Iceland may not have had many people – just 320,000 on an island a little smaller than Great Britain – but by the 21st century it had built itself into a banking powerhouse. In 2008, the house of cards came tumbling down when the financial crisis made its way from the United States, to Europe, and finally to the island that banking built.
Driven by the same speculation and risky lending that drove the United States economy, Iceland crashed hard. Relative to the size of its economy, Iceland’s financial crisis was the largest banking collapse in history. All three of its major, privately-owned banks failed. What’s remarkable about Iceland’s banking crash isn’t just how massive it was, but how quickly they rebounded since.
Unlike other countries who haven’t seemed to learn the lessons that the financial crisis forced upon them, Iceland’s position was “never again.” Frankly, Icelanders knew they couldn’t afford to let banks play dice with their entire country’s economy. Repeated over and over in the streets and in Iceland’s parliamentary house came the words “Let banks fail.” In 2008, while America was hastily putting together a bailout package for its largest banks, Iceland let theirs crash.
Far from being suicide, the gamble seems to have paid off.
Over half a decade later and Iceland’s economy has bounced back. Questions about what to do with the unemployed – common in the U.S. – are not heard in Iceland. Iceland has managed to drop unemployment to around 4 percent, but even that isn’t good enough. There are serious discussions taking place in Iceland about whether it’s possible to get as low as 2 percent.
“Politicians always have something to worry about,” Sigmundur D. Gunnlaugsson, the 38-year-old Prime Minister said in an interview last week. “We’d like to see unemployment going from where it’s now — around 4 percent — to under 2 percent, which may sound strange to most other western countries, but Icelanders aren’t accustomed to unemployment.” [source]
By comparison, the United States continues to see around 7 percent. Other places in Europe are absolutely abysmal. Greece and Spain are seeing around 25 percent unemployment and their economic woes continue. What makes Iceland different?
When Iceland’s banks went under, and the economy with it, many homeowners were put under water over night. Instead of foreclosure deserts like Americans saw, the government stepped in to prevent Icelanders from losing their homes.
The banks’ first task was restructuring the loans of companies and households that could no longer pay them. The government passed a law mandating that loans had to be reduced to no more than 110 percent of the underlying property — helping homeowners who had ended up underwater. [source]
This kept people afloat while they restructured their mortgage and found new jobs in the recovering economy. Without the government intervention, many Icelanders would have been reduced to poverty and potential homelessness.
When the financial crisis hit America, instead of a wholesale dismissal of those who most directly caused it, the banks simply allowed their trouble-making workers to play a game of musical chairs. When the music stopped, the same people who had led to the mess were still sitting (you can find out what some of these guys are up to here). In Iceland, it was a banker bloodbath.
When new banks were set up, built on the ashes of the old ones, rather than keep the same people on board there were widespread dismissals for incompetence.
In Iceland, blame for the crisis fell almost entirely on the country’s financiers. While banks in other parts of the world were tangled up in bad bets on the American mortgage market, banks in Iceland had taken on mountains of debt to bet on speculative assets, and had spun a web of self-serving loans. Almost all the top executives were fired and many are now facing criminal prosecution. [source]
Which brings us to the final point:
As Sen. Elizabeth Warren pointed out at a recent congressional hearing, not one upper level executive at a major bank was charged with a crime after overseeing trillions of dollars in damages.
She called on the Fed, the SEC, and the OCC to provide records on the number of people the agencies have charged criminally and civilly, the number of convictions and prison sentences they have obtained, the number of people banned or suspended from working in the industry, and the total amount of fines leveled against Wall Street ne’er-do-wells.
Warren knows the answer to most of these questions, but wants to shame the agencies into action. Yes, big banks have been forking over billions of dollars in civil settlements for bad behavior in the lead up to the crisis. There have been prosecutions of various smaller mortgage brokers, and some civil charges and settlements against executives who helped cause the crisis. But zero Wall Street CEOs are in jail for bringing down the economy, and no CEOs have faced criminal charges. [source]
In Iceland, they treat financial crimes like crimes.
After it was shown that the biggest bank in Iceland was lending people money to “invest” in the bank (therefore boosting consumer confidence in the bank, also known as fraud), Iceland threw the book at the executives who committed the crime.
Hreidar Mar Sigurdsson, the former chief executive, received five and a half years, while Sigurdur Einarsson, former chairman of the board, was sentenced to five years in jail.
These are the heaviest sentences for financial fraud in Iceland’s history.
The court gave Olafur Olafsson, one of the majority owners three years and Magnus Gudmundsson the former chief executive of the Luxembourg branch, three and a half years. [source]
The road to recovery from the biggest banking collapse in world history is not always smooth. Still, despite the challenge, Iceland appears to be doing everything it can to restore faith in its financial system. The benefits appear to already be paying off. In 2014, Iceland is expected to see its economy expand by 2.7 percent, a modest gain but better than the OECD-area average which is around 2.3 percent. If those numbers don’t shock you, they should.
It’s the kind of growth you would expect from a country who has knuckled down and got serious about building a healthy, well-protected economy. Sure, they won’t see blinding fast growth, but it would be much more terrifying if they did.
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