Viking Economics (5 page)

The government decided to urge compromise and settled the strike, with the employers’ association making concessions.
¹³

The government largely gave up the Thatcherite agenda. Danish banks struggled in the 1980s but escaped the Norwegian and Swedish crashes. The Danes retained a stronger regulatory regime on finance, and their banks maintained higher cash reserves as well.

Norway and Sweden bounced back quickly from their collapses through tough and effective governmental intervention, avoiding the “lost decade” syndrome that dogged Japan after its early-1990s crash, and that seems to be the continuing reality of the United States and much of Europe post-2008.
¹⁴

When the 2008 banking crisis hit countries like Britain, France, and Germany, the Norwegian and Swedish banks were unscathed. Of course, the fact that giants around them were toppling
had a negative impact on their economies as a whole, but Denmark, Sweden, and Norway all found it easier to regain their footing because their stronger democracies made sure their banks were clean, transparent, and accountable. Rejecting free-market ideology, they had largely returned to what works.

St. Louis Federal Reserve Bank vice president Richard G. Anderson studied the responses of Sweden and Norway to their financial crises. He wrote, “The Nordic bank resolution is widely regarded as among the most successful in history.”

Two financial crack-ups by Viking descendants would seem to be enough, but a decade later the Icelanders set up an even greater disaster. How the Icelanders did it and then played the rebel in charting their recovery is told in the next chapter.

I was impatient to meet the man who led Iceland’s “Pots and Pans Revolution”—the mass movement that mobilized Iceland after its economy spun out of control in 2008.

Hørdur Torfason asked me to meet him at an outdoor table of his favorite café in downtown Reykjavik. A small park lay between us and the plaza in front of Iceland’s House of Parliament. Hørdur (pronounced roughly like “Harder”) suggested I take a seat where I could easily see the epicenter of the Icelandic awakening. I remembered, taking in this grinning and powerful elfin man, that he was a performer and would want to set the stage before he recounted his story.

It turned out that Hørdur carried in his personal history an ancient Viking theme.

In the earliest centuries of settlement in Iceland, when free-spirited Vikings got in trouble with their community, they were banished. That’s what happened when Hørdur, in the 1970s a popular Icelandic actor and singer, came out as gay.

“Jobs dried up,” he said with a shrug, but I saw the pain in his eyes.

“The thing was, I couldn’t any longer bear my profile as a matinee idol, making love to women on the stage, when my real life was in the closet. Still, I didn’t expect I’d lose my ability to make a living.” He paused and took another sip of coffee. “I went into exile, to Copenhagen.”

Hørdur made a living in Denmark, but his longing to return to his own country led him to set up annual concert tours in Icelandic towns, performing one-man shows night after night to empty theaters.

“If the janitor would stay and listen to me, I’d perform for him,” Hørdur told me. “I would tell him, ‘Next year I’ll be back, and if you liked my songs, I hope you’ll bring your family and friends.’ ”

Hørdur returned Iceland each year, gradually rebuilding his audience until finally it became possible once again to make a living as a performer in his native land. Those who knew him saw him as a man of enormous determination and strength. It was that reputation that led grassroots Icelanders to turn to him as someone who could lead them in a crisis.

After World War II, Iceland developed important features in common with their Viking cousins. To learn more about Iceland’s political economy, I met with Professor Thorvaldur Gylfason. The internationally known University of Iceland economist welcomed me into his large flat, high in a building by the sea in downtown Reykjevik. The walls were covered with art he’d collected in his travels to numerous overseas consultancies and conferences. As
we relaxed in his living room, Thorvaldur told me that in some respects Iceland didn’t fully fit “the Nordic model.”

I objected. After all, Iceland had free university education, universal health care, universal pensions, and full employment. Thorvaldur agreed, but said Iceland’s historic poverty meant that it did not achieve the level of expenditures on education and health care that the Swedes and the others did, nor was its labor force as highly skilled. He also said that Iceland’s democracy is not as robust as that of the others. Compared with the citizens of Sweden, Denmark, and Norway, a much higher percentage of Icelanders regard their own government as corrupt.

For Thorvaldur, the cooperative movement’s decline in the second half of the last century was a sign of this corruption. Co-ops had once been a major force for Iceland’s economic development as it had been the others. Iceland’s co-op leaders, however, began to leverage political connections to gain subsidies while maintaining the movement’s inefficiencies, instead of innovating to solve problems. He saw cooperatives operating like “crony capitalists.” Sweden, Denmark, and Norway, Thorvaldur said, would not tolerate crony capitalism.

Despite Thorvaldur’s points, I still include Iceland in most of this book’s references to “the Nordics.” Except for Finland, whose ancestry is quite different, the Nordics descended historically from the ancient Vikings, and Iceland retains the closest cultural connection to the early Vikings of any of the four. Icelanders still read eddas and sagas in the spoken language of the ancient Vikings.

Iceland’s everyday egalitarianism is reflected in everyone’s being on a first-name basis with everyone else. The Norway I first encountered in the late 1950s placed such importance on honorific titles so important that I even gained a title when I became
a university student. Whereas even the listings in the Icelandic telephone book are alphabetized by first name.

All four nations founded by the Vikings have similar parliamentary systems, but Iceland was the first among them—indeed, first in the world—to invent a national representative assembly where decisions are made through deliberation and voting. In 930
AD
, and still, Icelanders call it the
Allting
, the assembly of all.

The actual site of the original
Allting
lies in a starkly magical valley where the European and American tectonic plates meet. The giant plates forming the earth’s crust have been separating from each other, at the rate of a centimeter per year, at that very spot. It was a perfect place to launch a governance structure so attractive that a millennium later representative democracy could still inspire movements to shake up kings, dictators, and oligarchs alike.

Thorvaldur believes that despite their historic head start, modern Icelanders have not evolved the highest degree of democracy in the world. Iceland became top-heavy, its political class overlapping with owners of fishing fleets.
¹⁵
In the early 1900s, unlike in Sweden and Norway, Iceland’s trade union–linked party, the Social Democratic Alliance, had been unable to form a government.

I acknowledge that the minority position of the political left is one more reason to question Iceland’s inclusion among “the Nordics.” However, Icelanders resemble Swedes and Norwegians one crucial way. In their march toward a modern economy, Icelanders also gained ownership of major banks, via the state and cooperatives.

The people’s agency in the economy, however, was undermined as the twentieth century came to a close.

Iceland’s 1995 election planted the seeds of its 2008 crisis. The victors, a center-right coalition, began to deregulate the financial sector. Unlike their Viking cousins’ earlier behavior, Icelanders took it to an extreme. Iceland joined the international trend initiated by the United States’ repeal of the Glass-Steagall Act (an act that separates investment banking from ordinary banking). By 2003, the government fully privatized most banking. Now Icelandic bankers were free to take ownership stakes in their customers’ companies.

Iceland’s economy was especially strong in the early years of the twenty-first century: pharmaceuticals, fish processing, retailing, real estate, transportation. Building on that economic credibility, Iceland’s largest banks opened branches abroad and even bought foreign financial institutions.

Internally, the bankers created a reckless culture for their executives by offering stock-options and other compensation policies that incentivized risk-taking. They made the Norwegian and Swedish banks’ mistake of creating a real estate bubble, but they also doubled down on those bad bets by making high-risk loans to holding companies.

As the economy heated up, Iceland’s government lowered the traditionally high taxation rates. The popular perception of what was happening was a boom, so ordinary Icelanders joined in by buying consumer goods on credit and failing to save, increasing the underlying vulnerability of the economy.

The now-private banks leveraged their capital base to buy up banking assets worth several times Iceland’s gross national product. Landsbanki handled its difficult cash-flow situation by opening
an online subsidiary, Icesave, offering high interest rates and taking deposits from 400,000 people in the UK and the Netherlands. (Iceland’s entire population is 330,000.) Other banks followed suit. In effect, the banks themselves were operating a Ponzi scheme.

By 2007, Iceland had become the fifth-richest country in the world. Its per capita income was 60 percent higher than that of the United States. The
Wall Street Journal
told its readers about “the greatest success story in the world” and called it “Miracle on Iceland.”
¹⁶
President Ronald Reagan’s economic advisor Arthur Laffer’s endorsement of Icelandic financial strategy was titled, “Overheating Is Not Dangerous.”
¹⁷

But it was dangerous. Even allowing for the fact that the U.S. Wall Street crowd was egging them on, Icelanders had—in their own “neighborhood”—the recent disasters in Norway and Sweden to learn from. Thorvaldur’s father was a former finance minister; he was born into the political class. He told me that during the go-go years prior to the 2008 collapse, not once did he hear anyone refer to Norway’s and Sweden’s disastrous 1980s flirtations with neoliberalism.

When Icelanders went shopping for assets internationally they especially favored buying in the UK. In 1976, Iceland won its third Cod War with Britain over who had the rights to fish within what Iceland claimed to be its territorial waters. The Cod War left some bitterness. How sweet it must have been for Icelanders now to buy British assets.

Iceland also had a historic grievance against Denmark, their
colonial master for 600 years. A few Icelanders told me mean jokes about Norway, their senior partner in an economic alliance called the European Economic Area (EEA), where equality-hungry Icelanders believed that Norway pulled rank and failed to adequately consult its junior partner.
¹⁸
It must have been exhilarating to be loaded with cash and buy assets in Denmark and in Norway.

Snapping up assets internationally gave rise to the phrase “Viking capitalists,” referring (positively in some Icelanders’ minds) to the ancient practice of raiding other countries and seizing booty.

I turned to political scientist Eirikur Bergmann, author of a leading book on the Icelandic boom and bust,
¹⁹
to get more perspective. Eirikur is Director of the Centre for European Studies at Bifrøst University, and he greeted me in a high-rise office building largely tenanted by other academics, a stone’s throw away from the wharves and surf of the North Atlantic. Still a young man, he was in blue jeans and an Icelandic sweater.

Eirikur reminded me that Iceland is an old nation but a new republic, only gaining its independence from Denmark in 1944. Iceland can also be seen as a micro-state, with only 330,000 people to uphold a unique language and culture. Many regard Iceland’s sovereignty as fragile.

Icelanders’ insecurity, Eirikur said, helps to account for their nationalistic politics, their resistance to joining the European Union, and their excitement about suddenly appearing, a decade ago, to be on the top of the economic heap—
Viking capitalists!

In 2006, both Fitch Ratings and the Danish Bank publically criticized Icelandic banking behavior. Iceland’s chamber of commerce went to Columbia University Business School professor Frederic Mishkin and paid him $124,000 to coauthor a report on Iceland’s economy and banking systems. In the report “Financial
Stability in Iceland,” Mishkin offered an optimistic picture of Iceland’s future. He failed to mention who was paying him to write the report, as shown in the Oscar-winning documentary film about the global financial crisis of 2008,
Inside Job
.
²⁰

In October 2008, just two years after the Danske Bank issued its warning, Iceland suffered one of the worst banking implosions in history. The stock market tanked. Hundreds of thousands of people in Britain and elsewhere demanded their money back.

Iceland’s was the first modern economy in which virtually the entire banking sector went belly up, and making it worse, the currency collapsed.

Unemployment and inflation shot up. Many Icelanders, encouraged by their government and banks, had spent their savings and had nothing to live on. Because the government had lowered taxes, another mistake frequently made by neoliberals, Iceland had no “rainy-day fund” for contingencies. Some in the Western mass media described Iceland as a failed state.