Politicians who lack clear political vision tend to go astray when there are many complex questions to ponder.

When Milton Friedman visited Iceland in the nineteen-eighties he was asked what solution he had to Iceland's economic problems. Friedman gave a simple answer: "The solution is freedom". The freedom of the individual and the freedom of the nation are the foundation of all well-being--spiritual and material alike. The motive behind attacking the Treasury deficit was not only its bad economic consequences. An equally important consideration was that a persistent deficit is a sure-fire recipe for higher taxes in the future, and higher taxes erode the freedom of the individual. Necessary as taxes may be, we must not forget that by their very nature they restrict our freedom... In the early nineteen-nineties, corporate income tax was 50 percent. The Government cut it first to 30 percent and later to 18 percent, and Treasury revenues and economic growth actually increased as a result.

Personal income tax has already been lowered and during the current government's term of office it will be reduced by a further four percentage points. An income tax surcharge on the highest incomes will also be removed, and inheritance tax has been reduced and harmonised at a level which will never exceed 5 percent. In addition, it is planned to reduce value-added tax on food, which will benefit the lowest income groups in particular. I am convinced that these tax cuts will greatly strengthen the Icelandic economy well into the future. And not just the economy. The whole of society flourishes and becomes more diverse when each and every one of us keeps more of what we earn and can dispose of it as we please.

The political dialogue in the last century revolved around the dispute between those who believe in control and those who believe in freedom. Between those who regard the state as the be-all and end-all of everything, and those who are convinced that freedom of word and deed is the foundation for progress and prosperity. The privatisation debate touches on the essence of this conflict. When the Government launched its privatisation programme it encountered heavy political opposition. Left-wingers found fault with everything, and every time some state enterprise was supposed to be sold off, in their view precisely that enterprise happened to be the cornerstone of society. It did not matter whether a wool factory, printing company or fish meal factory was being privatised--the counter-argument was always that market forces were now taking over an important public service. So it was necessary to proceed slowly. There is little point in hoisting all the sails only to run aground on the nearest rock. But gradually the public noticed that the doomsday prophecies did not come true--far from it, service improved and expanded after privatisation. And support has steadily been growing for the view that market forces need to have as much say as possible. That a special case must be argued every time that the state undertakes to provide a certain service, such as health care or education.

He then goes on to gloat about the success of bank privatization:

I am convinced... that it would not have been appropriate to sell off the state-owned commercial banks at an early stage. The nation needed to have reached a broad understanding that it was advisable for the state to release its grip on this important market. The point has now been reached where the state has withdrawn completely from operations of financial companies, apart from housing loans, and the Icelandic financial market is much stronger as a result. Banks are now more capable of backing Icelandic business and have been expanding overseas on a growing scale. This is a very positive development which shows beyond all doubt the enormous force unleashed when the state entrusts individuals with freedom of action.

Here is an interview Friedman gave on Icelandic TV in the 1980s.

(If the embed doesn't work for you, here is the direct link)..
More recently, another economist was publishing a paper specifically about Iceland, but on a different note. Joseph Stiglitz's "Monetary and exchange rate policy in small open economies: the case of Iceland (2001)" was discussing risk reduction:

This paper discusses monetary and exchange rate policy and the financial risks that are involved for small open economies in the current environment of less restricted and increased volume of global capital movements. It then goes on to analyze the policy interventions that are available to reduce and manage these risks. The specific case of Iceland is discussed within this framework. While it might be preferable if the problems posed by global financial instability are addressed by reforms in the global financial architecture, significant reforms are not likely to emerge in the near future. In the meanwhile, countries such as Iceland must take responsibility for their own welfare by managing these risks. That entails actions that reduce the likelihood of a crisis occurring and that reduce the costs incurred when the crisis occurs. Tax and regulatory policies (including financial sector regulation and disclosure regulation) can and should be used both to reduce the likelihood of a crisis and to help manage the economy through a crisis. Such regulations can affect short-term capital flows, which have been at the center of recent crises. There are arguments for the use of price-based interventions and controls imposed through prudential banking regulations. But reducing the risks faced by a country requires even more extensive action: it entails focusing on appropriate bankruptcy codes, exchange rate regimes, and designs of financial systems.

This however was the sort of discourse dismissed by the reigning Friedmanites, that might have averted the worst of the crisis.

Of course some people in Iceland as well (the Left-wingers Oddson denounces in his speech) were actively opposing this but to no great avail. Steingrímur J. Sigfússon chairman of the Icelandic Left-Green movement, recently wrote about the policies that were already underway as Oddson spoke at the AEI:

In the years 2003-2004, government-supported projects of heavy industry investments in aluminum smelters and big hydro-electrical and geothermal power plants set off inflation and increased overheating pressures.  This was followed by tax reductions, benefiting mostly the high-income classes and owners of big estates and capital.  This, of course, added to the increasing inflation.  The housing market was booming and there was also mismanagement in that area.  On top of all this, the financial sector, based on newly privatized banks and investment funds, expanded very rapidly and bought up subsidiaries overseas that expanded to big operations in the UK, Scandinavia, Continental Europe, and even in the US.

This led to a huge hypertrophy of the banking and financial sector relative to the Icelandic GDP.  Many alarming signs were hovering above our heads in the years 2005, 2006, and 2007, but no measures were taken.  The atmosphere was a thoroughly laissez-faire one.  The government and leading members of the business sector seemed to think that the upswing in the economy and good years would last forever.

(Both the AEI talk and the Stiglitz paper were via Toby Sanger's article in AlterNet, which has a great recap of the situation).

I hope our Nordic contingent might be able to add more regarding the popular attitudes that allowed the crisis and the effect of the crisis in everyday life. Anyway it's always useful, even now, to be able to point out the kind of ideoleptic nonsense behind this collapse - especially in a forum such as EuroTrib that was yelling and shouting about the precipice the whole world economy was being driven to by Friedman's evil minions the world over.