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WHEN WILL THEY EVER LEARN? The crash 2008 (HRUNIÐ) revisited, three years later.

What was Iceland like before HRUN (crash)? What were the main causes of the crisis? Is anyone responsible? A few conspiracy theories. What are the main consequences? Are there any solutions? Are there any lessons to be learnt?

What was Iceland like before?:

While Europe was devastated during World-War II, Iceland became rich. Despite receiving Marshall aid twice per capita what war-torn countries in Europe received, Iceland continued to maintain a closed and protectionist system: Imports were restricted, exports were licenced, prices were state-regulated, fishing was heavily subsidized, the krona was regularily devalued by government fiat, banks were state-owned, directors of banks and funds as well as other high officials were political appointees, inflation was rampant, real rate of interest was negative, receiving loans was based on political favouritism. Coalition governments were, with rare exceptions, lead by the two major parties: The Independence Party (conservatives) and the Agrarians (who called themselves progressives). Those two parties between them ran a spoils-system (crony-capitalism). All major business (exports/imports, banking, insurance, retail, oil-distribution, and the spoils of servicing the US- naval base) were devided between companies run by party loyalists. This had nothing to do with a free-market system. This was a corporatist system (cf. Mexico), where political power was used by two dominant cliques to distribute favours to party loyalists. It was a politically administered oligopoly. This system was by definition corrupt at the core, but with widespread popular participation.

The Social-democratic Party (est. 1916) made four break-throughs to reform this system:
  1. 1936- a comprehensive health, disability and old age insurance, based on rights, not alms (unemployment insurance and obligatory participation in pension-funds was not achieved until ca. 1970),
  2. 1960-71 the SDP pushed through partial opening-up and liberalisation of the economy, but the conservative entrenched interests made it only partial.
  3. – The SDP led Iceland in joining EFTA in 1970, which was a significant step towards introducing a market economy.
  4. – The SDP led negotiations with the EU (1989-93) on Iceland´s membership of the EEA (European Economic Aerea). This was by far the biggest step towards breaking up the old patronage-political spoils-system. It means Iceland is by 2/3rds a member of the European inner market , under co-ordinated legislation on the free flow of goods, services, capital and labour as well as competition rules across the EEA. Since 1994 Iceland has adopted EU laws and regulations covering the inner market, in addition to R&D and co-operative agreements on culture, education, student exchanges, etc.

Causes of the crisis:

The best analysis of the causes of the crisis is to be found in a report (April 2008) – half a year before the crash – by Willem Buiter, a world renowned expert on financial crises. The hardcore of his analysis was that the business model itself of the Icelandic financial system after privatization (2002) was totally unsustainable. It was never a question of if- but only when- it would collapse. This model was based on the smallest, independent, currency aerea in the world (similar in size as the city of Coventry). Its cancerous growth (from one to ten GDPs in six years), based on easy access to foreign capital markets at low interest, led to the accumulation of huge debt in foreign currency – the banks borrowed short-term, but lent out long-term – way beyond the capacity of the Icelandic Central Bank to act as a lender of last resort, with its meagre reserves. After 2006, when financial markets started freezing, this unsustainable business model was doomed. The warning signals were everywhere, both domestically and abroad, although Icelandic supervisors failed to notice. Mr. Buiter´s recommendations included immediately turning the banks´ foreign branches into subsidiaries, under licencing and deposit-insurance of the host countries. Also, moving the banks ´ HQs abroad, where the bulk of their business was anyway.

This report (and several others from abroad) proves that the government received ample warning and expert advise on how to avert imminent disaster. The government´s reaction was to suppress this report. It remained steadfastly in denial of the flashing warning signals and did nothing to the very end. Why? The only rational explanation is that the political key-players (the PM, the Soc-dem leader at the time, the Ministers of Finance and Banking, the Central Bank directors and the head of the Financial Surveyllance Authority, along with other top officials) were so heavily indoctrinated by neo-con ideology - i.e. that government intervention is always bad, and the myth that markets are self-correcting - that they ignored the warning signals and rejected advise on government action. The only other explanation that makes any sense, is that the entire political leadership of the country was a bunch of incompetents. Perhaps the ultimate explanation is a mix of both.

Is anyone responsible?:

The best thing that has happened in Iceland after the crash is the publication (in 9 volumes and more than 2000 pages) in April 2010 of a report of a „Special Investigation Commission“ (SIC), appointed by Parliament (Althingi). This report presents massive evidence disclosing corrupt business practices by the leading nouveau-rich business oligarchs and an astounding level of naivité and incompetence on behalf of the so called political leadership.

Unexpectedly, the authors of this expert evaluation, came to highly specific and concrete conclusions, in their search for the truth about who carries the heaviest responsibility. Having revealed innumerable examples of corrupt business practices by the owners of the banks and their closest business associates, they actually accuse leading politicians, the heads of the Central Bank, the regulatory authorities and a few high officials of being responsible for major mistakes and negligence of public duty under the law, failing to take decisive action to avert imminent disaster.

The authors of the report descibe in considerable detail how the owners of the banks robbed them from the inside in favour of their own companies and those of their cronies. They heeded few rules on limits for lending to interrelated parties, on prudent risk management or realistic assessment of collaterals. Insider trading and market manipulation were the rule rather than the exception as well as „ creative accounting“ by their chartered accountants, to boost share prices. It seems they ran their banks along the lines of William Black´s manual on „The Best Way to Rob a Bank is to Own a Bank“.

This report was in due course presented to Althingi. As regards the leading politicians, it was up to Althingi to decide, wether the persons named in the report should be brought before a special court, dealing with political mismanagement under a special law. Through an embarrashing show of backroom intrigue, parliamentarians of the leading parties, some of whom had been members of the government immediately responsible for the crash, voted in such a way as to acquit their own but, through accident or renegation of a secret deal, voted by a majority of one to put the hapless former PM and leader of the Conservative Party, Mr. Haarde, alone in the dock. His trial is now ongoing. Since this manipulation of justice by Althingi is generally condemned by the public, the case is expected to be dropped on a convenient technicality.

As for the banksters, the owners of the banks and their accomplices, it is up to a Special Prosecutor´s Office to follow up on the evidence presented by the special report by pressing criminal charges against them. Although the evidence for corrupt practices is massive, as presented in the SIC report, prosecuting the major offenders is an immensely complicated task. Although Iceland is a small country, in terms of population, the Special Prosecutor´s Office has the task of investigating fraudulent business practices on an international scale. Believe it or not, the bankruptcies of the three leading Icelandic banks make the list of the ten biggest bankruptcies in financial history. Each group of oligarchs seems to have, with expert help from their banks, at home and abroad, created an immensely complicated and interrelated network of holding companies, located in tax-havens the whole world over, for the double purpose of hiding ownership responsibility, as well as for tax-evasion purposes. It is noteworthy, that out of the 147 individuals who were interrogated by the SIC-commission, not a single one admitted to any responsibility for the financial melt-down of the country. „Not my department“, was the common answer. It is therefore no wonder that now, three years after the crash, the Special Prosecutor has only convicted one minor official for insider trading. A case brought against a few minor operatives in the financial system for business malpractice, was thrown out by a lower court for lack of conclusive evidence.

With all those crucial issues of legal and political responsibility unsettled, political discourse in the country has become poisoned by vicious accusations, endless blame-gaming and political vitriol of unprecedented intensity of hatred and intolerance. Despite the massive evidence presented by the Special Investigation Commission to the effect, that the IP (conservative party) and their junior progressive partners, carry by far the greatest share of political responsibility for the devastating disaster that befell the nation, neither party admits to any responsibility. The commissioners marshall massive evidence to prove the party leaders and coalition partners (1995-2005), Mr. Oddsson and his partner Ásgrímsson, bear heavy responsibility, not only for failed macroeconomic and monetary policies, but for mismanagement of state assets in the privatisation process by delivering major state banks into the hands of party affiliated cliques, in breach of all rules of procedure. This, along with the de facto privatisation of the fish quotas, handed out for free to a favoured few, in blatant contradiction of the law, created and capitalized the groups of oligarchs who ultimately robbed the banks and ruined the country.

The party leaders concerned, who emerged from the report as „culprits-in-chief“, have escaped any political responsibility, being sheltered by a statute of limitation. Also, Althingi has failed to face those facts, e.g. by adopting a motion of sensure, barring those individuals from public office in the future. On the contrary, the conservative leader cum Central Bank Director (1991-2009) has been appointed editor-in-chief of the conservative daily newspaper, which he uses on a daily basis to falsify the history and to put the blame for our national calamity onto all his enemies, domestic and foreign. Americans would presumably have raised an eyebrow, had Nixon, after Watergate, been appointed editor of the Washington Post, continuing to confound his innumerable enemies in his daily leading articles.

Understandably the general public has lost all confidence in parliament, in political parties and in politicians, in general. The same goes for the media (still in the ownership of the oligarchs), the judiciary and most state institutions. In our Icelandic „winter of discontent“ 2008-09, intense public demonstrations, affectionately called the „Pots-and-Pans- Revolution“, brought down the conservative-social-democratic government of Mr. Haarde and Ms. Ingibjörg Sólrún Gísladóttir. That was without precedent in Icelandic history. This revolution brought the left to power, first as a minority government and then, after snap elections in April 2009, with a parliamentary majority. Thus the left was given the responsibility to clean up the mess, left by the neo-conservative experiment with this once-upon-a-time Nordic welfare state. With the left up to its shoulders in bloody cuts in social expenditure in order to save up money to pay the debts, the parties that bore the heaviest responsibility for the mess, now in opposition, miss no opportunity to jeer at their efforts. The fatal weakness of the social-democrats in leading the rescue team, is the fact that they joined the conservatives in a coalition for the last 18 months before the fall, without making any visible difference. Also they will have to swallow a bitter medicine of self-critisism, if they are to regain the trust of their natural constituency again.

Conspiracy theories:

Although Iceland´s fall was both predictable and preventable, at least in terms of ameliorating the consequences, those responsible consistently deny any wrongdoing. It is a common experience of life, that those who refuse to admit their mistakes, will in their state of denial remain unable to learn from their mistakes. This is the state of affairs of the body politic in Iceland after the fall. Those who carried the heaviest share of responsibility for the fall, and are now in opposition, stubbornly resist to admit any responsibility. On the contrary they revel in all sorts of absurd conspiracy theories, putting the blame on their perceived enemies, domestic or foreign. The British and the Dutch, with the support of the European Union, are accused of unfairly demanding, that Icelandic taxpayers pay the debts of Icelandic banks, privately owned and operating branches abroad.

It is easy to whip up nationalistic frenzy against foreigners, suspected of using their influence behind the scenes (be it within the EU or the IMF) to bully poor little Iceland into submission. When the Nordic countries refused to come to the rescue by foreign currency loans, unless Iceland sought help from the IMF (obviously because they had lost all confidence in the Icelandic government and the Central Bank ) they were immediately classified as enemies. For a while the Central Bank Director, Mr. Oddsson, applauded Putin´s Russia as Iceland´s sole remaining friend, until his misunderstanding that the Kremlin was ready to rescue the bankrupt Central Bank under his control, was corrected. The president of Iceland, a former leader of the succesor communist party, insists that Europe betrayed Iceland and our only true friends are now to be found in China and India. Married to a London socialite and a billionairess, he is now thought to be preparing to run for a 5th term as president on a populist andti-EU ticket.

After the fall, the Icelandic government guaranteed all savings deposits in Icelandic banks, except in branches abroad. Under EU law and regulations, also adopted by Iceland under the EEA-agreement, minimum savings deposits are guaranteed by the home country insurance fund. Having paid out their lost savings in the failed Icelandic branches in London and Amsterdam to depositors, the British and Dutch governments made a claim on the Icelandic government that they repay the minimum deposits under an agreement, where Iceland was granted a low interest rate and generous terms. Twice, negotiated settlements of this issue, granting state guarantee of payment, were rejected in referanda in Iceland, at the initiative of the president. Chartered accountants have since come to the conclusion that the bankrupted bank has enough assets to cover the bill. Nonetheless ESA (EFTA´s Surveillance Authority) has come to the conclusion that Iceland is in breach of the EEA agreement by discriminating between customers, depending on location of branches. If the EFTA court concurs with this conclusion, the way is open for the British and Dutch governments to sue Iceland for full indemnities, demanding immediate payment at market rates. Wether they will bother to assert maximum claims if the bankrupted Landsbanki will in the end turn out to have sufficient assets to cover the minimum deposit claim – no one knows, for sure. But this unsettled issue has poisoned the relationship between the governments concerned and may negatively affect Iceland´s application for its EU membership.

One theory, put forward by those who are most adamantly against Iceland´s EU membership, is that all our troubles can be blamed on the EEA -greement (1994). The EEA-agreement opened up the inner market for both investments and capital movements. Without those rights, so the story goes, the Icelandic banks would have been barred from opening up branches abroad. This simple explanation avoids the fact, that it was up to the Icelandic authorities to make sure, that the Icelandic banks operated abroad in the form of subsidiaries, under the deposit guarantee system of the host countries. Had it done so, there would have been no Icesave. The Norwegian government did this by making sure that the domestic deposit insurance scheme only insured deposits in Norwegian currency. This did not prevent Norwegian banks from operating abroad. But it forced them to operate as subsidiaries, under the licencing, surveillance and deposit-insurance of the host countries .

Conspiracy theories of this type, refusal to admit to one´s own mistakes and putting the blame on everybody else, are symptoms of sick politics. Factual evidence is ignored and rational arguments avoided. Instead demogues are tempted to try to whip up emotional frenzy directed againt imaginary enemies, in order to draw the attention of those suffering away from the real culprits.

The consequences:

Is it true that there is a special Icelandic way out of the recession? This hypothesis has received some traction in foreign media, mostly due to the self-congratulatory demagogery of the president of Iceland. By referring the Icesave agreement with the British and Dutch governments to a referenda, where the proposition to give a state guarantee for repayment was rejected twice, many concluded that Icelanders were simply refusing, by democratic means, to pay the debts of private banks. Even Los Indignados in the Plaza del Sol in Madrid and angry mobs in the streets of Athens, have put up protest signs applauding „the Icelandic way“. This is a misunderstanding that does not stand any scrutiny. First it turns out, by recent estimates, that the bankrupted Landsbanki may have sufficient assets to repay the minimum deposit guarantee in full. The referanda were therefore about nothing, except an attempt by the president to restore his flagging popularity, having been for years the mouthpeace and PR-agent of the oligarchs who ruined the country.

But true enough, the Icelandic government - unlike e.g. the Irish and Greek governments – never stood a chance to bail out the banks. The debts, left over by the banks when they became bankrupt, were ca. 120 billion euros, or more than nine times the Icelandic GNP. Although the Icelandic Central Bank emptied its foreign currency reserves into the bottomless hole of the banks, it was an insignificant pittance compared to their overall debt and served only to bankrupt the Central Bank itself. This only serves to prove that the business model itself of the Icelandic banks was from the beginning totally unsustainable. It was a house of cards, destined to fall as soon as access to foreign markets to refinance debt, closed. The Icelandic Central Bank was never able to act as a lender of last resort. The miniscule Icelandic currency area was a fake from the beginning to the end. Icelanders cannot take pride in any virtuous decision, not to bail out the banks. The banks were in fact insolvent long before the crash . And there was nothing that the government could do about it. It had no creditworthyness left, no access to financial markets and its bond rating issue had fallen to junk.

Perhaps Icelanders should reconsider their attitude to their public enemy number one, poor ole´Gordon Brown, who placed the Icelandic banks, the Central Bank and the government of Iceland on the list of most wanted terrorist organizations, along side al Queda. Had there been any chance in hell that the government could borrow to bail out the banks, ultimately at the tax-payers´expense, Mr. Brown´s act clinched it finally. Perhaps the president should invite Mr. Brown to Bessastadir, his residence, for tea and present him with the Order of the Falcon. The friendless Mr. Brown would presumably deserve it better than the oligarchs, who were all in their time recipients of the highest honours of state, handed out by the president.

The whole financial system of Iceland went bankrupt. Foreign banks, mainly German and other European banks probably account for ca. 85% of the total losses, approximately 40 billion euros. This means – again contrary to the Irish and Greek experience – that the imprudent and risk-seeking creditors of the Icelandic banks, who had made great profits in the good times, were forced to accept heavy losses themselves. But it was certainly not anything that the impotent Icelandic government could take credit for.

Although – again unlike the Irish and Greek cases – foreign banks had to suffer heavy losses as a consequence of the bankruptcy of the Icelandic financial system, there was plenty of debt left behind for Icelandic tax-payers to shoulder. Before the crash, the Icelandic state had been relatively free of debt. Now the gross sovereign debt of the Icelandic state is ca. 90% of GDP. Most municipalities, most businesses and households are struggling to avoid default, due to a heavy debt burden. This is where another difference between Iceland and the euro-zone countries has a significant impact. A major consequence of the financial crisis was that the national currency went into a free fall, precipitated by the strong positioning by the banks against the krona. The consequences were dire, and are unsolved to this day. The stock of foreign currency denominated loans doubled. Devaluation caused an inflationary spurt, which sent the rate of interest sky-high. Due to the automatic indexing of long-term loans to the consumer price index (CPI) with a simultaneous fall in purchasing power and asset prices, debt burden became generally unsustainable. The mutation of foreign loans along with a steep fall in asset prices ment that servicing debt became way beyond the capacity to pay, by households and businesses.

This is not only felt to be social injustice. This is at the core of the economic problem. If reduced income, due to the recession, of both households and businesses goes mostly into servicing debt, there is little left to hold up effective demand or to invest in productive capacity and new jobs. The economy gets locked in a vicious circle, where reduced demand leads to a contraction in economic activity, increased unemployment and demand for more social expenditures. Although devaluation improves the competitive position of export branches (fishing, aluminium and tourism), it is essentially a short term fix, because the debt servicing increases in line with higher revenue in Icelandic currency.

Are there any solutions?:

How can a country with a high level of debt break out of the vicious circle of debt servicing and economic contraction? The keynesian formula, successfully tried out during the Great Depression, was for the state to resort to deficit financing, if market failure had paralized the private sector. The state can do this by a combination of means: Borrowing, quantitative easing (printing money), public works, or tax reduction. The point is that in the case of private sector failure, the state should stimulate economic activity through deficit financing. But this is hardly a realistic option for states that have already sunk into a mirage of debt, with their creditworthyness losts and the cost of borrowing, to refinance existing debt, spiralling out of control. For such countries austerity seems to be the inevitable bitter medicine to swallow. In such a situation, states have to raise revenues to pay back the debt by cutting expenditures and/or increasing taxation. This they can only do with a rescue plan from non-market institutions, such as the IMF or the ECB (European Central Bank). Smelling blood, the markets (speculators) become predatory, sucking the lifeblood out of a sick economy, like in Greece today.

But austerity, cutting state expenditures or raising taxes on household and businesses, will not stimulate economic growth. The danger is that an overdose of austerity will paralyze the patient and suffocate any hope of economic growth. Here we are approaching the crux of the matter. Although austerity is unavoidable, economic growth – effective demand from households and new investments by businesses – is necessary to pull off success. This is why massive writing off of bad debt (which is anyway unsustainable and beyond the debtors´ capacity to pay) is imperative. If reduced income of households and businesses is increasingly swallowed up by servicing debt, little will be left to support effective demand for goods and services and businesses have no incentive to invest in productive capacity. This is a recipe for stagnation.

Although the left-wing government in Iceland has been relatively good at administering IMF-proscribed austerity (it has cut the budget deficit from 9% to 2% of GDP by 2012), it turned out not to be radical enough to insist on massive and immediate cancellation of unsustainable debt as a crucial part of their restoration program. Could they have done it? Look at it this way: Iceland´s creditors – foreign banks – suffered heavy losses when the Icelandic banks became bankrupt. Early on, they wrote off those debts in their balance sheets as lost. In the after-market, hedge funds and other speculators bought up those claims at massive discounts. The owners of those claims are now the owners of the restored banks in Iceland. Through an emergency legislation in October 2008, the Icelandic government transferred the domestic assets of the bankrupted banks (savings deposits and outstanding loans) and vested them with the new banks. For this the Icelandic government (the taxpayers) had to pay. One must assume that the government bought those assets at great discounts, since they had already been written off by the creditors, and since many of the outstanding loans were obviously unsustainable and could never be recovered.

What the government should have done right from the beginning, was to let the banks´ customers, the debtors, share in the nogotiated discounts of the loans, mutated by the massive devaluation. This should have been done across the board. It was specially imperative for houserholds with foreign currency denominated loans, reduced income and falling real-estate prices. Writing off „bad“ loans should have been an important priority for businesses too. This would have been the only way to follow up the unavoidable austerity messures with an equally important stimulus packet. This would have kept up effective demand and provided incentives for business for starting investing again. In the case of Iceland, another important ingredient in the restoration plan, would have been to stimulate foreign direct investment (FDI) to harness the improved competitive position in the energy and tourism sectors. This would have required the government to reach an agreement with the EU, as a top priority in the EU membership negotiations, for the ECB to give the Icelandic krona a similar stability guarantee as e.g. provided to the Danes, who still retain their own currency outside the eurozone, but pegged to the euro. Such an agreement would have enabled us to abolish the current capital controls, but they are the single most harmful obstacle to foreign investment in Iceland. There are plenty of attractive opportunities for foreign direct investment in Iceland. But a fragile and fluctuating national currency on life-support is sure to keep prospective investors away.

This reveals the fatal flaw in the argument, favoured by diehard opponents of Iceland´s EU – membership, namely that an independent currency to be devalued at whim by the governmet, is an ideal instrument of an economic policy. It is not. Not only does it keep foreign investment away. It prevents us in the long run from diversifying our economy. It kills off innovation. It prevents us from creating high-quality jobs in the new knowledge economy. That means that the best and the brightest will in the future find their opportunities in life outside Iceland.

Icelanders could in their present difficulties learn a lot from the Estonian experience. Estonia was deeply affected by the international financial crisis. Through it all they maintained the fixed parety of their kroon with the euro and, at the beginning of the year, fulfilled all the conditions of joining the euro-zone. This meant that they had to implement their „internal devaluation“ through heavy cuts in salaries and social expenditure, while suffering drastic reduction in GNP. Now, after a short recession, they are back on track with strong economic growth (8.4% in t he first half of this year) and resurgent foreign direct investment. Even the Irish, despite their heavy debt burden, are back on track as regards foreign investment.

Toomas Hendrik Ilves, the president of Estonia, asked by a German journalist, why Estonians without a murmur put up with hardship that sent the Greek screaming to the barricades, said: „Compared to Stalin´s deporations it did not feel all that bad. I guess it´s harder if you have been living the good life of bunga bunga parties for too long...“ Then he added: „A currency devaluation would have led to massive defaults for the middle class that had bought houses with euro-denominated loans. We would have ruined the most productive part of society. So, we had to persist and join the euro“. – This meant that in Estonia the crisis was tough, but short-lived. „Now the foreign investment flows are on the increase, since investors know their assets won´t be devalued“, said Mr. Ilves. In Iceland, by contrast, the crisis has been prolonged with no end in sight, yet.

It is not too late yet, for the Icelandic left-wing government to prove its authentic social-democratic credentials. But time is running out. An economic stimulus packet, based on massive discounts of unsustainable debt as well as debt rescheduling is of the essence to create jobs and confidence in the future. Another issue of vital importance for this government is to prove that they will honour their pledge to remove the corrupting influence of the illegal system of the privatization of the fishing resources within the Icelandic economic zone. Allowing market forces to fix the right price for the valuable fishing quotas through auctioning, is the best way to fix that problem. So far it seems this government does not have the inner strength and leadership required, to stand up against the strongest and most priveleged lobby in the land. That is a real pity because the opposition is totally descredited by its ignoble past and thoroughly subservient to the vested interests of the shipowners and the heavily subsidised agricultural lobby.

Are there any lessons to be learnt?

For the past thirty years or so the world has been ruled by little else than a neo-conservative ideology, imposed upon humanity by the most powerful forces on earth – and with disastrous consequences. US presidents, British PMs, Russian oligarchs, East-European finance ministers, third world dictators, Chinese communist party ´s secretaries, India´s Congress Party elite, the International Monetary Fund and The World Bank and the chiefs of the US Federal Reserve - all of those and many more have preached the mantra of unrestrained market forces, the evils of state intervention and the magic of privatisation, deregulation and tax- reductions for the super rich. This is an ideology – it has nothing to do with science – unashamedly in the service of the plutocracy – roughly one percent of the human population – who own the world or control the vast majority of global assets. This is a thoroughly undemocratic creed. Since the democratic state is firmly held to be a part of the problem, but never a part of the solution, this ideology by definition excludes democracy.

Footloose financial capital, swarming around the world like a plague of locusts, has during this era, grown to become at least ten times bigger than the real GNP of the productive processes of the world. This is a force vastly superior in strength to individual nation states (globalization), who have succumbed to this irresistible force in waves of financial crisis shaking the world. In the past few years we have experienced the Mexican crisis, the Asian crisis, the Russian crisis, the Latin-American crisis and now the advanced economies of the US and Europe are in the throes of a financial crisis, that threatens to spin out of control into a long-standing economic depression. It all began by the American financial sector being let loose on the world, unhindered, deregulated and unsupervised, reaping huge profits by selling fake products and fraudulent services, ultimately being caught in the act of fraud and deception, egged on by boundless greed with this whole financial superstructure tottering on the brink of the abyss, threatening to bring the whole world down with them, unless the state – the embodyment of the democratic will – would bail them out, at tax-payers ´expense.

The lesson to be learnt is to bring this wild and dangerous beast of unrestrained capitalism back under democratic control. This means that this jet-set elite of buccaneering capitalist predators preying on humanity in search of profit, wherever it is to be found, has to be legislated, regulated, supervised and taxed again by the democratic state. It means that all the New Deal reforms imposed in the wake of the Great Depression in the thirties of the last century, must be reintroduced. Banks must be again devided up between commercial banks and risk-seeking investment banks. Superconglomerates regarded „too big to fail“ and thus a systemic time-bomb, must be broken up into managable units. Taxes must be made proportionate to the risks taken as a means of control. And the Tobin-tax, long since proposed as a shrewd instrument of control, should be imposed immediately, creating a sort of „financial pollution fund“, ensuring that never again shall taxpayers be forced to nationalize the losses, after the capitalists, („the markets“) have pocketed all the profits. Super-salaries and bonuses, the risk enhancing incentives of the system, have to be brought under control or else taxed away. And the tax-havens, operated outside the law for tax-evaders and corporate criminals of every hue, should be hounded and closed down without mercy. Finally, the international community should welcome the „Buffet tax“ – named after the third richest man in the world – who publicly offered to pay at least as high a share of his income in tax as his secretary. Taxes, after all, are the price we pay for living in a civilized society.

In the case of Iceland the lesson to be learnt is to make sure that a group of misguided ideologues and irresponsible plutocrats will never again get the chance to gamble with the fortunes of the nation. Icelanders should by now have learnt the hard way that they belong to the family of Nordic welfare states in a regional co-operation within the union of European democracies. It is remarkable that the Nordic model has withstood the onslaught of the international capitalist crisis with flying coulours. That is a lesson to be learnt and kept at heart.

Jón Baldvin Hannibalsson The author was the leader of Iceland´s Social-democratic Party 1984-96 and Minister of Finance and for Foreign Affaires & External Trade 1987-95.

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