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In Iceland's Fall, We Sin All

by rifek Sun Apr 26th, 2009 at 03:47:59 PM EST

Alright, Iceland's election results are in, and the Independence Party has taken a thumping (not to the extent deserved, as it still received about 23%, but given that 25-30% of US voters still consider Bush to have been the greatest thing ever...) due to its involvement with dead banks and the collapse of Iceland's economy.  And of course that collapse was entirely due to the ignorance and greed of Icelanders.  I don't think so.


Back in the early 2000s, Alcoa approached the Iceland authorities about building a large, aluminum smelter in Eastern Iceland.  This in turn required the construction of a huge, hydroelectric plant, which Alcoa magnanimously offered to finance.  I shall now wait while you read the parts of John Perkins's Confessions of an Economic Hit Man that tell about how he and other such raiders would approach underdeveloped countries, offer to finance projects, wait for the country to default, and then foreclose on the project.

Insert theme from Jeopardy.

There was considerable, local protest arising from fears of environmental, social, and economic disruption.  But Alcoa utilized the usual tactics (selective purchasing of leaders, astroturfing, puff pieces posing as neutral reporting [Note that Anita Roper is a Director for Alcoa.]) and was able to plow through with the projects.

Construction began, and their sheer scale swamped the Icelandic economy.  The government jacked interest rates to 15% to keep the economy from overheating in the face of a tsunami of foreign capital.  Suddenly there was a relatively large carry trade targeting the krona.  This pumped up the krona the same way the yen carry trade has pumped up the dollar.  And every person and company in Iceland who could, sought relief from these interest rates by seeking their financing offshore, and of course they put up their new-found paper "wealth" as collateral.

And then it all unwound, as it had to.  The new assets Icelanders had acquired proved not to be worth what they had paid.  Carriage positions were unloaded.  Offshore lenders got nasty as collateral shrank.  Without the resources of the US or the EU, Iceland could do little more than watch itself circle the drain.  The IMF rode to the rescue, but that amounts to little more than another Alcoa loan.  And the UK had the temerity to retaliate with the anti-terrorist laws.

In other words, Iceland was the target of the same sort of business as usual the developing world has been subject to for years.  Except that Iceland is a nation of blue-eyed white people, has over a millennium of European culture, is a Western democracy.  But the economic results are the same as we have seen throughout Latin America, Africa, Asia, and Eastern Europe.

How is it that Iceland could withstand the economic storm no better than Albania or Vietnam (Put aside the political response at present.  Institutional strength matters, and Iceland has nearly 1100 years of representative government.  Even at that, people were in the streets.)?  Perhaps it is time to acknowledge that the system is the problem?  That if we leave it to its own devices, it will ultimately consume everything, even us, like Logi Fire?

Update [2009-4-28 16:50:48 by rifek]: 28 April Addendum: Trond Ove linked to an article on Iceland Weather Report (which it turns out is more than a weather report) and suggests I cite to it as my main source. Actually the roots of this diary are a bit more complex.

When it all hit the fan in Iceland last Fall, I awoke from my usual stupor and wondered what was going on in the land of some of my ancestors. What was all that Icelandic speculation that had been flying around? After all Reykjavik is not Dubai and cod is not petroleum.

So I scratched around a bit and found that the central bank, in an effort to head off inflation, had jacked up interest rates until they hit 15% in September 2006 (I focused on two years earlier because that was when the US banks began applying the brakes as they realized that maybe those no-doc loans they had been making weren't such safe bets after all.). Then I saw that a lot of speculation resulted from these elevated rates. And I saw that the inflation closely tracked the Alcoa development boom. And I went, "Oh." And then I was distracted by shiny objects.

Until the election, where I found myself reading about the backlash against the banks and found myself thinking, "You know they screwed up, but that's not not where this mess started."

And the rest is diary.

I doubt the movie Dreamland will ever get here, so I'll go find a copy of the book.

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An interesting take. It fits the facts.

One thing you might add is that the reason Alcoa established a smelter in Iceland was the fact that electricity is virtually 'free'. Smelting aluminum is very very energy intensive.

A large harbour was also built for incoming bulk ore.

You can't be me, I'm taken

by Sven Triloqvist on Sun Apr 26th, 2009 at 04:11:32 PM EST
... the equipment to exploit a renewable power source and then foreclose on the loan when it cannot be serviced.

If its business as usual for African and smaller Latin American countries, Alcoa will now be selling Iceland consumers electricity generated with Icelandic natural resources, with much of the proceeds flowing offshore.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Apr 26th, 2009 at 05:11:37 PM EST
[ Parent ]
Icelanders already have all the free electricity they need AFAIK.

You can't be me, I'm taken
by Sven Triloqvist on Sun Apr 26th, 2009 at 05:16:05 PM EST
[ Parent ]
... one thing transnational corporations do is to take advantage of financial crises to gain ownership of existing productive assets at fire sale prices. If it was Paraguay or Côte d'Ivoire, that's exactly what we would be expecting to start happening.

IOW, Iceland may have all the sources of electricity that it requires inside its borders ... that is no guarantee of the means of producing that electricity remaining in Icelandic hands.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Apr 26th, 2009 at 06:48:17 PM EST
[ Parent ]
Except that unlike Paraguay and Côte d'Ivoire, Iceland is populated by white, Christian people who speak English, not brown communists who speak funny.

So if the Icelandic government decides to renationalise, tax or - perish the thought - prosecute some of those companies, it would be too politically expensive to do a Pinochet on them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 26th, 2009 at 07:09:58 PM EST
[ Parent ]
... with its long standing Democratic institutions that got the Allende treatment.

Whether Iceland can resist a standard transnational corporate resource grab, I'd be surprised if the grab is not made. I hope that it can resist.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Apr 26th, 2009 at 09:24:47 PM EST
[ Parent ]
You will notice that Iceland's democratic traditions or lack thereof never featured in my analysis. What makes it politically expensive to go after Iceland is that it's got too many white, Christian people. (Or rather, it's located in a part of the world where most Americans think there's a lot of white, Christian people - I doubt the actual demographics matter any more than the length or depth of their democratic traditions.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 27th, 2009 at 03:39:40 AM EST
[ Parent ]
But it also makes it a bigger win for a TNC that succeeds in screwing Iceland out of some valuable resource ... a parasite often does better in a host with few other parasites.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Apr 27th, 2009 at 08:45:50 AM EST
[ Parent ]
Only assuming they get to actually keep it. We aren't - quite - living in a Shadowrun scenario (yet): If a transnat goes up against a determined, sovereign government, the transnat is going to lose.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 27th, 2009 at 02:19:18 PM EST
[ Parent ]
There are more binding constraints on a small island economy than on a large economy, which gets back to the tacit premises of the "Iceland is too 'Western' to fall prey" argument, which is that if Iceland puts up a determined resistance, it will find a sympathetic hearing in countries that are large enough economically that a transnational has to take their concerns seriously.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Apr 27th, 2009 at 11:03:31 PM EST
[ Parent ]
defense of Iceland.  

The media narrative will run on very different lines, you may be sure.  If Alcoa even gets mentioned, it will be as the Great Benefactor.  

Americans know nothing about Iceland, and their imaginings can be manipulated.  

The Fates are kind.

by Gaianne on Wed Apr 29th, 2009 at 02:40:33 AM EST
[ Parent ]
But doing a Pinochet on Iceland will piss off Norway no end. And Norway has oil.

Oh, and if you're really unlucky, pissing off Norway might piss off Germany too. And they have ball bearings.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 29th, 2009 at 03:07:39 AM EST
[ Parent ]
They should tell the IMF and the banks to fuck off, and enter into partnership arrangements with bauxite producers to supply bauxite in exchange for a percentage of the refined aluminium.

Then they could sell a few million Units redeemable in aluminium to the Chinese etc and pay off as much of the loans as is reasonable to get the monkey off their shoulder.

Alcoa could stay as an operating partner on a production share, or a competitor would probably do it instead - certainly a consumer nation.

Essentially Iceland would then be exporting their energy in the form of aluminium.

They could solve most of the rest of their problem - which is the absolutely surreal housing debt (index-linked principal!) by unitising land rentals as I suggest.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Apr 26th, 2009 at 07:34:42 PM EST
The new government is looking to hire expert ministers.
by rifek on Mon Apr 27th, 2009 at 09:38:49 AM EST
[ Parent ]
Experts in keeping the Icelanders in hock

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Apr 27th, 2009 at 10:35:50 AM EST
[ Parent ]
Hopefully, another flavor.  You might send the new Finance Minister a nice proposal on how to accomplish exactly what you have proposed before regarding conversion of the debt into shares in a new LLP.  That would be much harder for Alcoa to fight in court.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 27th, 2009 at 12:41:41 PM EST
[ Parent ]
Or he could send the new Prime Minister a CV...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Apr 27th, 2009 at 12:46:30 PM EST
[ Parent ]
Second!  But I didn't want to suggest such a massive commitment, given what I have come to understand of his preferences.  But functioning as a consultant on retainer could be as effective and less onerous than taking a ministerial role.  Off with the CV, Chris!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 27th, 2009 at 02:13:07 PM EST
[ Parent ]
A happy story goes that Mexico's Tequila crisis was energetically saved by the $50 billion assistance package, and within 3 years the loan was returned, with the US earning a profit of $500 million.

Where did that $500 million came from? It came from hard working Mexicans, of course. Would Adam Smith recognize here the often quoted taxation of productive enterprise?

Then came the 1997 Asian crisis - of those hapless, inept, evidently lazy Asians. Their economies were helped back into track within 2 years, with a handy profit of fire-sold local enterprises.

With crises being so profitable, little wonder that the crises become ever more elaborate.

by das monde on Sun Apr 26th, 2009 at 10:46:30 PM EST
Great diary, rifek!  I was not aware of this backstory.  Has this information appeared in print and on TV in Iceland?  It is a powerful political message.  It was not just that entrepreneurs and politicians in Iceland got greedy and tried to buy the world.  The were instead the victims of a hit by a TNC and all of the citizens have suffered to the end that Alcoa gets cheap geo-thermal power for its exclusive use.  Properly managed, this has the potential to turn Chris Cook's ideas into a national demonstration project.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 27th, 2009 at 12:47:06 PM EST
The Telegraph's Ambrose Evans - Pritchard (aka the "Hammer of the EU") - had an interesting take which illustrated well exactly how interested the Chinese etc would be in acquiring Aluminium "Units" in addition to the relatively limited physical metal.

A 'Copper Standard' for the world's currency system? - Telegraph

The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.

Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".



"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Apr 27th, 2009 at 01:17:05 PM EST
[ Parent ]
"Copper Standard"
Pennies from Heaven!  At the rate things are going both pennies and nickles are likely to be much more valuable for their metal content than for their nominal value.  The mint loses money as it is on minting those coins.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 27th, 2009 at 02:07:44 PM EST
[ Parent ]
... $1 and $5 coins.

When we first started using pennies as the smallest unit of money, they could actually BUY something. Now vending machines don't even take them, and people leave them in little penny holders in the servo to avoid carrying them around.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Apr 27th, 2009 at 02:11:17 PM EST
[ Parent ]
We'll probably have to in another year or so.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 27th, 2009 at 02:15:17 PM EST
[ Parent ]
A penny's worth of copper to give a yellowish hue to a dollar coin spreads the copper around much more thinly ... and making the coin slightly bigger than and slightly thicker than a quarter makes a much more sensible coin than the big platters of four times as much make believe silver as a quarter, and one that would make the vending companies much happier as well.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Apr 27th, 2009 at 03:38:28 PM EST
[ Parent ]
look like copper, but also contain a white metal which I believe is zinc.  It melts out and separates when heated.  

All the same, they are worth more as metal than as currency.  

The Fates are kind.

by Gaianne on Wed Apr 29th, 2009 at 02:48:53 AM EST
[ Parent ]
isn't that why it's illegal to collect them and melt them down?
or is that myth?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Wed Apr 29th, 2009 at 03:14:02 AM EST
[ Parent ]
In most countries it's illegal to destroy the physical tokens used to represent money, because the central bank needs to know how many such tokens are around in order to make monetary policy, in order to conduct token switch-overs (when you get a new edition of bills - say with improved security features.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 29th, 2009 at 03:28:25 AM EST
[ Parent ]
Don't need to buy the metal, just controlling interests in the companies that dig up the stuff.  Such as Chinalco's growing stake in Rio Tinto.
by rifek on Mon Apr 27th, 2009 at 05:47:29 PM EST
[ Parent ]
That's one way of doing it, but they'll still get screwed by the management.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Apr 27th, 2009 at 06:13:36 PM EST
[ Parent ]
With a 1/5 stake, that may prove less than simple.
by rifek on Mon Apr 27th, 2009 at 06:47:12 PM EST
[ Parent ]
People are just beginning to connect the dots.
by rifek on Mon Apr 27th, 2009 at 05:53:30 PM EST
[ Parent ]
Has this information appeared in print and on TV in Iceland?  It is a powerful political message.

There is an icelandic documentary movie just released about it.

See http://icelandweatherreport.com/2009/04/quite-possibly-the-most-important-icelandic-film-ever-made.h tml

And rifek, you should probably update your story and list Iceland Weather Report as your main source.

by Trond Ove on Tue Apr 28th, 2009 at 10:02:38 AM EST
[ Parent ]
Weel, I would, except that it wasn't.
by rifek on Tue Apr 28th, 2009 at 02:15:06 PM EST
[ Parent ]
Telegraph: Former Iceland bank governor David Oddsson defends role in meltdown

One of the disadvantages of being a hate figure in a very small country is that everybody knows who you are and where you live.

"I am famous in Iceland's community of 300,000, and two or three months ago I used to have two or three guards with me," he says, sipping coffee in his lounge. "Now, though, I go where I like. When this was first going on people would cry hostility towards me, but today I get a very positive reaction. People were angry and they needed to find out who was mostly to blame."

But he's still an arrogant shit...


You can't be me, I'm taken

by Sven Triloqvist on Mon Apr 27th, 2009 at 02:55:28 PM EST
Yep, and he probably honestly believes he had no part in this mess.  Oddsson is an odd son of a...anyway.
by rifek on Mon Apr 27th, 2009 at 05:50:58 PM EST
[ Parent ]


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