Gissurarson: Iceland Out in the Cold

Professor Hannes H. Gissurarson gave a lecture on the Icelandic bank collapse and the future of capitalism at a breakfast meeting of the Swedish think tank Timbro in Stockholm Tuesday 29 October 2013. Sharing the podium with him was Urban Bäckström, former Governor of the Swedish Central Bank and now Director of the Employers’ Association. Gissurarson argued that the international financial crisis had essentially three causes: 1) excessive risk-taking stemming from the unwritten rule that profit is captured by bankers, while loss is transferred to taxpayers; 2) misguided government intervention, for example in the subprime loan market in the US and in the expansionary pre-crisis policies of the American Federal Reserve System; 3) incorrect pricing of risk despite a belief to the contrary, based on new financial techniques. Professor Gissurarson observed that capitalism still seemed to be subject to what used to be called business cycles.

Professor Gissurarson rejected the common claim that the Icelandic bank collapse had been caused by a “neoliberal” legal and regulatory framework for the Icelandic financial market: the framework was precisely the same as in other member countries of the EEA, European Economic Area. He also rejected the claim that Icelandic bankers had been more reckless than their colleagues elsewhere: all bankers had been reckless. Otherwise it would not have been necessary to bail them out in the US and Europe at enormous costs to American and European taxpayers. The Icelandic banks had not been too big when looked at as European banks: But they were certainly too big to depend on institutional support from Iceland alone. What happened in the crisis was  however that all other countries, for example Switzerland, were helped with large currency swap agreements with the American Federal Reserve System, while Iceland alone was refused such an agreement.

Urban Bäckström said that capitalism had not failed despite the financial crisis. He reminded the audience of the fact that Sweden had suffered a severe banking crisis in the early 1990s, when an asset bubble had burst and the Swedish krona had tumbled down. They had come out of the crisis successfully. Government had saved the banks, but removed the equity from the owners of banks needed saving, while protecting the interests of depositors and creditors. In his comment on this, Professor Gissurarson said that the Swedish scheme of coping with a banking crisis was a sensible one, but that the Icelanders had not been able to implement such a scheme because they lost total control of the situation when the British Labour government suddenly closed the two Icelandic banks in England, at the same time as it presented a huge rescue package to all other banks in the country, and then, to add insult to injure, when the Labour governemtn also put one of the Icelandic banks on a list of terrorist organisations, causing an immediate stop to all financial transactions to and from Iceland.

The meeting was well-attended, and a sympathetic, if cricital commentary of Gissurarson’s paper was published in Dagens Nyheter, Sweden’s biggest quality newspaper. A tape of the meeting, with the lectures and the discussion afterwards, is available on Youtube:

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