The Icelandic Costa Concordia

Will they choose the euro, or the American dollar or, heavenly days, the loonie? Will they pick a currency behind door 1, 2 or 3?
Will they dollarize?

I’m talking about the Icelanders, of course. Having privatized the banks and let them behave as if they were Vikings out plundering the world only to discover that they weren’t Vikings at all but simply incompetent, inexperienced louts with massive egos, the Icelandic government has started looking at creating a system that will take some of the disastrous decision  making out its hands and put it into more competent hands.
Iceland, because of its history of Danish rule and having a small group of wealthy farmers who had political control of the country, does not have a long history of taking care of its own business. The Danes ran things. Badly, even very badly. So badly, in fact, that hunger was common, poverty endemic, disaster always at hand because of selling off the exclusive right to trade meant no competition but, instead, loss of control of pricing. A country with a population of approximately 70,000 during the  mid-18th C and a small group of farmers knit together by having the same interests, t hat is, keeping wages low, workers disenfranchised, and currying favour with the Danish traders.
The result was a group of land owners who employed seasonal workers and doled out land to share croppers.
The Danish traders, in the meantime, controlled trade. There wasn’t much chance of an Icelander getting a lot of experience at international trade or business in general, unless it was something like guiding foreign visitors to the geysers in summer.
Icelanders weren’t hewers of wood or miners of rock because there was no wood and no ore. They raised sheep and did off-shore fishing with hook and line in a survivalist economy.
They eventually got the Danes to quit selling the exclusive rights to trade with them and once the English and Scots started turning up to buy sheep and horses and whatever surplus the Icelanders had, there was actually money in the economy. Before that, it was all trade, a lot of which was priced in butter. In 1878 there was still no bank in Reykjavik. It would have been pretty difficult to have taken deposits in butter.
There was some Danish silver around. When reports say someone was paid in dollars, those were rigs dollars, Danish dollars. There weren’t many of them.
Iceland was a curiosity.  German, French and English explorers and tourists made the dangerous and difficult trip to see the volcanos, the geysers, the lava fields. They left behind coin in kind. But it was a very small amount and most of it went to a few guides and outfitters in Reykjavik.
Then, after a lot of campaigning, Iceland got its constitution back. It got to make its own financial decisions. WWI drove agricultural and sea products up in price. WWII brought the English and then the American occupiers who paid for everything instead of looting. If you are going to have occupiers, they’re the kind you want. They pumped a lot of money into the economy. They’re gone now and Iceland no longer holds a strategic place for the defense of the Americans and their allies.
But Iceland lagged. It was slow to mechanize. It clung to old ways. However, when it modernized, it went for it flat out.
The problem is that Iceland doesn’t have much in the way of resources. Seafood. Tourism. Wool products. Bjork. Cheap electricity. The cheap electricity is good for smelting bauxite into aluminum. It’s not like the country is sitting on diamond fields or nickel deposits. The climate dictates against agriculture. So, what the Icelanders needed was a product that didn’t require these things. In international finance, it found just what was needed. Some cell phones, computers, the ability to issue bonds, make loans, and take in deposits. Shazam. The perfect product.
The problem was that the country is still small. No longer 70,000 but 300,000 people. That’s still about the size of Victoria, BC and Victoria, BC wouldn’t dream of providing in and of itself all the people needed to create an international financial empire. Icelanders are astounding in that they often master a variety of skills, often at a very high level. They say it is because there are so few of them.
However, that doesn’t make a poet an international banker. It doesn’t make a chef a hedge fund manager. It doesn’t suddenly give someone running a gift shop for tourists, the ability to run a chain of clothing stores.
The craziness was so great that no one bothered to ask if there shouldn’t be some restrictions on the ability of the banks to borrow and lend money. No one asked why the Icelandic banks could offer interest rates on their bank deposits or on their bonds many times greater than banks and bankers in institutions with hundreds of years of accumulated experience. No one asked how the banks were making money. If the banks were providing large loans to favoured lends, it was just business as usual, capitalist cronyism.
You see, the old mentality still existed. There were still the important ruling families who took for granted their right to make decisions, the right to make money, the right to fill the positions of power. That’s the way it’s always been. Iceland never had a resident king or royal family but it still had a ruling class that over a very long time had come to believe they had the right to run things, no matter whether they were competent or not. The problem was that everybody else was part of the system. They believed it, too.
The system created a monetary unit that was volatile. Inflation was a problem. Therefore, mortgages were tied to inflation. People chose to dollarize, or, in this case, Danishize. They took out mortgages in Danish currency. That way their mortgages didn’t go up with inflation. Which was great, until the krona fell by fifty percent and people’s mortgages doubled.
What people in Iceland were doing is what people do everywhere when they don’t trust their currency. They try to deal in a stable currency. In Cuba, the official currency is the peso but what people want is the American dollar. The same is true everywhere. We all want our hard earned money to retain its value. What is happening in these cases is called a flight from domestic money. However, the more people buy foreign currency, the lower the domestic currency falls. Governments deal with this by imposing currency controls. Iceland did this. You had to get a permit to buy other currencies.
Who wants to hold kronur if they’re going to be worth half as much and if the real exchange rate, never mind what the government says, is steadily dropping.
Can the Icelandic government give its citizens places to put their savings so that they hold their value? If not, people will want to trade those kronur for anything that will retain its value, including Canadian dollars. 
If, as we’ve recently heard, Iceland might adopt the Canadian dollar, it could no longer be the lender of last resort for any of its banks that got into financial trouble. It couldn’t simply print money or create it electronically. What the Icelandic government could still do is raise taxes and offer bonds for sale. However, raising taxes in a time of recession is difficult, if not impossible, and given the losses Greek bond holders just suffered, lenders are going to want to be paid high interest rates and given guarantees against default.
Still, if converting to the Canadian dollar imposes some external discipline upon the Icelandic government and the banks, it may well be worthwhile. Dollarization is already used in numerous countries such as the British Virgin Islands, the Caribbean Netherlands, East Timor, El Salvador, Panama.
These are not uncharted waters. However, that doesn’t mean they aren’t full of reefs and no Icelandic Prime Minister wants to become Iceland’s Captain Schettino. Iceland, in 2008, looked a lot like the Costa Concordia. It looks now like the Costa Concordia might look like if it were patched and re-floated. The Canadian loonie might be the tug needed to tow it to dry dock.The question is who is capable of being its new captain?

Sigrun Davidsdottir: the kreppa

 Dr. John Tucker and Sigurn Davidsdóttir
Photo by W. D. Valgardson
Sigrun Davidsdóttir´s third Beck lecture was a smashing success. Luckily, Trish Baer and John Tucker had anticipated the crowd and had booked a regular room plus a larger room. Well before the lecture was to start, we all  had to move to the larger room.
It may be that people love hearing about disasters. It may be Sigrun´s reputation. It may be that people are fascinated by Iceland and all the bits and pieces they´ve heard about the economic crash over the past four years.  Maybe it was a bit of all three but the audience was intent and after the lecture, the question period went on for a long time. Sigrun is good at answering questions. Here answers were clear and to the point.
She started off saying that Iceland lost 80% of its financial sector from 2008-2011. That got people’s attention.
She called the story about the crash a saga with thirty protagonists, several hundred fellow travelers and a whole nation of spectators.
Her position, living in London, England, reporting for Icelandic radio, with a father and brother who were both bankers, gave her a unique position from which to observe and analyze what has happened.
She emphasized, once again, that the collapse of a bank or an economic system is not a natural event. It is an event caused by some people.  No one person can do it alone so other people have to be involved. And, a lot more know what is going on but refuse to admit it.
There were the fellow travelers. The politicians, the people who worked in the banks, then there were the general population who saw what was going on but didn’t understand it.
As Sigrun talked about the Kreppa, I couldn’t help but think of the Costa Concordia. Ships don’t run onto the rocks by themselves. There was the captain. There were his senior officers. There were all the people who might have noticed something was amiss and there were all the people on the ship who were forced to be participants against their will.
Sigrun took us back in time and gave us an historical context for the crash. Iceland has several political parties. The Conservatives have been the political backbone of the system. The Independent party brought about changes to the Icelandic fisheries. Quotas could e bought and sold. This was done in such a way that quotas that hadn’t been purchased could be sold for large amounts of money. This brought an inflow of money into the Icelandic market.
As well, the banks were privatized in 2003. The banks had been controlled by political parties and many people thought the privatization would end the political influence but it didn’t. Other changes were made so that there could be international business companies that aren’t owned by anyone in the country. All these changes were part of a dream to make Iceland a financial centre.
Iceland, Sigrun pointed out, is a country of contacts. Who you know is critical to how well you get ahead.
Who you know if more important than what you know. From 2002-2006 there was record growth, record profits. But in 2006 the Geysir crises occurred. It was a mini crisis. Financial institutions outside of Iceland started to pay attention to what was going on in Iceland. Other banks started to give Icelandic banks bad reviews. The Icelandic banks were not being funded by the Icelandic people. Instead, bonds were being issued to outside organizations.
From 2006-2008 a difficult time started with short spells of things going well. The credit crunch had begun.
When she was working in Copenhagen she started having questions about the Icelandic economy because businessmen would contact her saying they were going to set up businesses but the businesses never were started. In London in 2005, 2006, Icelandic businessmen were happy but other business people dealing with them were not.  One Swedish banker described Icelandic businessmen as teenagers.
I was amused by this description. I immediately remembered the year that Landsbanki representatives came to Gimli. They set up a display at Islindingadagurinn with the intent, I was told, of getting people to invest. Iceland was offering stupendous rates on its bonds while other countries were offering paltry amounts. I asked a friend if he was going to invest in the bank. He said no, he only had a few thousand dollars to invest and the people from Iceland weren’t interested in anything under a million dollars. The lecture brought back a host of memories from the years just before the crash.
Teenagers are known for their enthusiasm but they aren’t great managers. Not surprisingly, things started to come apart. There were attempts to save the banks. The Central bank was aware that the banks were running out of liquidity. The UK offered financial advice. It was ignored. One gets the impression of incredible arrogance on the part of the Icelanders involved. There was a meeting with UK authorities in 2008, the Icelanders promised all sorts of things to make the situation better. None of the promises were kept. After a meeting with the Icelanders about the ICE SAVE accounts, after the Icelanders left the room, the UK minister said to his people don’t believe anything these people say.  Icelandic financial credibility was gone.
The banks collapsed. This created a power vacuum. For ordinary people there was a sense of relief by the end of December. There had been tremendous pressure for everyone to make money.If people weren’t making large amounts of money, they felt they were being left out and were failures. With the collapse, the pressure disappeared.
After Oct 2008, the banks were split into domestic and foreign. The foreign  banks went bankrupt. Currency controls were put in place.  A special prosecutor’s office was set up. A thousand page report on the crises was released. After that, it was not possible for the people responsible to say that they did not know what was happening.
What were the things that were done that brought about the crash? Sigrun gave us a list. It was shocking.
1.       The banks had favoured clients.
2.       There was unsecured lending.
3.       Loans, when they came due, were rolled over.
4.       There were no margin calls.
5.       Clusters of companies were set up off-shore. They were given huge amounts of money.
6.       There were big schemes and small schemes of various kinds.
 For example, one man had 6 companies. The assets that were worth something were put into one of these companies and the debts put into another. The one with the assets he would keep and the one with the debts would go bankrupt and the bank and its depositors would lose.
The big losers in all this were the foreigners who had loaned the Iceland banks money. German creditors took a huge loss. Icelanders who had some money to invest, lost. People with foreign exchange loans. The pension funds.The all lost.
As vast as this credit crash was, with so many people both in Iceland and abroad affected, there were only a small number of people who directly caused it. Sigrun estimates about fifty. Many people at the centre of the crash haven’t suffered. They’ve managed to hang onto money through various schemes.
However, the law grinds slowly but it does grind and, it is inclined to grind very finely. The first charges have been laid. There will be others.
The lecture was packed with information. It sparked an array of questions. What more could one ask? The topic, of course, is so complicated and vast that it could be the topic of an entire semester’s course.
The Richard and Margaret Beck trust is a foundation set up by the Becks for lectures on Iceland. 

Liar Loans

Do you remember liar loans? Someone working at MacDonald’s would go into a bank and say “I want to buy a house. “ The loans officer would say, “Great. How much do you want?” No credit check. No questioning whether serving hamburgers and fries paid the kind of money that would let someone make the monthly payments on a  hundred and fifty thousand dollar loan. Or a two hundred and fifty thousand dollar loan.
Why no credit check? Because the rules had been changed. You didn’t change them. I didn’t change them. The people at the banks and loan companies changed them. The loan managers were to get a commission and their boss was to get a commission and his boss was to get a commission. If you were a loans manager with ten loans officers, you could make a lot of money.
But let’s say that you were old fashioned, you worried about lending people money who obviously couldn’t pay back the loan so you went to the loans manager and said, “We can’t give this person a loan. He’s probably making minimum wage.”
“Don’t ask,” the manager would say. “Give him the loan. See if he wants more. If he can’t pay, it’s not our problem. We’re going to bundle loans together, lousy ones, okay ones, a few good ones, then we’re going to sell the package to someone who wants an income stream from the interest. Sure, a few mortgage holders will default but so what? House prices are moving up. Someone else will buy the mortgage.”
Let’s say you were a loans manager for a small operation. You had fifty million to lend out. In the past, you’d check and recheck the borrower’s credit history. You’d hold onto the mortgage and collect the interest and use it to pay staff, expenses and depositors. After all, it was the depositors’ money you were lending out.  But, now that you could bundle the mortgages together and sell the bundle, if you rolled the money over ten times during the year, you could lend out 500,000,000. And you could collect commissions on ten times as many mortgages. Nifty. 
Except that in the contract fine print, it said that if things went wrong, you had to take back the bundled loans. Since you only had 50 million in capital and you’d loaned out 500 million, you couldn’t do it. 
It came to a bad end because someone figured out that the bundles were crap. The default rate had been based on mortgages that were given to people who could afford them. Not only that but pretty quick, those bundles also included credit card debt, automobile loans, just about anything you can think of. Everybody collecting commissions was making so much money moving product, you know, like moving TV sets or computers through the door, that no one bothered to pay attention to the product. Those bundles got sold to the 99%, particularly to people who were retiring and who needed to replace their wages with interest payments. “Just like buying a bond,” they were told.
The people selling them that were as full of crap as the product.
That’s what happens when businesses are left to regulate themselves. Chinese exporters have been known to put toxic chemicals like melamine into food because it made a poor quality product look like a good product. American bankers and financiers aren’t any better.  They created and sold a product that was so toxic that the American government has had to intervene to keep interest rates absurdly low. It has had to provide vast sums of money to backstop toxic mortgages. The product was so toxic that it could still destroy the political and economic system of the United States.
The 99% didn’t create these toxic mortgages. The 99% didn’t create a system of commissions that would reward a few through irresponsible loans. Previously, the system had always worked because the duty of the lenders had been to the stockholders and depositors. Once a commission system with the ability to sell off mortgage and loan contracts was in place, the only duty was to the people collecting the commissions.
Let’s not revise history, as some apologists for the 1% are trying to do. The 99% may have been suckered by TV ads, newspaper ads, posters, letters in the mail that said they could afford to buy the house of their dreams but they didn’t create the irresponsible system. Nor did they reap the rewards. It wasn’t the depositors who loaned out the money. Always follow the money.  That way you know who is running the scam.
Check out Iceland. It was the canary in the coal mine. Who created the crises there? Look back at Japan. Who wrecked their economy? Europe is a slow motion train wreck that may still manage to destroy the future of the 99% in the rest of the world. 
Since commissions and bonuses are supposed to be for exceptional performance and since what we’ve got is disaster, maybe it’s time that all those commissions and bonuses that were taken on false pretenses should be taken back.