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An Artificial Prosperity

By Matt Eliason

  • Game Overs According to author Michael Lewis, Icelanders were burning their Range Rovers in the streets of Reykjavik during the economic crisis in order to collect insurance funds. It ends up that these claims were completely false.

Bouncing Back; Iceland‘s Economic Meltdown and the Journey Back to Prosperity. Chapter 1

 

The most publicized account of the events leading up to Iceland’s economic meltdown was written by well-known American writer, Michael Lewis, in his New York Times Best Selling Book, “Boomerang.” The author, most famous for his book, “Moneyball,” details the Icelandic bank’s asset inflation by stating that Icelanders learned the, “…importance of buying as many assets as possible with borrowed money, as asset prices only rose.”

Ultimately, Icelandic bankers learned that they could trade inflated assets to each other at inflated prices, creating an “artificial prosperity.” As one hedge fund manager stated in Lewis’ book, “You have a dog, and I have a cat. … You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners but Icelandic banks, with a billion dollars in new assets.” This irresponsible economic system was not a sustainable fiscal model. The deregulation of the financial sector that had led to amateur financiers lending billions of dollars to companies abroad would soon come back to haunt Icelanders, as the growing financial bubble was about to burst.

Although there were signs that financial mischief was occurring, everyone seemed to look the other way. The average Icelander’s individual wealth was growing immensely and times were really good for the Icelandic economy - as far as they knew. However there came a time around early 2008 when the fabricated appearance of artificial prosperity began to reveal itself as a, “too good to be true” scenario with Icelandic interest rates yielding unrealistic returns. But again everyone seemed to turn a blind eye to the unsustainable affluence as the domestic audience, as well as the international depositors, continued to make boatloads of money.

Now in full disclosure, some details regarding the banking crash that Michael Lewis gives in his book are a bit exaggerated or just completely false, such as his assertion that Icelanders were commonly burning their Range Rovers to collect insurance funds. I have talked to numerous Icelanders about this detail in his book because it received a lot of attention in the American media and everyone laughs off this claim as ridiculous, stating that this part of his story was completely fabricated. Things did not get as bad as the audacious author had described.

Additionally, Lewis claims in his book that "almost certainly Iceland will adopt the euro as its currency, and the króna will cease to exist." Lewis’ assumption has failed to come to fruition as the króna, although prone to fluctuation, has rebounded strongly and currently sits at a reasonable $1 USD – 114 ISK exchange rate, influenced by the capital controls enacted by the Icelandic government.

However, one thing that Lewis nails dead on in his analysis is the fact that, “leverage buys you a glimpse of prosperity you haven’t really earned.” This is a perfect summary of the Icelandic banking debacle that distils the problem down to its core - the Icelandic bankers weren’t creating any value. They were simply borrowing money in order to create an artificial prosperity. It was only a matter of time before this “artificial prosperity” began to show its ugly head.

Starting in 2007, the dominoes began to fall regarding the Icelandic illusion that was turning this small European country into an international financing power. During this time, the Icelandic króna was incredibly strong, with a peak exchange rate of $1 USD – 56 ISK, which in hindsight, looks amazing compared to the current rate of $1 USD – 114 ISK. "The perfect bubble" was forming in the Icelandic economy that was artificially created through a surplus of financially irresponsible leveraged loans.

The unraveling of Iceland‘s banking system first started when thousands of British savers who had put money into online deposit accounts called Icesave. The service was offered by one of Iceland‘s major banks, Landsbanki, and consumers quickly started to lose confidence in the bank‘s ability to guarantee their money. Despite their anxiety, the banks reassured the English depositors that their savings would be covered by an Icelandic state guarantee scheme that was fully funded.The English depositors had originally been lured in by the enticing interest rates that Landsbanki was offering. 

In early fall 2008, the Icelandic bank‘s incompetence was beginning to reveal its true negligence as a growing fear was accumulating with regards to the country's ability to guarantee their deposits. A mad scrum involving the English depositors ensued and the customers of the Icelandic bank were desperate to repatriate their cash. What ensued was a banking catastrophe from the likes of which the world had never seen. The global marketplace would soon feel the fallout from this small Nordic country’s banking mishaps, sending the Icelandic economy into a downward spiral.

Chapter 2: Mending the Wound

Chapter 3: The Current State of the Icelandic Economy

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