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The Progressive Economics Forum

Milton and the Meltdown in Iceland

I was intrigued by what is happening in Iceland, so the following is a piece I’ve written on it.  It has some introductory macro-economics in it, which I think it is good to keep in perspective as we consider the frantic attempts being made to prevent an economic depression.

The economic and financial collapse of 2008 is shaping up to be a real life testing ground for the two titanic theories of 20th century economics: those of John Maynard Keynes on one hand and Milton Friedman on the other and their respective followers.

Keynes’s real analysis was more complicated and nuanced, but his main work, the General Theory of Employment, Interest and Money, provided a theoretical basis for the New Deal policies of deficit spending and investments in public works that helped countries recover from the Great Depression.

While Keynes certainly didn’t dismiss the role of monetary policy in countering an economic downturn, some of his followers (notably 2008 Nobel Economics prize winner Paul Krugman in relation to Japan) highlighted the possibility of a “liquidity trap” making reliance on traditional monetary policies, such as cutting interest rates, ineffective.

Milton Friedman, in his Monetary History of the United States, argued that the Great Depression was primarily caused by negligence on the part of monetary authorities such as the U.S. federal reserve, who didn’t do enough to counter an ordinary financial shock and bank failures by expanding the money supply.

Keynes’s theories, though often misapplied, provided the foudnation for much macroeconomic theory and policies in the capitalist world from the 1930s until the late 1970s when the oil-price shock and stagflation hit.

Friedman’s economic views about restricting the role of government, cutting taxes, low inflation, deregulation, privatization and the benefits of free markets spearheaded a reaction against Keynesianism and have considerably defined economic policy since the 1980s.  While his narrow form of money supply monetarism was quickly abandoned in the early 1980s, most governments have relied primarily on monetary tools instead of fiscal tools for their macroeconomic policies over the past few decades.  

Alan Greenspan, former head of the U.S. federal reserve, had no particular expertise in economics, but was a disciple of libertarian Ayn Rand and an advocate of Friedman’s economic policies, including tax cuts and deregulation.  He is widely considered to share the blame for creating the conditions that resulted in the current economic collapse.

Greenspan’s successor as chair of the federal reserve, Ben Bernanke, is also a follower of Friedman, but is an accomplished economist and interestingly enough an expert in the economics of the Great Depression.  Although his focus has been on other issues, such as the importance of credit markets, he has stated that the federal reserve was responsible for causing the Great Depression and making banking panics during it “much more severe and widespread.” 

Bernanke is now one of the people in charge of what is probably the most expensive experiment in human history, with a cost of well-over $1 trillion to the U.S. Treasury alone and rising.  (This leaves the cost of the $6 billion CERN large hadron collider far behind in the microscopic dust).

Although we are in the midst of them, it appears that these experiments inspired by Friedmanite economics are not meeting with much success.   Each action taken by the U.S. Treasury and federal reserve until mid-October was met with a further decline in stock prices.  Stock markets did not start to recover until much more aggressive action was taken by European nations, including effective nationalization of major banks, and then followed by the U.S.   This is far beyond what Friedman and his followers would have advocated.

What does this all have to do with tiny Iceland, one of the most physically isolated countries in the world with a population of only 320,000?

Iceland–better known for its geothermal hot springs, abundant fish, all-night raves, and eclectic musicians such as Björk and Sigur Rós–quickly became the first and foremost casualty of this economic and financial meltdown.  The country is now essentially bankrupt after taking over its three major banks to prevent them from failing.  These banks owe more than $60 billion overseas, about six times the value of Iceland’s annual economic output.  As a professor at London School of Economics said, “No western country in peacetime has crashed so quickly and so badly.” 

This made me wonder: what on earth happened to get Iceland and its banking sector into such a state?

It turns out that Iceland, despite its coalition governments and Nordic social mores, became a poster child for Friedmanite economic policies from the 1990s on.  Friedman himself visited Iceland in 1984 and participated in a lively television debate with leading Socialists.  He inspired a generation of young conservative intellectuals in Iceland who came to power in 1991 through the Independence party and have run the government through different coalitions since then.

Under Prime Minister David Oddsson and explicitly inspired by Friedman, they implement a radical (but now familiar) program of privatization, tax cuts, reductions in spending and deficits, inflation control and targeting, central bank independence, free trade and exchange rate flexibility.  Corporate taxes were cut from a  rate of 50% down to 18%.  Privatization and deregulation were driven directly through the Prime Minister’s office and the major banks were privatized early this decade. 

At first, the policies seemed to be very successful.  The economy grew at a strong pace, rising until Iceland achieved one of the highest per capita GDPs in the world.  In 2007 it also topped the score for the UN’s Human Development Index.

Iceland rocketed up to the top ten rank in the indexes of economic freedom designed by the Fraser Instittue and the Heritage Foundation.  It was lauded by the conservative Cato Institute for its flat taxes, privtaization and economic freedoms–and Naomi Klein was criticized for not mentioning it (along with Ireland, Estonia and Australia) as an example of the success of Friedmanite economic policies. 

Icelandic banks and businesses, with the support of their government, expanded aggressively overseas, particularly into the U.K. and the Netherlands. The banking industry and private businesses flourished and created a number of billionaires on the island.

 Then it all came crashing down.

Short-term interest rates and inflation have both hit 14% and the country’s currency has lost half of its value.  As a result of its economic and financial meltdown, iceland now has an external debt equivalent to about $200,000 per person with virtually no prospect of repaying it.

This wasn’t caused by the U.S. subprime crisis or by what is happening at the former centre of free market capitalism on Wall Street, but instead by the same Friedmanite free market policies being applied in one of the smallest countries in the world.

What is somewhat incredible is the apparent lack of remorse or self-reflection and doubt being expressed by the ideologues who put these policies in place and caused this economic and financial meltdown.  Amazingly, many neo-cons continue to argue that this was caused by regulations that were too strong, or by a confluence of unlikley events, including a rise in “leftist attitudes“.

There seems to be a belief among many that a financial market bailout will soon relieve the credit crunch caused by the subprime fiasco and then we can go back to business-as-usual.  We don’t need to look too far back in time or too far abroad to see how misguided that view is.

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Comments

Comment from Travis Fast
Time: October 14, 2008, 12:55 pm

Great post by the way.

Comment from Paul Tulloch
Time: October 14, 2008, 1:46 pm

Great stuff Toby. I just wanted to add that whoever picks the winners of the Nobel prize made a great choice in Mr. Krugman. His viewpoint and brush strokes of economic wall hanging very much share the same paint can as those of us on this blog site.

It was quite refreshing seeing such perspectives getting more than just a passing acknowledgment. I take his winning as a victory for all on this side of the fence and congratulate the progressive discourse on hanging around amidst all the unfriendly stone throwing and being cast aside.

With the banks now being nationalized what will be the next step?

I have already heard the rumblings from the right wingers that this is just a temporary necessity.

If we had a republican government with even a slim hope of winning in the US then I might agree with them. As once the state intervenes and saves capitalism from the neo con capitalists, it will be business as usual.

However, the important point for the incoming democrats are what kind of lasting regulation of capital will we see. Is this all just a an illusion that once the working class, aka “mainstreet”, (we got to fix the American discourse, call it what it is, the working class! damn) bails out the financiers, what exactly will the political process of compromise between these two cemented as. It concrete has been torn apart in a rapid fashion, and once we get the temporary fix needed, assuming their is one, which I am not so sure of, will we be having a long hard look at the make up of our economic forces and the regulation of them.

I hope for the world’s sake we see some political space within the democrats and others across the world start towards the long systemic deep thought needed for such structural change. I would have hoped more of a back lash to this could be mounted within our own country, but I am still sticking with my original prediction, HARPER MAJORITY, but a slim one at that. I hate being a pessimist and I hope I am wrong.

I know right now many think this is all just temporary but how long will it be before we are back to this spot again. Change! Change.

How long did we wander the earth as hunter gather’s, will will never be able to wonder the earth even but a small small fraction of that time with a global system that is as phracked up as the system what we have melting around our feet.

Election day rant as the lot of blue, red, and a smattering of orange, and green signs slowly flitter back and forth amidst the strong winds- of change. Some have fallen over, some so nicely placed, the odd one defaced. These signs are what give us faith that it all does matter, at least for the 60% that try.

paul

Comment from travis fast
Time: October 14, 2008, 2:24 pm

Paul are you serious about the other Paul?

The work he got the Oscar for argued that even under extreme violations of perfect competition and unequal distribution of the gains from trade, a policy preference for free trade was superior to managed trade. He is no friend of mine.

Comment from Todd Archer
Time: October 14, 2008, 6:00 pm

What Travis said.

The guy’s a good-enough liberal economist, but I really can’t feel much kinship there.

Comment from Paul Tulloch
Time: October 15, 2008, 2:59 pm

As I stated, we do dip our brushes into a paint can that has a similar colour. Perhaps not for every wall that needs covering, however when he uses other colours I am not inclined to use, I am not as forthright with my endorsement of his craftsmanship.

I will say this about Krugman, he is a least a step in the right direction. Given the soap box, he has done an amazing job within the melee of right wingers.

So yes I am glad for the media attention he gets winning the award but not for the work he won it for. Does that make sense?

Of course I am not for free trade, in fact I am am working on an initiative to broaden the concept of managed trade into the realms of fair trade. I am working with some unions to grab hold of the fair trade initiative with a bit more robustness. Given the current forces, we are undoubtedly going to see some protectionist movements, that will be needed to balance the forces pushing for free trade. However I think functionally, the labour movement should start pushing for fairer trade. Yes it is but a fledgling initiative but the qualitative happenings can springboard into making a necessary quantitative change.

The whole subject of fair trade is quite appealing and amazing reading some of the case studies that have been implemented. How ever the concept of “go big or go home” has got to start embracing the current dabbling and must take hold at a wider systemic level.

I do feel that many worthy NGO’s have blazed a pathway forward, we now need to get some dollars and organizations involved to round out the edges and ensure the flows start.

Paul

Comment from Andrew Jackson
Time: October 16, 2008, 7:21 am

Excellent post Toby. Really enjoyed it.

Paul Krugman has metamorphosed from a tight arse super academic economist who poured scorn on the left (expecially ones who drew policy implications from his trade work) to as close as one can get to being a social democrat within the Democratic Party. His most recent book rightly emphasises the important political/ruling class roots of rising inequality and insecurity. It is no bad thing to have someone of his ilk get the Nobel,

Comment from Jason
Time: October 16, 2008, 4:16 pm

Iceland has a managed peg, which is something Friedman never advocated.

Comment from Leigh Thomson
Time: October 18, 2008, 6:48 am

Bingo Jason, that’s probably a key part of what the IMF and G7 want dismantled, in Iceland and globally, that they know will go over like a brick in melting glaciers. They’ve not been releasing details of their plan, nor the ‘liberalizing’ EU deal. A lot of collective ‘figuring out’ can happen on blogs…

thanks,L

Comment from James Swanson
Time: October 21, 2008, 8:51 am

James A. Swanson, Los Altos, California, USA
http://www.bushleagueofnations.com [for FREE downloads of entire book]

America needs to listen better to its Canadian friends, including Toby Sanger. And America’s economic navigators had better heed and learn from the Iceland disaster, a “dead” canary in the coal mine.

Although no one forced the Icelandic neocons to follow their neocon nitwit counterparts in the United States, apologies to the citizens of Iceland are in order, and Greenspan should be second in line to apologize, after only the U.S. Republican Party (GOP) itself.

America will have to fight and win a long difficult economic war in order to avoid the GOP Great Depression II.

Unfortunately, we are virtually out of ammunition, thanks to the profligate and incompetent policies of Bush, which have their origins in Reaganomics and the quasi-religious GOP mantra that “deficits don’t matter.”

America is not indebted to Reagan—America is in debt because of Reagan.

Because the federal discount rate is already so low, there is little additional stimulus to be achieved by lowering it further. (It cannot go below zero.) That ammo has already been “wasted.” Yes, “W” stands for “wasted.”

As for the stimulus created by deficit spending, we are already ingesting a catastrophically high level of that particular “cocaine”—and, unfortunately, we are not even getting a “buzz” from it.

In the fiscal year just ended (2008), Bush set another record for the largest federal deficit ever, and it appears that the 2009 deficit could double that.

In fact, the 2009 deficit alone could approach the total national debt run up during the entire 200+ year history of the United States prior to Reagan.

This and much more is discussed in, “The Bush League of Nations: The Coalition of the Unwilling, the Bullied and the Bribed – the GOP’s War on Iraq and America,” by James A. Swanson (2008, CreateSpace Publishing, 448 pages).

As a gift to patriots everywhere, the entire book can be downloaded for FREE at http://www.bushleagueofnations.com. Please pass along the good news.

I ask for nothing in return, except that you consider using my book to help kick out America’s worst political party ever.

Jim Swanson
http://www.bushleagueofnations.com

Comment from Toby Sanger
Time: October 21, 2008, 5:25 pm

Thanks for your comments and especially to Andrew for the excerpts he provided of OECD reports on Iceland in his subsequent post.

What is also interesting are the IMF’s financial stability, selected issues and article IV consultation reports. They tended to be a bit more concerned than the OECD about the financial health of their newest client.

I also wanted to thank Jason, because even though he was wrong (Iceland DOES have a floating exchange rate), his comment forced me to look into when Iceland shifted from a managed peg to a floating exchange rate for the krona.

(The answer was March 2001, shortly before the bank was made largely independent. For future reference, the IMF has a classification of exchange rate and monetary frameworks at:
http://www.imf.org/external/np/mfd/er/index.asp)

In searching for that, I discovered this really interesting (well, for an economist anyway) paper written by Joseph Stiglitz for the Central Bank of Iceland in 2001:
http://www.sedlabanki.is/uploads/files/WP-15.pdf

In it he raises much concern about the possibility of Iceland, as a small island state with a floating exchange rate, suffering an economic and financial crisis from the policies it was following. In the absence of reforms in the “global financial architecture,” Stiglitz outlined a set of pretty reasonable regulatory and tax measures that Iceland should implement “both to reduce the likelihood of a crisis and to help manage the economy through a crisis.” They are good suggestions, with some more broadly applicable.

I did some revisions to this post and turned it into a article, which the Alternet news service has now published:
http://www.alternet.org/workplace/

Comment from Leigh Thomson
Time: October 28, 2008, 7:29 am

Thanks Toby, although apparently Iceland did peg itself, ever so briefly, prior to when Jason wrote.
http://www.bloomberg.com/apps/news?pid=20601085&sid=auCZ.ljDGCJ0&refer=europe .

I was also intrigued by a Globe comment regarding the IMF package that included ‘floating interest rates’. Presumably,for this to be included and noted, the interest rates must have been somehow managed before. And of course today, with the IMF’s ‘help’ the interest rates are up at 18%, supposedly to ‘stabilize the currency’…

It horrifies me to think what IMF conditionalities are going to do to countries like Pakistan and others. Ukraine’s parliament is apparently fighting madly to postpone uptake, as it has always done, perpetually between a rock and a hard place. I think we can safely assume that none of the G8/20-plus a few who are invited to Washington for mid-November meetings are going to want the best for smaller countries. Most of them are colonizers and oppressors of minority cultures in their midst. Which brings us back to the sign-on for a better process at http://www.polarisinstitute.org; the deadline for signing on is today.

thanks again,
Leigh

Comment from Leigh Thomson
Time: October 28, 2008, 8:06 am

Jim Stanford had a particularly good article yesterday in the Globe, including
“One of the many lessons to learn from the current mess, therefore, is that we shouldn’t trust speculators to determine the fundamental prices of our economy. We should make those decisions ourselves.”
http://www.theglobeandmail.com/servlet/story/RTGAM.20081024.wcostanford27/BNStory/specialComment/

Comment from Leigh Thomson
Time: October 28, 2008, 12:52 pm

Thus, to be clear, while Iceland desperately attempted to regain some currency controls in early October, these failed, due likely to the over-riding problems resulting from its Friedmanite bent which you so clearly outlined.

It may be worth looking into before-and-after interest rate policies in Iceland, Pakistan,and other states that may resort to IMF loans. I did gather that the IMF recommends what amounts to privatization of Icelands national housing program. Together with the floating interest rates, it seems like the IMF remains intent on its liberalization agenda.

The Financial Stability Forum and EU proposal for a body of ‘supervisors’ for the IMF doing ‘monitoring as an early warning system’ still leaves financial speculation as the main driver of the system intact.

Thus the link provided to call for a process so that more than just a few hand-picked leaders meeting in Washington are heard, including civil society, and the link to Jim’s article which is helpfully clear regarding the folly of any cluster of leaders leaving core policy up to speculators.

Comment from travis fast
Time: October 28, 2008, 1:43 pm

The FT reports that the IMF is NOT insisting on the privatization of the housing financing program nor pensions nor any other significant social policy change:

http://us.ft.com/ftgateway/superpage.ft?news_id=fto102020080826217315&page=2

“On the banking sector, the IMF has sought assurances on the restructuring of the sector and a review of banking legislation to ensure it conforms with international banking practices, as well as an in depth review of what happened to trigger the crisis.

Crucially, however, the IMF is not insisting on the privatisation of Iceland’s Housing Financing Fund, a state backed mortgage lender.

The IMF has also not placed any deadlines on when the Icelandic state must sell the shares it now owns in the country’s three largest banks – Kaupthing, Landsbanki and Glitnir – which it has nationalised.

These measures are regarded as a sign that the IMF is not attaching punitive conditions on the Iceland as part of its rescue package, the people close to the talks said. “It is not demanding any fundamental changes to the social infrastructure,” said the person. “They say they have learned from South Korea and they don’t want to exacerbate any sharp downturn.””

Comment from Leigh Thomson
Time: October 28, 2008, 4:05 pm

“Directors encouraged the authorities to act promptly on their pledge to reform the publicly-owned Housing Finance Fund (HFF), which will be important to increase the effectiveness of monetary policy. They recommended redefining the HFF’s role in the financial market by separating the social component, which provides targeted support, from the market-based component, which should not benefit from state aid.”
http://www.imf.org/external/np/sec/pn/2008/pn08120.htm
This begs the question, who divided the Housing program into a ‘social’ component and a ‘market-based’ component. Further, by requiring the government withdraw all the funds which it apparently has provided in the past, we see the usual kinds of IMF-inspired cutbacks, though carefully designed so that spinners, like the FT, can say ‘its not [fully] privatized’. It actually looks like a strategy of carving out a niche for private finance to profit from, at course at the expense of low income residents who need fully subsidized housing.

Comment from Leigh Thomson
Time: October 28, 2008, 4:11 pm

clarification, the IMF is apparently requiring Iceland to withdraw all its funds from the ‘market-based component’ of the Housing program. It’s letting the government put funds into the ‘social’ ‘targetted’ component, which, if its anything like what the Harper government is doing, could be simply the media budget.

Comment from Travis Fast
Time: October 28, 2008, 5:27 pm

But Leigh the information you point to was put out on the 10th of September well before Iceland asked for help. All that IMF release relates to is the way in which the IMF and OECD regularly release documents in support of existing government policy so that it appears though such policies have higher order support. I have not been able to find any official document of the terms (indeed how could I it has just been concluded) nor have I been to find an report that indicates that what you are pointing to are actual conditionalities. Not saying they do not exist.

Comment from Leigh Thomson
Time: October 28, 2008, 7:16 pm

The item was part of an ongoing dialogue between the IMF and Icelandic government officials, discussing steps the government was prepared to take, and those which the IMF recommended. At present it’s all we have to go on, as details on the final plan are not available, you’re correct on that point.

Comment from Leigh Thomson
Time: October 30, 2008, 6:55 am

Reviewing the IMF consultations with various consultations, as well as yesterday’s announcement rewarding ‘market access’ countries,
http://www.imf.org/external/np/sec/pr/2008/pr08262.htm , there should be no doubt in anyone’s mind that the IMF remains intent on using the current crisis to prolong existing unhealthy country commitments, and pry open new markets in countries which had retained to date any form of public control in service sectors, including finance.

The audacity of these and other players is simply beyond comprehension.

It was good to see the CLC call out some of the players yesterday on the home front, in their brazen attempt at another public money grab.
http://www.canadianlabour.ca/en/a-safety-net-pensions

Comment from travis fast
Time: October 30, 2008, 10:32 am

Leigh the press release you point to has this to say about eligibility and conditionality:

“Eligibility: Countries with track records of sound policies, access to capital markets and sustainable debt burdens. Policies should have been assessed very positively by the IMF in its most recent Article IV discussions. Given this strong emphasis on past performance, financing is made available without the standard phasing, performance criteria, monitoring, and other conditionality of a Fund arrangement. However, borrowers are expected to continue their commitment to maintain a strong macroeconomic policy framework.”

The Key sentence being:

“financing is made available without the standard phasing, performance criteria, monitoring, and other conditionality of a Fund arrangement.”

The next sentence makes clear such a facility is to be used in shoring up neoliberalism a not to fund new social programs.

The hole point of the original blog post was that Iceland was a poster-boy for neoliberalism. So why would the fund step in and want to cause the current neoliberal government anymore acrymony from its political opponents by insisting on more neoliberalism. Do not get me wrong I suffer under no illusion that the Fund remains committed to neoliberalism. It is just, I think, they recognize that they and the governments they support are very much on the ideological defensive.

Will they. the Fund, try to push around more vulnerable less neoliberal countries who come to them for help. Perhaps. But that was not your original argument.

Comment from travis fast
Time: October 30, 2008, 10:40 am

Should have read ” I suffer under no illusion that the Fund does-not-remain committed to neoliberalism”

Comment from Leigh Thomson
Time: October 30, 2008, 2:10 pm

Travis, the IMF presses its agenda regardless of political opponents in any given country, and will continue to press its agenda regardless of the stripe of any given countries’ political incumbents, past, present, or future. You don’t need to trust me on this, just do a review of their archives, or of IFI watchdog groups.

The reason is that when a structural adjustment program has been implemented, it becomes very difficult to get out of. You perhaps know the history of some countries who have successfully distanced themselves from the IMF, but only by first paying off their debt.

The initial post here by Toby did very well in outlining the elements of Iceland’s economy. Still, the post did not deal with the question I raised on this blog prior to her post, asking why, initially, did Iceland refuse the IMF’s offer of ‘help’.

What is apparent is that the IMF continues with an approach that pries open economies even further to the grasping hand of private greed. Governments, even of economies that are mostly Friedmanite, try to avoid use of the IMF, and only do so when there is no where else for them to turn.

The reason I’m taking the time here to go on about this is because there is a meeting in two weeks in Washington, with consensus already developing amongst participants, to give the IMF a newly refurbished lead role gllbally in dealing with the financial crisis. Thus, it behooves us to understand a) the kind of offers the IMF is giving to countries now during this crisis, b) why one such offer was initially rejected by Iceland, c) how any more of the same can possibly assist any country, even with a few topped up ‘supervisors’ ‘monitoring for early warning signs’.

In fact, what is becoming more apparent with each passing day is that the current crisis is being used in a most cynical fashion, to regain opportunities to extend the global reach of speculation to areas of the economy, notably in energy, water, food and financial services, which were lost in the last WTO round.

So Iceland is important to understand in it’s Friedmanite aspects, but also in its ongoing relationships, that the agenda doesn’t stop there, nor with Greenspan’s mea culpa. It is pushed forward by other players, and given the upcoming meetings where the IMF is likely to be hailed as the coming saviour for the world’s problems, we had better continue to ask tough questions. We can’t simply assume that the IMF is going to play nice guy, though it might try to appear so in the media.

I know that it is hard to get actual info on IMF prescriptions for states- the Halifax Initiative a number of years ago used a Freedom of Information Act request to obtain a copy of the IMF’s prescription for Canada in 1994. It was line for line what Paul Martin implemented in his disastrous cuts of ’95, wherein 12,000 public service jobs were lost, environmental and other service sectors gutted, yet to be restored. That’s what the IMF brings. It hasn’t changed. Please do some extracurricular reading on the subject, then share that with us. thanks,Leigh

Comment from travis fast
Time: October 30, 2008, 2:22 pm

Leigh I don’t disagree with your general point. I took exception to your characterization of the specifics of the Fund’s agreement with Iceland. As they indicate there is no conditionality. It is important that we, on the left, use good examples when arguing against the Fund and its neoliberal project. I do not think Iceland is a good example and I have yet to see evidence that the current deal contradicts this. Which you concede.

And also I should say that claims such as the one you made are singularly counter productive:

“That’s what the IMF brings. It hasn’t changed. Please do some extracurricular reading on the subject, then share that with us. thanks,Leigh”

What should I respond: ” that I have read and forgotten more than you will ever know about the IMF” ?

But that would be similarly counterproductive.

Comradely yours,

Comment from Leigh Thomson
Time: October 30, 2008, 3:09 pm

Travis,
1) the IMF’s new liquidity is available without conditions to any country that fulfills the eligibility criteria. This is a separate project, available for all currently ‘market access’ countries.

2)The IMF’s arrangement with Iceland was not carried out under the new liquidity facility, indeed the liquidity facility was announced later. The IMF dealt with Iceland under its regular program, and included the increase of its interest rate up to 18%, and changes to its Housing Fund which the gov’t of Iceland stated it would comply with.

3) I only conceded that the final write up was not online, perhaps that wasn’t clear. In no way that does that fact absolve people from making sense of the paper trail available.

4) apologies for the snappiness, but sometimes the nature of e-conversations leads to frustrating back-and-forth responses without significant advances in understanding. Can we take this up again when some new info emerges or is dug up? if you’ve got time at present to track back on some of the IMF’s recent negotiations with countries, and can summarize them for us, it would be very helpful.
thanks again,Leigh

Comment from JS
Time: November 9, 2008, 4:03 pm

What every foreign expert seems to neglect or forget is the indexation of the currency, the Icelandic krona. That, along with floating the currency and a 18% interest rate is plain and simple DEADLY. I don’t know why the IMF and the Icelandic government doesn’t see this. It was the high interest rate plus the floating of the currency that attracted foreign speculators in the first place, one of the biggest reasons for the collapse and what’s the solution? Trying to attract back part of the problem.
Unbelievable.

Comment from Baldvin Jónsson
Time: November 10, 2008, 4:29 am

I want to start by thanking all of you whom have written comments here and of course, a special thanks to Toby Sanger.

I’m Icelandic, as you might have guessed from my name, a pretty normal Joe one might say, and I have learnt quite alot just from studying your comments here and the links you have provided.

My question’s to you all, if you don’t mind getting one, are:
1. What would you think would be the best way to rebuild a totally collapsed system?
2. Should Icelanders be looking more into the Walrasian model?
3. Do you think that Iceland might be a brilliant “model” for the experience of trying something completely differenet, for example going back to the economical ideas of the 17th century, where banks in England i.e. where loaning money at the ratio 2:1 instead of 9:1 which seems to be the most common ratio today?

As a novice in economics but one whom desperately would like to see Iceland rise from it’s ashes like the Phoenix, I would be extremely interested in seeing your ideas and thoughts on these matters.

The Icelandic public feels betrayed. The general public had no idea that our “financial-vikings”, as many have called them in recent years, were building their enterprises under OUR responsibility. We find it simply insane that the government new and did nothing about it until far too late. But at the same time we feel lost. Totally confused. People are protesting against many different things now, simply because nobody seem to really understand where to go from here.

Finally, I want to grab this opportunity to apologise. I am truly sorry that the Icelandic banks were not able to fullfill their commitments in the UK, Holland, Belgium and etc.
But please don’t be mad at the whole Icelandic population. In our ignorance, we simply had no idea.
If think loosing a big sum of money feels bad, how would you like my situation then? As it looks now, both me and my children AND my grand children, will spend our entire life’s paying this back. So obviously we are desperately trying to find ways to make this easier.

Any ideas are highly appreciative.

Comment from Daði
Time: November 10, 2008, 5:15 am

Thank you for a great article on the misguided ideologues who got us into this mess.

Hopefully we will learn and not grant them any powers anymore.

Comment from Anna
Time: November 10, 2008, 4:49 pm

I can’t believe the number of people here who think this is a good article.

” Then it all came crashing down… This wasn’t caused by the U.S. subprime crisis or by what is happening at the former centre of free market capitalism on Wall Street, but instead by the same Friedmanite free market policies being applied in one of the smallest countries in the world.”

You provide absolutely no basis for this argument, your main point. How do you even arrive at this conclusion? You offer it merely as a stand-alone statement and expect people to take is as a fact.

As an Icelandic economist I have to say this looks like a poor attempt to convince people of your agenda while misrepresenting policymakers in Iceland.

Comment from Leigh Thomson
Time: November 11, 2008, 7:23 am

Dear Anna, the key word is ’caused’, vs. ‘triggered’. Your comment is very important to the discussion as it highlights how fragile real economies are under a Freidmanite/neoliberal regime. Pull out the brick of poor people’s homes from the bottom, and collapse ensues.
The house of cards could be rebuilt, minus a few of the lighter pieces, bringing in more bricks of the public’s resources, and by digging deeper into the earth’s resources. Which is exactly what the IMF and the ‘powers’ that be are attempting to push further this weekend, and have already in their conditions negotiated with Iceland. Statements coming out of Strauss-Kahn and the G20 communique over the weekend after their prep meeting in Brazil, posted at http://www.imf.org, both retain a condemnation of what they insist is protectionism, but which is more accurately survivalism. All people have a right to access water, food, health care, peace, and to protect their own environments, without private financiers forcing themselves into additional sectors of the economy, profiting from other’s pain, and leaving humans and the earth even more destitute.

It’s time for a model that not only provides oversight for some of the worst behaviour, but which puts those most affected in the driver’s seat. The UN is currently in the process of reviewing the financial crisis with a more inclusive process and is one useful alternative. Please see http://www.halifaxinitiative.org for an effort of over 620 civil society groups around the world. There are many good alternatives.
thanks again for your input here, Anna,
Leigh.

Comment from mharring
Time: January 22, 2009, 7:25 pm

Ugh.

What does Friedman have to do with the casino capitalism that went on in the Icelandic banks? The Icelandic financiers played a good game of “heads we win, tails you lose” with international banking deposits and domestic customers while putting the krona at grave risk. What they did was destroy the krona and the value of everything denominated in krona. I fail to see what this has to do with Milton Friedman.

This happens on Wall St. and Fleet St. too. and it’s an insiders game with plenty of political payoffs. Keynesianism will only keep the game going by putting the funds in the hands of politicians, bureaucrats and their favorite lobbyists.

Comment from AJ Witoslawski
Time: February 28, 2009, 2:08 pm

This blog post has been refuted here:

http://mises.org/Community/forums/t/6618.aspx

Comment from B. Siemiatkowski
Time: March 7, 2009, 5:01 pm

@Anna
“As an Icelandic economist I have to say this looks like a poor attempt to convince people of your agenda while misrepresenting policymakers in Iceland.”

Well, if you are really an Icelandic economist, that would explain why Iceland is in such a big mess right now.

What about a sweeping deregulation of a financial market during the 90s?

@ AJ Witoslawski
“This blog post has been refuted here”

Are you definitely sure that you have pasted a correct link? Because it looks as if you dont even bother to read it. Perhaps if you have done it, you would have know that this blog post of yours is just a typical free-market mumbo-jumbo.

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