WHEN GOOD FISHERMEN BECAME BAD BANKERS:
By Nick Gier, Professor Emeritus, University of Idaho
A Denmark Retrospective:
Fond Memories for Me and 41
Years of Socio-Economic Progress for the Danes
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In 1966, just as I graduated from Oregon State University, I was awarded a Rotary Foundation Fellowship for International Understanding. For my foreign destination I had the choice of Iceland, Denmark, or Nepal. I was an avid mountaineer at the time so the Himalayas pulled hard on my soul, but I also had some scholarly goals as well. I didn't realize that learning Nepali (linguistically related to Sanskrit) would have set me up nicely for my current work in Hinduism, Buddhism, and Gandhi Studies.
Iceland was attractive because I could have studied the famous sagas, but I chose Denmark because it was on continental Europe but mostly because its famous philosopher Soren Kierkegaard. That fellowship year (in which I gave 21 speeches to Rotary clubs in Danish) led to marriage to a Danish woman and three additional years (two of them sabbaticals) in that wonderful country.
On April 18, 2009, people of Iceland elected a new government in the wake of the most dramatic events in the country's 67-year modern history. Settled by Norwegians and their Scottish and Irish slaves in the late 9th Century, the Icelanders claim that they founded the first parliament, the Althing, in 930.
The Icelanders converted to Christianity in the year 1000 and they received their first bishop in 1056. During the Little Ice Age the island was completely surrounded by sea ice during long winters, and their settlements in Greenland failed completely. The Icelanders survived because of their fishing and the exportation of dried cod.
Iceland passed from Norwegian hands to the harsh rule of Danish kings in 1380. King Christian III forced the Icelanders to convert to Lutheranism. Those who resisted were defeated in battle and their leaders were beheaded. The Icelanders finally wrested their freedom from the Danes in 1944.
In 1995 Iceland's Independence Party, a member of the same international organization of conservative parties as the American Republican Party, led the country in a program of privatizing banks and reducing taxes. Independence Party leader David Oddsson's hero is Milton Friedman, America's most famous champion of free markets.
With very little regulation Iceland's three largest banks became so over leveraged that their debt exceeded the nation's gross domestic product. As one Icelander quipped: "Iceland is not a country; it's a hedge fund." Iceland's banks offered very high interest on accounts in their European branches, and their collapse left nearly 500,000 depositors (300,000 in the UK alone) high and dry. The population of Iceland is only 320,000.
Just as the Securities and Exchange Comission was tipped off to Bernard Madoff's shenanigans 11 years ago, British regulators ignored warnings that Icelandic financiers had gone berserk, an appropriate term given that it comes from Old Norsk meaning gone wild. The British newspaper The Guardian described the conservative government's actions as "cowboy policies of expansion into financial services and credit." The value of Iceland's stocks rose nine times and then crashed to only 10 percent of their original value.
A contributor to Wikipedia states that "relative to the size of its economy, Iceland's banking collapse is the largest suffered by any country in economic history." Iceland's temporary financial madness will stand out in history along with the Holland's tulip mania of the mid-1600s.
Just like some of our Republicans, Independence Party leaders blame their problems on everyone except themselves, and Iceland's president offered an American air base to Russia in return for a $15 billion bail out.
But cooler heads have prevailed. Huge loans from the International Monetary Fund and some European countries have prevented national bankruptcy, and has allowed the repayment (with the help of deposit insurance) of up to 80 percent of the money owed to European creditors.
Starting in November 2008 Icelanders turned out in the largest protests in their history. The conservative government was forced to resign and a Social Democratic-Green coalition was appointed as caretaker until Saturday's election. This coalition now won a five-seat majority in the 63-seat Althing and the conservative Independence Party is now reduced to 23 seats. Social Democrat Johanna Sigurdardottir will become the world's first openly lesbian prime minister. As in many European elections, voters can casts ballots for both candidates and parties. Sigurdardottir received an astounding 70 percent of the candidate vote.
Just as so many Americans have done, Icelanders indulged themselves in their false economic boom. Their wealth, mainly in the form of a housing bubble, tripled. Finding the best interest rates from foreign banks (3 percent rather than 15 percent at home), many of them took out loans in currencies such as the Swiss Franc. Now faced with payments in their own currency, which has dropped 33 percent in value in one year, Icelanders have resorted to setting their new SUVs on fire.
When center right governments have taken power in European welfare states, they have essentially left the social programs in place, although with less funding. In contrast to the U.S. Iceland still has its social safety net in place. The government offers generous unemployment benefits and all laid off workers must receive three months severance pay. There is universal health care and the schools are excellent.
Cowboy capitalism nearly ruined what used to be a stable and prosperous nation, and most commentators now believe that by joining the European Union and adopting the Euro, Iceland can return to its place as number one in the UN's Development Index. Many of the new bankers were very successful fishermen. They now fall back on a profession for which they are much better suited.