An article released by the New Left Review shows that the leadership of the Central Bank acted carelessly and often vindictively in its economic policies, contributing to the collapse of the economy.
The article in question, “Lessons from Iceland”, was written by Robert Wade and Silla Sigurgeirsdóttir. It details some astonishing behaviour on the part of so-called professionals, among them Davíð Oddsson. Here are a few choice samples:
“As the collapse gathered speed, Oddsson moved on 7 October 2008 to peg the króna to a basket of currencies at close to the pre-crisis rate and simultaneously lowered the interest rate (which amounted to pouring petrol on the raging fire). He consulted no one save his protégé, Haarde. Even the Central Bank’s chief economist was kept in the dark. In conditions where the currency was already tumbling, the foreign- exchange reserves were exhausted and there were no capital controls, the peg lasted for only a few trading hours; it was perhaps the shortest-lived currency peg ever. But it was long enough for cronies-in-the-know to spirit their money out of the króna at a much more favourable rate than they would get later. Inside sources indicate that billions fled the currency in these hours.26 Then the króna was floated—and sank like a stone.”
“Senior figures may also have calculated that bringing down Kaupthing, the one bank that looked as if it might survive, would be sweet revenge on the principle of ‘If my bank has gone down, yours is coming down too’. At a dinner during the 2007 IMF Annual Meeting in Washington DC, it is known that Oddsson jabbed his finger at Kaupthing’s Chairman and said that, if the bank started to denominate its trans- actions in euros, ‘I will take you down’.”
“Iceland’s new banking elite rode the bubble, intent on expanding their ownership of the country’s economy, both competing and cooperating with each other. Using their shares as collateral, they proceeded to take out large loans from their own banks, some of which they spent on buying more shares in the same banks, inflating share prices. Their executives were instructed to follow suit. They performed the same task for other clients, including the other banks. Bank A lent to shareholders in Bank B, who bought more shares in B against the shares as collateral, raising B’s share price. Bank B returned the favour for shareholders in Bank A. The net result was that the share prices of both banks rose, without new money coming in. Depositors, too, were urged to shift their savings into shares, and bank employees spent their evenings telephoning households up and down the country to this end, using tactics that could only be described as predatory lending. The result was to shield major shareholders from risk while yielding them a percentage of the very high profits.
“Much of this was ‘Ponzi’ finance, in which the debt could only be refinanced by further borrowings; much of it rested on fake capital, the result of illegal market manipulation. But the unsustainability of the process remained hidden, as the banks established elaborate carousels of co-owned companies in places like Luxembourg, the Isle of Man, the British Virgin Islands, even Cuba, that bought each other’s shares and leveraged up each other’s balance sheets. With their self-dealing concealed, Iceland’s financial institutions seemed to have increasingly strong balance sheets, at least to the inexpert or the incurious. Brokers criss-crossed the country, persuading households to load up on more debt and to convert new or existing króna debt into much lower-interest Swiss francs or Japanese yen. They assured their clients that this was ‘a no-brainer’—‘the króna would have to fall by more than 20 percent for it not to be, and that’s not going to happen’. The super-abundance of credit allowed people to consume in extravagant celebration of their escape from the earlier decades of credit rationing through political connections. It allowed them to see themselves as ‘independent people’ at last—which may help to explain their ‘happiest in the world’ ranking.”