From Goldrush to Collapse

From Goldrush to Collapse Explaining Iceland s Financial Rise and Fall Stefán Ólafsson University of Iceland After the Goldrush Plenum lecture at a conference organized by the Faculty of Human and Social Sciences University of Iceland Reykjavík 27th-28th May 2010

The Biggest Bubble Economy Rise and Fall of the Stock Market The Icelandic Þróun úrvalsvísitölunnar Stock Market 1993-2008 Index 1993-2009 10100 9100 8100 7100 6100 5100 4100 3100 The Collapse: Stock market fell The currency fell Banks fell Government fell Depression set in 2100 1100 100 1.1.1993 1.1.1994 1.1.1995 1.1.1996 1.1.1997 1.1.1998 1.1.1999 1.1.2000 1.1.2001 1.1.2002 1.1.2003 1.1.2004 1.1.2005 1.1.2006 1.1.2007 1.1.2008 1.1.2009

Inequality and Neo-Liberalism in USA 1917-2006 Income share of top 10% - Source: E. Saez 2009 50% 45% Top 10% Income Share 40% 35% 30% Excluding capital gains 25% 1917 1921 1925 1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 Including capital gains

Policy and Power Shift from 1980s Influential group within the ruling Independence Party (IP) turned to neo-liberalism, from 1979 (Book: The Revolt of the Libertarians )... This involved a wholesale import of radical policy ideas from American neo-liberal think tanks Backed up by an army of visiting neo-liberal ideologues (Hayek, Friedman, Buchanan and others) Supported by employers and the most powerful daily newspaper. Economists generally supported it also. Put into practice by Oddson s IP-led governments, from 1991, but with increasing strength from 1995 onwards... Hailed in 2004 as the most successful neo-liberal experiment (beyond Thatcher, Pinochet and New Zealand!)

From Neo-liberalism to Bubble Economy New ideology >>> >>> >>> New environment Marketization of the fishing sector 1983 and1990 Neo-liberalist ideology stronger from 1995 to 2008. Full privatization of banks by 2003 was a turning point; Banks reign... Increasing influence of neoliberalism from early 1980s Increasing predominance in policy debates Freedom of capital movements from 1995 Emphasis: Marketization; Privatization; Shareholder value; Tax priviledges to firms and financiers; Laissez-faire prevails in government; Bonuses in banks; Deregulation; Market ethic and values rule suprime. Banks turned into speculation vehicles; Casino capitalism Easy access to cheap money on internat. Market; Debt accumulation sets in... Increased concentration of power in business, politics and media. World s biggest bubble economy becomes a reality

Main Cause of Crisis: Debt Accumulation 800 Iceland's gross foreign debt 1947-2008 % of GDP 700 600 500 400 300 200 100 0 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 % of GDP 2007 Oct. 2007 Arthur Laffer says: No problem! Warnings issued The world s most indebted economy Privatiztion of banks finished Recession 1968-9 Privatiztion of banks begins Free flow of capital Banks went up to about 10 X GDP in size Sources: Historical statistics and Central Bank

Growing income inequality from 1995 Gini coefficients for disposable income (All taxpayers; all earnings counted; equivalized) 0.500 0.450 0.400 0.350 Gini coefficients 0.300 0.250 0.200 0.150 0.334 0.100 0.050 0.000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Public Tax Authority

Size and Consequences of the Crisis Characeristics Central Bank of Iceland and IMF prognosis: 10% cut in GDP from 2008-2010 Up to 20% cut in purchasing power Unemployment approaches 10% by end of 2009 Finland s crisis 1990-1994: About 14% cut in GDP 1990-93 About 7-8% cut in purchasing power Unemployment 17-18% at top

Economic growth 1945-2010 Historical Context of the Crisis (real yearly growth) 15-6.7 0 13.1 8.8 8.2 8 2.5 0.3 5.5 1.1 5.4 1.5 4.6 5.3 4.3 4.9 5.2 3.9 4.6 3.1 6.7 7.3 0.8 3.1 2.5 5.5 0.4 0.3 2.7 4.2 4.1 5.2 6.4 6.9 6.8 8 7.3 6.5 6.3 12 10-15% -10% -8% -10% 5 2.8 2.8 2.5 1.8 1.5 2.5 1.8 0-5 -0.2-3.8-4.2-3.9-2.6-2.3-0.1-1.8-2.8-0.6-3.4-1.7-0.9-1.5-4.5-0.4-0.7-2 -10 1945 1947 1949 1951 1953 1955 1957 1959-8.3 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Yearly change Breyting VLF of á mann real frá fyrra GDP/per ári, % capita in %

Contraction of GDP in EU 2008 + 2009 Iceland s Position (EU data March 2010) 8 6.7 3 0.1 0.2 0.3 0.3 0.4 0.9 2.9 2.9-2 -0.1-7 -17.3-6.6-6.2-6 -5.9-5.7-5.5-5.1-4.9-4.5-3.9-3.7-3.6-3.4-3.4-2.9-2.7-2.5-2.3-2 -1.9-1.8-1.7-12 -12.2-10.5 Iceland contrated by 6,5% in 2009 alone -17-22 -27-22.6 Source: Eurostat

1. Unemployment Consequences Prediction=10% by end of 2009

Unemployment in the EU in November 2009 % of labour force 25.0 22.0 20.0 18.9 Unemployed as % of labour force 15.0 10.0 5.0 15.5 14.6 13.5 13.1 13.0 10.8 10.5 10.3 10.0 10.0 9.7 9.4 8.8 8.7 8.7 8.3 8.0 7.8 7.8 7.8 7.7 7.5 7.2 7.1 7.0 6.8 6.2 5.9 5.5 4.0 3.2 0.0 Latvia Spain Estonia Lithuania Slovakia Turkey Ireland Hungary Croatia Portugal France USA Greece EU average Finland Poland Sweden Italia Belgium Czech Republic UK Iceland Bulgaria Germany Rumania Denmark Malta Slovenia Cyprus Luxembourg Austria Holland Norway Source: Eurostat

2. Level of Living Consequences

Purchasing power development 1955-2009 Comparable setbacks % change % breyting between frá fyrra years ári 30 25 20 15 10 5 0-5 -10-15 -20-7.7 10.5-5.2 11.2 2 0.4 1.6 11 11.8 10.3 11.9 5-17% -15% -24% -2.7-8.4-6.1 17.1 15.1 8.4 7.3 11.6-15.1 2.3 15.5 8.5 2 1.1 5.5 2.2-12.5-2.5 10.8 9.5 25.8-2.7-9.4-4.6 2.5-3.3-6.8 0 3.8 3.9 5.9 7 4.7 5.2-1.2 0.2 4.2 5.3 Heimildir: Sögulegar hagtölur Þjóðhagsstofnunar og Hagstofa Íslands 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 8 8-20% 5.3-8.2-12

3. Debt Consequences

Gross Government Debt - IMF forcast 2010

Total Debt Burden of Families Serious debt burden of indebted households April 2010 % which cannot make ends meet and % with very tight financial position All households Single parents Couples w. children Singles Couples, no children Can't make ends meet 14 20 15 14 10 Very tight finances 8 15 5 11 4 Total % in distress 22 35 20 25 14 Source: Central Bank of Iceland Total Survey of Household Debts

4. Emigration risk

Net migration in Iceland 1967-2009 Number of immigrants emigrants: Icelanders and foreigners 6000 5000 4000 3000 2000 1000 0-1000 -2000-3000 Recession Iceland might loose 2 4% of population 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Icelandic citizens Foreign citizens

Social Protection Softens the Crisis Unemployment costs rise significantly Activation measures have been stepped up Minimum pensions were raised > Pensioners are now guaranteed to be above poverty line Taxes were cut for low income earners in 2010, raised for others. Further tax increases expected in 2011. Various measures to aid families in big debt Public expenditures face big cuts 2010-2012 Biggest problems for families when unemployment goes with high debt level and reduced purchasing power. Biggest threat is political turmoil demagogy, splits and irresponsibility difficult to face issues

Politics: The Biggest Risk Factor Now Split within one government party Referendum on Icesave issue - A Farce Parliamentary investigation into the crash delivered in April Devastating Regular news of misdeeds General disillusion > Fragile conditions A period of political turmoil may follow

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