Iceland and The Crisis

Student’s name:
Lecturer’s name:
Course name:
Date of submission:
Introduction
Iceland is one of the well-decorated countries around the world. It is marked with a clean bill in health and education systems. Most people uniquely relate Iceland to as a country of togetherness and tranquility. It is small in terms of the demographic structure known to encompass about 300,000 citizens. However, the country has gone through some instances of ups and downs during its economic growth patterns. Iceland as a country has truly persevered through desolate trying times and resolved ways of avoiding such difficult episodes.
The Crisis
This article gives us a clear-cut research on what happened to the Iceland’s financial and investment fraternity as a whole. It begins by explaining that by October 6, 2008, Iceland was his hit by the worst bust in its economy and could in terms be irreversible. The International Monetary Fund’s (IMF) representative at Reykjavik was star struck when he was on requested whether it was possible for the IMF to grant a loan for the Iceland economic misfortunes. He could not fathom how a well-to-do and extremely stable country such as Iceland found itself in such desolate circumstance (Lac, 1).
For him, countries in third world depiction in Africa were given attention to because; of various financial problems evident in such countries. African countries could be helped by the IMF because they were marred by problems such as drought and famine, war, diseases and also the aspect of the lack of education.

However, a country which was once ranked as number one by the United Nations’ 2008 Human Development Index bothered the minds of many as to how they found themselves in such a situation.
It is, therefore, paramount to appreciate this article since it has purely tried to discern what ensued in order for Iceland to plunge in such an economic turmoil. The writer/narrator is trying to unravel the occurrences of the financial crisis in Iceland in the attempt to help avoid such a situation in Iceland or even other different countries. Before everything went berserk, Iceland was respected for having three profound banks in the wake of 2003. These famously celebrated banks were the Landsbanki, Kaupthing, and Glitnir.
At the beginning of 2003, these banks were understood to account for about 100% of the country’s gross domestic product (GDP); boasting in assets worth of a few billion dollars. This was extremely overwhelming for the country’s economy because only three banking giants were responsible for its growth and development. Having such a budget as a bank requires a high level of management and also security (Lac, 2).
In addition to this, the banking assets accrued by the three banks exponentially grew in the following three and a half years were raising its summation to margins of over $140 billion. On the higher side, it true to say that the banking system was biting more than it could chew and therefore; at this instant is required a form of regulation. This was an overgrowth regarding the banking system and immediately put the Iceland’s economy on the market charts. As this was happening, concurrently, the Icelanders were being lent money haphazardly by the banks for them to buy real estates and also stocks.
In any economy as the when the demand for a particular asset is on the increase, its prices clearly go up. This was the same scenario in Iceland as more Icelanders demanded to purchase stocks and real estate, the assets prices skyrocketed. Reporters claimed that the periods between 2003 and 2007, U.S. was doubling in terms of the stock market whereas; in Iceland, the scenario was nine times in the value of the stock market.
The U.S. was keenly focusing on the Iceland’s banking system because they were getting hints that something was amiss. Additionally, the U.S. was unsettled since the Icelanders were not even afraid of the outcome of these skyrocketing financial margins. No one in Iceland was perturbed with current financial excellence; it was just a celebratory mood all over. Reporters of the famous Bloomberg in March 2006 began to refer to Iceland as “Billionaire Tycoon Thor” (Lac, 3) that braved U.S. with the hedge fund. This was truly a two-sided statement that required a lot of review and attention in order for one to completely get the meaning of it.
Moreover, in 2006 Icelanders were recognized to be completely affluent showing signs that a single family was three times wealthier as compared to the year 2003. This new wealth for the Icelanders had put a lot of emphasis on the emergence of the investment banking industry. Just over three years, families started raising their living standards by spending their money on anything they laid their eyes on. Even the educational system especially the universities were focusing more on courses that dealt with money and economics.
A professor at the University of Iceland who was teaching fishing economics testifies how students were fleeing from his course in the attempt to learn economic of money. The whole country was under the spell of money marking in an economic kind of mindset. Technical courses such as engineering were also implementing ways by which it will assimilate its students in having courses that touched on finances. The entire country had forgotten what it was all about; being strictly skewed towards financial firepower made it a different niche altogether.
Iceland astonished a lot of people world over because; over a short period of time, it became extremely wealthy out of nowhere. A small country with a population of approximately 300,000 people was becoming affluent that fast brought so many questions to people’s minds. This doubt of economic growth to many was a story that needed unraveling, and it did not take long for the truth to spell itself out. Since the whole of Iceland relied on the financial stability of the banks above, many economists regarded this as putting all your eggs in one basket formality. This country was noticing the blind spot in the financial market fraternity, it just pretending that everything would continue the way it was (Lac, 5).
As it was predicted to happen, Iceland found itself in economic disaster when all the three of the global-size banks fell apart. It is of importance to appreciate that this financial disaster was highly likely to occur and it was just a matter of time. These banks collapse spelled banking losses of approximately $100 billion that were to be settled by the innocent Icelanders. As we saw earlier, the GDP for Iceland was completely dependent on the three banks and hence, their downfall meant the country’s as well.
We can easily say that each and every man, woman and child was supposed to actually pay about $330, 000 in order for the banks’ debts to be fully settled. This kind of money was impossible to raise because the economy, of course, was in disarray. The immediate form of livelihood in Iceland was fishing and most people had abandoned it to undertake financial investments. To add salt to the wound, the Icelandic’s own currency the Krona was also retrogressing and therefore meant that the country’s activities in the international market were also going to the drains. When a country’s currency drops below the required mark, that country will only be able to undertake domestic businesses since, in the international front they will have to spend a lot to gain access to international assets (Lac, 3).
After the immediate collapse of the three banks, it was documented that the total amounts of debt that Iceland summated of their GDP were a surprising 850 percent. This particular summation was even greater than the one that drowned the United States in debt and which was about 350 percent. Comparing the two percentages, we can deduce that Iceland did not have experienced economic analysts who could have taken note of U.S. crisis earlier in Wall Street and prevented its own crisis. It was clearly evident that Iceland was completely on a higher level of spoils and thus required answers to what happened (Lac, 3).
The article further elaborates that the U.S. crisis was much better as compared to the Iceland one because the American citizens were able to bail it out of the misfit. These issues were so grave in Iceland that we even see 100,000 citizens reaching out to pollsters and telling them that they were actually reconsidering moving to other countries. That number spells out like an approximate a third of the total Iceland’s population wanting to decamp to a better country for assistance.
Iceland living standards for each and every citizen had deteriorated in unimaginable ways, even as the narrator tries to show us how a once famous hotel (101 Hotel) is now abandoned and lacks clientele. The 101 Hotel was famous for hosting an affluent customer pool, and the five-star hotel is structured to have thirty-eight rooms which are exceptionally looked after. But after the crisis, the article explains to us that only six of the thirty-eight rooms were booked, and the room the narrator was occupying was given to him at a half price. This shows us that Iceland crisis was affecting each and every person on the ground (the rich and the poor). Hospitality and hotel industry were falling the same way the economy was falling since even the rich people were fleeing to other countries so that they won’t either be reported or worse arrested.
The burning question that remained in Icelanders’ minds was what brought about this imminent financial bloodbath? At first, the man from the IMF tries to show that the conception of graft in these three banks was a result of poor and incoherent management patterns. He continues to say that “It was just a group of young kids” (Lac, 5), meaning that the management lacked the right experience-mandated personnel. A good illustration of these young workers is shown by the narrator as he meets up with Magnus Olafsson (not his real name though).
This gentleman is twenty-six-year-old and was working in a bank from where he stole a lot of foreign cash and hid it in his house before the onset of the crisis. He tries to justify his actions by telling us that most of the people during that period of the crisis were seen carrying bags in the streets. This was indicative that individuals working in banks were stealing a lot of money in parts.
Evidently, during the Iceland crisis, many Icelanders were devising ways of adapting to it since they had loans of items that they thought they required earlier. During those periods of financial stardom, Icelanders without any thought were to real estate agents and took up mortgages that later became a nightmare to them. Other as seen earlier went ahead and took loans on expensive vehicles like the Range Rover. One of the ways by which Icelanders figured to solve the Range Rover problem was to either sell it abroad to Europe or set it ablaze and receive an insurance cover. This completely shows that the Icelanders were desperate because the economic problem was getting out of hand.
A small country like this which believed that everything could be monopolized even the religious notion (Lutheran) really confused people in terms of what exactly amplified the crisis. People in Iceland were understood to know one another in terms of names, decent and also employment. In addition to this, the country had only nine surnames that were used all over it, meaning that knowing someone was relatively easy (Bergmann, 13).
All we are trying reveal here is that this country was not a country but merely an extended family. When a country is disclosed to be an extended kind of family, it therefore, means that it completely independent in terms of the political, social and economic basis. But in Iceland, this was not the case after the inception of the notion of financial investment. People forgot their traditions/roots and began embracing aspects of greed and corruption.
One of the issues that seemed to be bothering Iceland as a country and could have contributed to this crisis was that Icelanders did not know anything about their country. The narrator tries to show this by asking a few people where the Prime Minister’s office was, and no one had an answer for him. This aspect of the lack of knowledge is seconded by a woman at the National Museum who simply tells the narrator that, “No one actually knows anything about our country” (Lac, 13). It is therefore with this mindset, that we can start understanding how such an economic disaster emanated. Ignorance sometimes is cultured by people out of laziness and a composition of the don’t care attribute.
Icelanders were in this kind of a state of mind showing us that they had no afterthought in regard to decision-making. In addition to this, it is not possible for any individual living in a particular area pretend that he/she does not care about the surrounding. In order for a country to be successful citizens have to be concerned with it in regard to its decision-making protocol. Icelanders to me were not serious about their country it encouraged selfish bankers to mess around in the banking system without being questioned.
If we take the article’s point of view in the 1980s whereby; David Oddson implemented the Milton Friedman ideologies of overriding the government controls, we can easily understand where the problem began. David Oddson as a prime minister in Iceland enforced measures such as lowering taxation, a trade that is freed up and industry privatization. Later on, in 2002, Oddson went ahead and encouraged the notion of bank privatization.
This in due process, without having experience in the banking sector, got himself appointed as the Central Bank governor. David Oddson was not in any way conversant with the finances, economics or even business he was just a poet by training. Evidently, this was the hallmark of the problems to occur in Iceland’s economic sector. One cannot just declare himself as a Governor of the Central Bank without any scrutinized experience package and be expected to enhance productivity (Lac, 14).
The money that the banks lent to friends and families in Iceland was used in buying things like homes in places like Copenhagen and London, second-tier airlines, sub-scale retailers, private jets, holding expensive parties among others. All these items bought as investments lacked one important aspect which included research. Icelanders bought these things without even doing logistics research on the ground in regard to these companies and items of self-preservations. They were buying things just because they had the money to buy without even thinking of whether they will make profits or losses. This kind of panic buying was very dangerous and lacked reason which in turn led to great losses and witnessed regrets (Bergmann, 23).
A clear-cut example was when one of the major shareholders of the Glitnir bank called the FL group carelessly bought about 8.25 percent stake in the parent corporation of the American Airlines. This was deemed stupid because no member at the FL Group had any experience or even understanding of what happens in the airline industry. It is mandatory for one to clearly understand what he/she is investing in and what outweighs what in terms of the investment. Dishing out money to an airline company that no one has experience about was truly a negative aspect for the FL Group and could not bear any fruits in the long run (Lac, 16).
Similarly, in 2006 it was reported that a Scandinavian bank was weakening but one of the famous Iceland’s banks the Kaupthing was willing to buy stakes from it. As it was true, Kaupthing had surprisingly bought 10 percent stake in crumbling Scandinavian bank and therefore; answers were to be given as to why it did such a market suicidal thing. This form of leveraged buyouts (LBOs) astonished a hedge fund in London which essentially resulted in hiring private investigators to decipher what was happening in the Iceland’s financial arena.
After the private investigators had done their research in Iceland, it was understood that inexperienced individuals in the finance departments were getting loans from overseas in terms of short-term billions of dollars. After they get these loans, they ended up loaning the monies to themselves and also to friends who finally get the money muscle to buy extravagant assets. Ultimately, making the world’s assets prices to rise because the Icelanders were giving very high prices for them (Bergmann, 32).
Later on, in November 2003, we see the former CEO of Singer & Friedlander Tony Shearer getting completely confused when Kaupthing buys 9.5 percent of the stake from his bank. Shearer becomes entirely curious of the Kaupthing actions that he makes a trip to Iceland in attempt to meet with its chairman Sigurdur Einarsson (Lac, 18).
Shearer was even more perplexed to learn that the Kaupthing’s chairman had no interest in meeting up with him. It was not until a 19.5 percent raise in stakes by Kaupthing that Shearer went to Reykjavik to at least know what these people were all about. He came to comprehend that a majority of Icelanders in Reykjavik were very young and according to him did not know what they were doing.
After a thorough perusal of the Kaupthing’s annual reports, Shearer concluded that the bank had lent its directors approximately £19 million for share buying and giving them the option to plow back their profit by selling those shares back to the bank. This loan was being misused because the bank lacked an elaborate and professional finance team to plan a budget for this money (Lac, 19).
He (Shearer) also recognized that the Kaupthing bank had only one non-Icelandic board member and each of the directors was given a four-year contract. This kind of management panel was very dangerous because the Icelandic directors would easily refute any form of objection from the non-Icelandic member during any form of decision making.
Tony Shearer’s management career came to a standstill when he came to terms with Kaupthing bank made efforts in bidding Singer & Friedlander in the attempt to buy. This move made Shearer to refer to Mr. Einarsson as an idiot because he was not thinking when making such a deal. The merger of Kaupthing and Singer & Friedlander in August 2005, led to Shearer officially quitting his job as a CEO due to fear of damaging his reputation. As was Shearer’s prediction, in October 2008, the Kaupthing Singer & Friedlander collapsed (Lac, 19).
Apart from Tony Shearer, in early 2006 there were other people who were uniquely concerned with the Iceland’s financial system. These people included Lars Christensen an analyst and three of his colleagues at Danske Bank (Denmark’s biggest bank). They wrote a report about Iceland’s fast growing financial system and how it was headed for a very bad turnaround.
The four individuals were trying to advise their clients who were seen to be interested in Iceland’s financial market and showing them that it is not wise to be in the same bed with them. However, the Icelandic banks did not take Christensen’s ideologies well; he was actually threatened with lawsuits if he was to proceed with what he was echoing (Lac, 20).
Iceland’s had evoked interest world over, and this led to one of the professors of economics from the University of Chicago known as Bob Aliber to probe more about it. The Iceland’s debacle motivated him so much that he ended up writing a textbook known as the “The Perfect Bubble” (Lac, 21). Aliber predicted the Iceland’s financial crisis in 2006 by the signs it was emanating at that period of time.
Concurrently, in 2008, Aliber was summoned to give a speech in one of the universities in Iceland –the University of Iceland’s economics department- where he declared that Iceland’s future was in jeopardy. He actually gave the banking system a lifespan of approximately nine months before they formally collapse. He was blunt when it came to giving the truth about the economy. Most of the Icelandic bankers who were present during the speech knew that he was objective and thus made it sure that his speech was not reported by newspapers (Lac, 22).
As the article unfolds, we happen to witness the narrator being summoned by Geir Haarde the Iceland’s prime minister. It was also excavated that he was the head of the Independence party that governed the country from the year 1991 to 2009. It is this meeting that the narrator comes to terms with the fact that the Independence Party is chiefly comprised of men alone. However, Iceland has other three parties including the Social Democrats (composed of mostly women), the Progressive Party and the Left-Green Movement (Lac, 25).
One of the standing out problems that was deduced by the narrator was the lack of financial experience in the realm of making financial policies. It was quite clear-cut to conclude as such because, the minister in charge of business affairs was a philosopher, the minister of finance was a veterinarian, the governor of the Central Bank was a poet and finally prime minister was not a good economist. This particular workforce immediately screamed disaster in the making and many Icelanders ignored it. Furthermore, the article gives us a clear illustration of how banks were managed before the financial crisis.
Landsbanki, one of the three banks that collapsed, had a currency-trading employee by the name of Stefan Alfsson who was not inadequate in his line of work. This particular individual was thirty years old when he joined Landsbanki in January 2005. In terms of experience, he was a just a mere fisherman for a period of about fourteen years. We can, therefore, come to terms that the banking system was very reckless in the way it hired its workers since; there was no experienced personnel in the banking sector before the Icelandic crisis (Bergmann, 45).
The Independence Party was very ego-centered and was not yielding to any help from financial and economic assistance. In essence, this party was not able to undertake any kind of financial renaissance exercise, but it was quickly rejecting people who were trying aid the economy. As seen from other economists, Jon Danielsson, an Icelandic professor in London School of Economics’ efforts to help Iceland was to no avail. Therefore, this pattern of not accepting help from the professionals also played a great deal towards the crisis (Lac, 26)
We can easily try to get in tuned to how such a poor country in the 1900s became rich in 2000. Iceland became a well off country in the early 1970s when the government privatized the fishing industry (introduction of the quota system of fishing). This process also enabled fishermen to get loans from the banks since they gave out their quotas as security.
After the fishermen had become rich, they started taking their kids to school, and this made PhDs out of their kids. However, the guys with the PhDs were not willing to work as either fisherman or as aluminum smelters. They wanted to do something else other than those two jobs, and investment banking was what they wanted to do in the wake of the twenty-first century (Lac, 33).
As the narrator continues with his research in Iceland, he comes to an understanding that most of the men usually talk to one another and women also converse with women. Even if there are equal rights and treatments for both sexes, there is a form of segregation in the country in terms of decision- making.
The Independence Party before it stepped down on February 1, 2009, was fully run by men, meaning that decisions were entirely implemented and enforced by the same (men). On the other hand, as the party stepped aside, the Social Democrats who were composed of a majority of women took over. Its leader by name Johanna Sigurdardottir was focused on bringing Iceland back to its feet (Bergmann, 65).
A country that doesn’t work together with both genders is ultimately destined to fail. This is uniquely brought out by the article since we see a country set-up that deals with only men for an elaborate part in decision making. In the end, we experience the most unfortunate Iceland crisis that takes people back in the 1900s when Iceland barely existed. Women are of great importance because they are also part and parcel of the country.
A good example is a former CEO for Kaupthing in London who went by the name of Kristin Petursdottir; she publicly declared that she despises the male-dominated financial culture. After her resignation from Kaupthing in 2006, she started her own firm in Iceland which was entirely run by women and happens to be one of the profit-making enterprises in Iceland (Lac, 38).
Conclusion
We can clearly say that the Icelandic catastrophe was caused by inexperience in the banking system. This kind of inexperience is both in the professional aspect and the non-intellectual form. In the professional aspect is whereby, the bankers lack education and experience in the department they were working in and hence were doing things without reason. On the other hand, in terms of the non-intellectual form, Icelanders pretended not to care about their own economy.
The prime minister who is at the highest of political offices refused to take advice from the economic professionals world-over just because of his ego. The fact that women were not included in decision-making also showed that Iceland as a country was failing and thus, in order to prosper had to involve them more.
References
Bergmann, Eirikur. “Iceland and the International Financial Crisis.” (2014): Print.
Lac, Karen. Quicklet on Michael Lewis’ Boomerang: Chapter-By-Chapter Commentary & Summary: Hyperink, 2011. Print.