Thursday, 12 May 2011

Iceland, Paperland, And Poverty

In general I prefer my posts to be on the easy side. This is because it makes them easier to write and means I can get back to volcano and earthquake watching. This brings me to Iceland whose territory is one of the most volatile on Earth.

The BBC has been doing Iceland in various ways this week. But they are sticking to the geography and the way they live and how different it is from Islington or Hoxton. The basic assumption is that they are strange and we are not which is something I am far from sure about.

But Iceland recently has been volatile in other ways notably in the World Money Crisis which is rolling on around the world in unexpected ways. Despite a population of only 320,000 by a series of accidents Iceland’s misfortunes became central to the whole financial collapse.

The Market Oracle covers a book on the subject, “Deep Freeze-Iceland’s Economic Collapse” by Phillipp Bagus and David Howden”, who have taken a long hard look at the whole business and how Iceland became Paperland.

It is a story, more or less, of Hagar The Horrible Becomes a Banker. In the link below Andy Duncan suggests that they make the story clear and explain why it all happened.

Reading down the article it is comforting to see many of the usual suspects lined up against the wall, albeit with different names. “Security mismatching” is our old friend lending long and borrowing short by different means. They really did think that could take on huge debts that might fall due for repayment before you could get your money back from those you had lent on to.

One reason for this was the invention of a wide range of financial devices to enable the stock of money to he increased on paper and sloshed around the world, often in secret by wheeling and dealing. That way it disguised the extent of imbalances between the borrowing and lending.

In effect it meant that the financial institutions, unleashed by politicians from earlier regulation or supervision effectively were given control over the money supply and creation. You may recall Meyer Rothschild’s dictum about if he controlled the money then nothing else mattered much.

How so much of this centred on Iceland arose from serious mispricing of interest levels in various places. In general rates of interest were far too low and the artificial discrepancies created in places like Iceland and Ireland meant that huge flows of money went there and then on to the Neverneverlands of borrowing.

The Irish situation had been dealt with splendidly by Morgan Kelly in the “Irish Times” in an article that has been well flagged around the serious web.

Meanwhile, back in our own little grubby corner of the Atlantic Isles the Governor of the Bank of England has become Mr. Glum, we have a government castigated for cuts that is increasing spending and liabilities and too many of the population seems to be heading into the debt slavery forecast by the links above. For those with property the advertisements promising “Equity Release” seem enticing. If prices crash however, where will all those borrowers be?

As for the Icelandic connection, unluckily some of the Conservation Party’s major backers are now facing problems that arose from debts incurred from Icelandic credits, our government owned banks face failing to get the Icelanders to pay up and if international interest rates do lurch up as they might then all the Treasury sums may need to be done again.

Next time round, if it happens, we will begin to see some bigger cuts that will be far from better. I wonder if Iceland has facilities for economic refugees?

But historically, we have been here before. In 1772 The Heron (Ayrshire) Bank went down, lending long to its own directors and borrowing short in London. There the lenders had some very fancy arrangements notably in East India Company stock on very high rates of leverage. It all turned very badly.

Then it cost us the American Colonies, what might it cost this time?

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