Greed and Iceland

  • Posted by a hidden member.
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    May 10, 2011 10:58 PM GMT
    I was listening to talk radio on my way work this morning and there was a story on about Iceland and the financial crisis they are in. The story recollected how Iceland's largest banks (Glitnir, Landsbanki, and Kaputhing) collapsed in October 2008. Apparently, the head of Kaputhing, once Iceland's largest bank, went to meet a group of hedge fund managers at a bar. Being that they were drunk, they apparently told the head of Kaputhing that the very things that allowed Iceland's banks to swell in monetary terms after deregulation (interbank lending, non-Icelandic deposits, and households wiling to take on enormous debt) would also collapse the economy! It sounded as if the hedge fund managers didn't give a damn and knew exactly what they were doing because of their greed.

    It is estimated that Glitnir, Landsbanki, and Kaputhing have foreign debt in excess of 50 billion Euros, a sum equal to 160,000 Euros per resident. This was over 5 times their GDP of 8.5 billion Euros. To top it off, Iceland has to begin repaying other European nations in 2012 and they simply don't have the money to do it.

    How can some people and companies be so greedy as to put money and their lust for it ahead of everything else, even their own employees and citizens?

    *I am not against capitalism or banks or anything like that; I am simply against greed and those who use it to knowingly hurt others
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    May 10, 2011 11:32 PM GMT
    There were actually other factors than just the simple idea that greed caused this crisis, although it is almost always a presence in any crisis. Here is a good article to read:

    "The key factor in Iceland's failure has been the monetary policy pursued by its central bank, in particular inflation targeting, similar to the UK.

    This means the central bank targets inflation, raises interest rates if inflation is above the target, and lowers them if inflation is below target.

    Such a policy has a sound foundation in economic theory and is often appropriate for large countries.

    In the case of Iceland, it was disastrous."

    Independent bank?

    Adding to this is the peculiar governance structure of the Central Bank of Iceland. Uniquely, it does not have one but three governors.

    One or more of those has generally been a former politician.

    Consequently, the governance of the central bank has always been perceived to be closely tied to the central government, raising doubts about its independence.

    Currently, the chairman of the board of governors is a former long-standing prime minister.

    Such a governance structure carries with it unfortunate consequences that become especially visible in the financial crisis.

    By choosing governors based on their political background rather than economic or financial expertise, the central bank may be perceived to be ill-equipped to deal with an economy in crisis.

    So there were multiple factors contributing to this. Lack of real expertise in knowing how to run a bank and having leaders who were in government with their own special interests.

    The government ultimately did not guarantee their banks like Ireland did, which means that they will be able to recover relatively quickly.
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    May 10, 2011 11:39 PM GMT
    Thanks for expanding on that for me. I wasn't able to hear the rest of it after I arrived at my office.

    Too much, too soon with no economic experience to back it up.

    And thanks for the link to the BBC link.
  • DanOmatic

    Posts: 1155

    May 11, 2011 1:00 AM GMT
    It also didn't help that Icelandic farmers and fisherman left their fields and boats to become hedgefund managers themselves--how absurd is that? They started building giant houses and bought Land Rovers and suddenly everyone was trying to keep up with the Joneses. There are some similarities with what happened in Ireland: two small countries with limited economies that got in over their heads. Now they're back where they started as marginal, economic backwaters.