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[Most links added are mine – Oui]
(AlterNet) Oct. 21, 2008 – Iceland, despite its coalition governments and Nordic social values, became a poster child for neoconservative economic policies inspired by Milton Friedman during the past decade. Friedman himself visited Iceland in 1984 and participated in what was described as a “lively television debate” with leading Socialists. This inspired a generation of young conservatives who came to power through the Independence Party in 1991 and have run its government through different coalitions since then.
Friedman may be dead now, but the economic and financial collapse of 2008 is becoming a real-life battleground of his theories against those of the other giant of 20th century economics, John Maynard Keynes.
Keynes’ analysis was complicated and nuanced. The work for which he’s best known, The General Theory of Employment, Interest, and Money, provided a theoretical basis for the economic reforms of the New Deal era — investments in public works and deficit spending that helped countries recover from the Great Depression.
While Friedman’s narrow form of money supply monetarism was quickly abandoned in the early 1980s, most governments have relied primarily on monetary instead of fiscal policy for stabilization of their economies over the past few decades. This turned Alan Greenspan, former head of the U.S. Federal Reserve and an advocate of Friedman’s policies, into the most important economic policy maker in the world.
ICELAND’S EXPERIMENT WITH FRIEDMAN POLICY
Under the leadership of Prime Minister David Oddsson and explicitly inspired by Friedman, Iceland’s neoconservative young Turks implemented a radical (but now familiar) program of privatization, tax cuts, reductions in spending and deficits, inflation targeting, central bank independence, free trade and exchange rate flexibility. Corporate taxes were cut from 50 percent down to 18 percent. Privatization and deregulation were driven directly through the prime minister’s office, and the major banks were privatized.
Economic missions and reports on Iceland issued by the influential International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) largely praised and encouraged these reforms, often disregarding the rising risks for its financial sector until recently.
Stiglitz’s paper (PDF) has invaluable advice that should have been considered by any nation — and especially Iceland — but it appears these recommendations were ignored. The right-wing reformers certainly didn’t change their course. Why would they? Life was good and getting better in the small island state, with showrooms full of fancy cars and booming real estate, business and financial industries.
BOOMING ECONOMY
At first, the policies appeared to be very successful. The economy grew at a strong pace, rising until Iceland achieved one of the highest per capita GDPs in the world. In 2007 it also topped the score for the United Nation’s Human Development Index.
Iceland rocketed to the top 10 in the indexes of economic freedom designed by the Fraser Institute and the Heritage Foundation. It was lauded by the conservative Cato Institute for its flat taxes, privatization and economic freedoms. The institute also criticized Naomi Klein for not mentioning Iceland (along with Ireland, Estonia and Australia) as an example of success in her book about the rise of disaster capitalism, The Shock Doctrine.
Icelandic banks and businesses, with the support of their government, expanded aggressively overseas, particularly into the U.K. and the Netherlands. The banking industry and private businesses flourished and created a number of new billionaires on the island. Then it all came crashing down.
≈ Cross-posted from a diary @ET — Revolting Iceland ≈
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Dutch savers who put their money into Icelandic internet bank Icesave will get up to 100,000 of their money back, whatever happens, finance minister Wouter Bos promised.
Bos did not rule out taking legal action against the Icelandic government, which is technically guarantor for the first 20,000 of each saver’s cash.
Dutch officials will be talking to the Icelandic authorities about getting savers’ money back. But discussions over the past few days have proceeded with `great difficulty’ the Telegraaf reports.
Frozen accounts
All the bank’s accounts were frozen at the beginning of this week when Icesave’s parent company Landsbanki was put under government control after getting into financial difficulties.
Some 120,000 people in Holland have a total of 1.7bn in Icesave. The Icelandic government is responsible for the first 20,000 or so, with the Dutch guaranteeing the rest up to 100,000.
Central bank president Nout Wellink said that most Dutch claims are under 20,000. Savers will get a form to fill in next week to make their claim.
Independent Islandic News: The Icesave fraud case
When the credit lines closed on Iceland in mid 2007, the Icesave had been started to drain money from the UK to divert into offshore island for personal gain. This is no bullshit, this is what most of the money went into. The UK was systematically drained of money. This flow of cash kept the banks alive here in Iceland, and kept up the vail of deception pulled over the eyes of the public and in some parts the politicians´as well.
The deception was kept alive by the media, owned by the bankers, and the Icelandic Chamber of Commerce, The Independence party, the Central Bank, the government and all those who played along to the song of easy money. The worst part is that when some hard criticism came along from academics and the foreign media they where shot down and said to jealous, angry or plain stupid. The media, the Central Bank and the government said this.
When the Icesave was started in the Netherlands the credit lines were already closed to Icelandic banks and financial companies.
British SFO to probe Islandic bank
341. Il est assez notable de remarquer que plus aucune des 2 banques n’a fourni de communication officielle sur leurs états fi nanciers depuis le deuxième trimestre de 2008.
"But I will not let myself be reduced to silence."
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While a lot of small retail savers in the Icelandic banks ended up keeping their savings, many big organisations including councils and charities are still fighting for their cash. Experts say it could take up to four years to sort out.
And as Iceland’s over-leveraged investors were obliged to pull out of their investments in the UK, they have left a trail of woe – from collapsed High Street giant Baugur to City broker Teathers and West Ham football club.
Here we look at how the meltdown is still affecting the UK:
Savers: consumers and small business – potential bill could be over £2.5 billion
All private individuals with deposits in Iceland banks in the UK have, or will theoretically, get their money back. Britain’s Financial Services Compensation Scheme has already paid out £4.4 billion to cover savings up to £50,000 in individual accounts. Sums above the £50K limit are covered by the Treasury but administered by the FSCS. The compensation bill so far is £2.5 billion for deposits at Kaupthing Singer and Friedlander, £500 million for savings at Heritable bank, and £1.4 billion at Landsbanki’s Icesave.
The FSCS recoups the money by charging all British financial services firms an annual levy to cover potential compensation payouts. For 2009-10, the levy will be £406 million to cover just the interest bill on money for savers at all failed banks.
See in my comment above, the Central Bank (DNB) in The Netherlands were give inferior or no financial statements upon request. In October 2008, the Dutch tried to protect the deposits and assets of Landsbanki in the Netherlands. The permit to open the Icesave bank in The Netherlands was from Iceland, as the headquarters of Landsbanki was established there. The Dutch were not able to protect the Dutch savers, Iceland gave priority to their locals. That’s the reason Gordon Brown or the U.K. took the drastic measure using the Terror Act to block asset movement to foreign entities. A few days later, without a written document, the Dutch convinced the court the banking permit had been revoked in Iceland, thus the assets were frozen. The EU regulation was not made for such a financial calamity. Iceland made the most of it by giving preference to their domestic savers. I can imagine the Brits, Germans and Dutch would be irate.
"But I will not let myself be reduced to silence."