanied by a savage downturn in collective investment schemes based on property.
The realisation that many banks and other financial institutions had demonstrated very unhealthy risk appetite and had purchased and were holding very dicey assets made banks fearful to lend to each other. As balance sheet values shrunk under the terrible pressure of falling asset prices, a credit crunch developed. The banks were fast becoming illiquid and reluctant or unable to continue to lend to borrowers who needed credit to survive. Credit is the blood that courses through the veins of the capitalist system.
Credit began to grow scarce at a time when various large economies were already moving into recession. Asset prices in free fall, absent credit and a near total loss of confidence and thrust inevitably began spilling over into the real global economy, making an incipient recession much worse than it might have been.
The world has been there before. The Great Slump of 1929, when Wall Street tumbled down, was followed by the Great Depression of the 1930s. Panic prowled remorselessly. Politicians and analysts feared that capitulation was about to happen, a time when far too many people practically gave up.
The result of years of credit excess, ideological deregulation of markets unaccompanied by setting in place of serious regulators of standards and behaviour finally demanded retribution. It all happened when the galloping price of crude oil and its derivatives was terrorising the world. Ironically, that was not the cause of the global failure. Greed and the excesses it breeds were the real causes.
Iceland was one major example of them. Credit had become as easy as pie. Their natural riches were not enough for many of the people of Iceland. They borrowed beyond reason and consumed above what is necessary for total satisfaction. It is not the end of the world for them.
This is what a sober person from Iceland had to say directly to a friend of mine who expressed concern for him about what was happening there. "Thanks for the concern - we really need it at this rather unsure time in our history," the man wrote. "What is happening is that the financial institutions imploded - at least some of them - and the state was not able to bail them out.
"The fact is that they have been riding high in recent years, when credit was both cheap and readily available, but were hit equally hard when the lending sources dried up. Now, the banks owe around 12 times the GNP in Iceland, and it was simply impossible for the state to rescue them.
"The good thing is that the economic foundations in Iceland are strong - we have resources in high demand (energy and fish), and the population is well educated and ready to work hard - and the country is beautiful! So we hope this will only be a temporary hitch, and we will be able to carry on.
"In the end, this will probably mean also that we join you in the EU, because we need a credible currency to compete in the globalised markets."
A brief analysis from the horse's mouth. Other countries will not be so lucky. We should not be among them. Our investors are being hit by the fall in asset prices - who isn't? And our economy will suffer a drop in the demand for its exports - which country won't?
But our financial system is sound. The banks do not depend on inter-bank borrowing - they have a large domestic deposit base underpinning them. Various companies will have lower orders, profits will shrink, and so will the government's tax take.
But we should be spared the worst of the brunt of this moment in history. What we need not to spare ourselves is the lessons from it all, not least from Iceland. Greed and excess lead towards a sure and extremely painful fall.