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.