In a withering 2009 Vanity Fair profile of the situation in Iceland, Michael Lewis described a bleak scene:
Iceland's de facto bankruptcy -- its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance -- resulted from a stunning collective madness.
To be sure, it may be hard to overstate the extent to which Iceland went absolutely insane in the run-up to the financial collapse. That a tiny country with a population about half that of El Paso, Texas, was suddenly a major global banking player -- when it had never held such a title before -- was jaw-dropping. That former fishermen suddenly found themselves as high-flying proprietary currency traders at the country's three major banks was just downright silly.
And make no mistake about it: Iceland's economy has paid dearly for the country's transgressions. Inflation spiked, GDP plummeted, and the country's stock market was positively eviscerated. (Click on the image to view a larger version.)
Source: S&P Capital IQ.
Fast-forward to today, though, and a very different picture is emerging. Unemployment has fallen to 6%. The consumer price index was up 6.5% year over year in January but increased just 0.3% month over month (U.S. CPI increased 0.4% from December to January). GDP for the third quarter of 2011 was up 4.7% from the previous quarter and 5.1% year over year. The Organization for Economic Cooperation and Development expects that country will show growth of 2.9% for all of 2011 and then climb another 2.4% this year.
In some ways, most impressive is that ratings agency Fitch just recently raised Iceland's debt rating to investment grade. That means that all three major ratings agencies -- Moody's and Standard & Poor's being the other two -- now consider Iceland debt to be investment-quality paper. Moody's recently projected that Iceland's GDP will grow 2.5% this year and government debt will fall.
A policy of zigging
At a 2011 conference aimed at dissecting the Icelandic collapse, Nobel Prize winner Paul Krugman noted that "Iceland zigged when all the conventional wisdom was that it should zag."
And what a zig it was.
Recognizing madness for madness, the Icelandic government took over the major banks that engineered the collapse. Rather than foist losses onto the taxpayers, Iceland rejected the "kowtowing to the lords of finance" approach and made private-market investors -- in many cases, other banks and financial companies, including Japan's Nomura and insurer Aflac (NYSE: AFL ) -- eat the losses. The banks were forced to forgive housing debt that exceeded 110% of home values. They've also charged some major banking executives with crimes.
It's an approach that differs drastically from what went on elsewhere in the world as other countries sought to defuse bloated and toxic financial sectors that threatened to blow a hole through their respective economies.
It's an approach that differs drastically from went on here in the U.S., where billions of dollars of public money was poured into major banks and lawmakers decried "too big to fail" out of one side of their mouths while giving the go-ahead for "too bigger to fail" mergers -- like Bank of America (NYSE: BAC ) buying Countrywide and Merrill Lynch; JPMorgan Chase swallowing Bear Stearns and Washington Mutual; and Wells Fargo gobbling up Wachovia -- out of the other.
If Iceland was all zig, then the U.S. wrote the book on zagging.
And then there's today
Michael Lewis wasn't wrong. What happened in Iceland before the crisis was just plain nuts. Last year, Citigroup chief economist echoed the sentiment, saying, "Iceland, in the decade and a half leading up to the crisis, was an example of collective madness."
Indeed it was. But what of the post-meltdown Iceland? It doesn't seem like a stretch to say it looks like a welcome return to sanity for the country.
It's a bit of sanity that would be a breath of fresh air here in the U.S., where the crisis-era enabling has only turned banks into even bigger mutant beasts that appear frighteningly well equipped to dictate the terms of their position in the economy. We've recently been treated to a startling display of their financial-sector power as the big banks -- B of A, JPMorgan, Citigroup -- have joined with regional banks (US Bancorp (NYSE: USB ) , Fifth Third Bancorp (Nasdaq: FITB ) , PNC Financial (NYSE: PNC ) ), foreign banks (Royal Bank of Canada, Credit Suisse, Bangkok Bank), and foreign governments to conduct a full-on assault on the Volcker Rule provision of the Dodd-Frank financial-reform package.
The Volcker Rule is a relatively small measure in the direction of curbing financial-market insanity, but it appears worrisomely likely that regulators are going to stand by as the patients blatantly cheek their bitter pill and prepare to spit it out at the first possible opportunity.
A soft spot for Iceland
As a student of happiness research, I have a special fondness for Iceland, as it's been singled out as one of the happiest countries on Earth. The Netherlands' World Database of Happiness ranked Iceland the third happiest country in the world based on average happiness between 2000 and 2009. The U.S. clocked in at 21.
In case you're wondering whether that ranking is a fluke driven by the pre-crisis, funny-money economy, it wasn't. Measured levels of happiness in Iceland are notably high going back to the early '80s. Perhaps more interestingly, surveys conducted in 2010 and 2011 showed that the small fishing nation continues to sport a rosy outlook on life.
Banking catastrophe aside, it's not as if it's all lollipops and rainbows in Iceland. In researching his book The Geography of Bliss, writer Eric Weiner visited Iceland, and the salient points of the visit that jumped out at me included excessive darkness, biting cold, high-priced everything, and a delicacy of (no kidding) rotten shark. Yet Icelanders tend to be very happy.
Is there a connection here? Does Iceland's happiness have something to do with the inhabitants' ability to see reality for what it is and accept it? And maybe a healthy dose of humility that allows them to recognize when they do something unbelievably stupid and move beyond it rather than try to pretend it's still OK?
What I do know is this: Iceland crashed harder than just about anybody during the financial collapse. Yet today, the country's economy is on the mend and moving forward. More importantly, Icelanders are happy and have somehow held on to that happiness without coddling their banking industry after it cratered the country's economy.
No, you can't use the same policies from a tiny fishing nation for a $14 trillion economy. But maybe, just maybe, there's something we can learn from those happy Vikings.
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