With a nasty cold or summat and the brain in reverse gear I wanted to post something about Iceland, having already posted on the subject long ago, but could not get it together. But on The Automatic Earth dot blogspot dot com I saw this item by Ilargi, a very perceptive commentator, and thought it was as good as any you will find.
The case of Iceland and its financial shenanigans is, if nothing else, intriguing and amusing. Not for some of the people involved, I know, and I mean no disrespect. But it is in the way the situation is dealt with and in how various parties try to come out on top.
A short background: Iceland had 3 main banks who all, albeit to various degrees, made unrealistic profits for investors and depositors in early 21st century times, and then went bust. One bank, Icesave, which had many clients in England and Holland, owes these clients some $6 billion, a sum the Iceland government is held responsible for and initially seems to have agreed to pay. The people of Iceland, all 320,000 of them as it were, have started questioning why they should pay for foreign investors' losses with banks with whom they have no connection other than that they happen to be located in their country.
Britain's decision to put Iceland on some terror alert list because of the banking affair is likely a big factor in this, as well as in the decision by the president to let the people decide in a referendum on February 20 whether they want to pay back the losses of foreign investors who had accounts with Icesave only so they could get a few basis points more interest on their funds. It doesn't look like they will.
Which may put Iceland on some black list, with the IMF threatening to withdraw emergency funds and Scandinavian loans in peril. The Dutch threat to block Iceland's entry into the EU is seen in Reykjavik as similar to Britain's terror list boondoggle. The prevailing sentiment these days among the geysers can best be summarized like this: "We may be small, but we ain't your bitch". And that is a sentiment that may provoke a lot of sympathy, provided the Icelanders play their cards right.
In the next 6 weeks they will come under huge international pressure to pay up or else, for there's nothing the international community fears more than members who don’t play by the rules, no matter how inane and insane they are. Plus, of course, Iceland is not some small African nation full of poor black people, it’s a small European nation full of the kind of people that wealthy US and EU citizens can identify with: white and relatively affluent. They could be your neighbors. They could be your family. They could be you.
So how reasonable is it for Britain and the Netherlands to demand restitution of losses suffered? Interesting question. The answer is not that easy, since it begs the next question. Who is to blame for the losses? There's the bankers, who went megalomaniacal, and got much bigger than banks based in what is population-wise not more than a mid-size town ought to be. But Iceland is a member of the EEA, the European Economic Area, which gives its banks the right to expand to the rest of the EU.
So alright, let's see. First to blame: the bankers. Second: The Icelandic government, who should have regulated its banks much closer. Third, the governments of Holland and England, who should have done due diligence and demanded far more strict guarantees from the banks. Fourth, the Dutch and British investors, individuals, local governments and companies, who all should have read the fine print. Fifth, the people of Iceland, who were living it up with the cash floating in freely.
But we all know how blame moves. The investors point to their own governments, who didn't warn them. These governments point to the government of Iceland, which didn’t warn them. That government points to the bankers, who went nuts, but who they still have to cover for. And last, the people of Iceland point to all of the above and say they should all have been wiser, and the fact that they were not doesn’t mean Icelanders now have to fork over, no matter how certain parties like to interpret laws and regulations. Some things just don't feel right.
And what do we feel about this, who are not directly affected by any of it? Well, try this one on for size. If you allow me to numb and dumb down the numbers a bit, the US at 308 million citizens is about 1000 times bigger than Iceland (320,000). Which means that the US equivalent of what the British and Dutch are demanding from Icelanders would be, loosely, $6 trillion. Now what would you say the odds are that the American people would agree to pay that kind of money, if it were payment for what their banks have (mis-)done in the past, to a group of foreign investors? Let's say Chinese and Japanese?
I may be wrong, of course, but I have the feeling that I know what Americans would think of that. They'd be marching in the streets, on their way to embassies and consulates, if not private businesses. They'd say: we have a hard enough time ourselves as it is, and we ain't paying no foreigners who weren't making sure they knew what they were doing.
The same reaction would come in London and Amsterdam as well, naturally. Funny thing is that the governments there were very quick to guarantee their citizens' losses, and only after that claimed them back from Reykjavik. There doesn't seem to be any legal obligation for them to do so, it looks more like an election-related issue. There are all sorts of depositor protection schemes in place, that's true enough, but everyone could have known that the established $30,000 guarantee from Iceland for every depositor account wasn't worth much, given that it’s backed only by the full faith and credit of 320,000 people. Britain is what, 200 times bigger than that?
But in the end, as I'm pondering all this, what is probably the most interesting part of it is that the American people ARE in fact in the same boat as the Icelanders. The main difference between them may well be that the latter stand up for themselves, where the former don’t understand what's going on. The US government has indeed already pledged $14 trillion in public funds (with a total risk of up to $24 trillion) for US bank losses. It's just that American banks are covered by the ability of the US to borrow enough money in international markets to cover their losses, something for which Iceland is simply too small. And also, the US gets to bleep around with accounting rules, so bank losses can remain hidden for a long time (though not forever).
So while it may look like the situations are entirely different, they’re not really. On the ground level, it's the citizens who are being forced to pay for institutional gambling debts, the old adage of keep profits private and make losses public. China doesn't go to Obama to demand payment guarantees tomorrow morning, but it's all just a matter of size. That size determines that the Icelandic situation is far more transparent, since smaller make simpler. But down the line, the Iceland banks weren't the greatest gamblers, it was Wall Street and the City of London. And the $20,000 that Icelanders "owe" per capita (in the eyes of others) isn't really the issue, it won’t kill them. They just take a stand against what they see as bullies.
The amount Americans "owe", though, is already more than twice as much per capita at $14 trillion. And there's no end in sight, since none of that money has been used to actively solve problems, it's all merely hiding them for a while longer.
In other words, here's waiting for the moment Americans become more like Icelanders, and stand up against bullies (I'm sure Oprah has advice to provide on the topic). But also, here's not holding any breath, and here's expecting that by the time any sizeable group stands up, the amounts owed will be a multiple of $20,000 and enough to generate debt and poverty for years, if not decades, to come.
And you know what the funniest thing about it all is? In America it wouldn't even take 320,000 people standing up, for real, to change policies and history in a heartbeat.
But they're not there. They’re in Iceland.
Size matters. But so does courage.