Cold Wisdom from Iceland

Government shouldn't spend taxpayer funds over voter disapproval.

Most Americans are by now familiar with the root of 2009's financial collapse: banks and government-sponsored organizations, prodded by government regulators, loaned money to people who couldn't pay it back.  Eventually, various big players in our financial industry were left holding the bag.  Rather than let the banking industry go abruptly bankrupt as everyone lost confidence in it, our government decided simply to bail out the banks by using taxpayer's money.

Whether or not this was necessary or a good idea will be debated until the end of time.  Whether the banks used our money wisely probably won't be, as everyone except those actually in charge knows the answer to that; for any members of the Obama administration who might be reading this, the answer is NO.

Lost amidst the hullabaloo was the interesting fact that, though the financial crisis may have started in America, it certainly did not stay there.  Virtually every other country with a significant financial industry had pretty much the same thing happen to them.

The Icelandic Tail that Wagged the Dog

One of the favorite tropes of the left is that big business is bad because a really large global firm can get more powerful than any one government.  Considering the gargantuan size of the American government and the grotesque incompetence of our historical industrial giants, this seems unlikely; GM can't manage its own way out of a paper bag, much less challenge Mr. Obama at running the world.

In part, though, that's because the United States is the world's largest economy.  Consider instead a nation like Iceland; it's not only possible, but actually not all that hard for private companies to create a problem too vast for the government of Iceland to clean up.  That's exactly what happened with Iceland's banks.

The American TARP bailout cost somewhere around $700 billion - we may never know the total bill, as Tim Geithner has tried to keep it secret every step of the way.  It sounds like an awful lot of money, and it is, but America's economy as measured by GDP is around $14 trillion which is a whole lot larger.

Pity the plight of Iceland!  When the excrement hit the fan in a very similar way, all three of Iceland's major banks collapsed.  For a time, the national banking system shut down completely, something that didn't happen in the United States even in the depths of the Great Depression.

With no banks open and no ATMs or credit-card clearing operating, the government really had no choice but to prop the system up: it is simply not possible to operate a modern economy if the only way to move money around is via suitcases full of banknotes that you happened to have in your mattress.

This, however, created a new problem.  Iceland is not a member of the European Union, but has historically had good relations and trade privileges that allow it to operate almost as if it were.  Specifically, during the boom the Icelandic banks underwent major expansion into European countries.  Under the various reciprocity rules of banking regulation, this meant that the Icelandic regulators had responsibility for Icelandic banks regardless of wherever else in Europe they might happen to be.

During the boom before the bust, the Icelandic banks did very well.  They expanded like gangbusters all over the place - until the music stopped.

When the collapse came, the debt turned out to be 50 billion euros.  This doesn't sound like much compared to our bust, until you realize that the entire economy of Iceland is only 8.5 billion.  Icelandic banks lost six times more than their whole country earns in a year.

Fixing the Unfixable

What do you do in such a situation?  Years ago, there would have been either a revolution or an invasion; even today, the Icelanders came about as close as ever they'd want to.  After mass protests and public disdain, the entire government resigned; a new caretaker government came in with the primary goal of trying to join the EU post haste to get their help mopping up the problem.

Meanwhile, rather than invade, the rest of Europe tried to help.  The Icelandic banks were particularly active in England and Holland; when they collapsed, neither the banks nor the government of Iceland had enough money to repay ordinary account-holders the way the American FDIC does when a bank fails.  The British and Dutch governments ponied up instead, not really wanting yet more voters to feel robbed, but they did expect reimbursement from Iceland.

In the best European form, Iceland's politicians agreed to what their fellow Eurocrats wanted.  Handshakes and cocktails all round!  But they forgot one small detail: the will of the voters.

For most of Europe these days, the will of the voters is more the subject of mockery than a matter for of serious consideration.  The more the English, Italians, Germans, and French say they want Muslim immigration to cease, the more loudly their leaders say they're just being racist; the more ordinary Europeans become convinced that "global warming" is a gigantic hoax, the more eager their parliamentarians become to sacrifice their economies on its altar.

Most Europeans wanted no part of a recent treaty taking even more power away from individual nations and giving it to unelected bureaucrats in Brussels; rather than listen, each nation simply signed on the dotted line, except for Ireland, whose voters kept being repeated called back to vote in recurring referenda on the matter until they got sick of it and coughed up the right answer.

Not so Iceland!  To the shock of just about everybody, President Olafur Ragnar Grimsson vetoed the debt-payment bill in response to a petition signed by one quarter of the electorate begging him to do so.

Whose Money Is It, Anyway?

England and the Netherlands are understandably crying foul.  It's not their fault the Icelandic banks collapsed and depositors couldn't be paid!  Each European government had agreed to keep an eye on their own banks and guaranteed to make all depositors whole, no matter where in Europe they might happen to be.

If you believe that "the government" has authority over its money, then that's all there is to it; Iceland had made an agreement, and Iceland should pay accordingly.

But the people of Iceland have realized a profound truth that the entire free world needs to pay attention to: No democratic government has a single cent of its own.  Every last penny comes out of the mouths of taxpayers; no government has any right to spend money that the voters don't approve of.

Insofar as a government does spend money over the objections of most of its people... it is no longer representative, democratic, or free, and America's founders would have been the first to call for its popular overthrow.

Under Icelandic law, the matter now goes before the people in a referendum.  If Iceland's voters choose to pay the money, so be it.

If they choose otherwise, there may be consequences for their countries, such as an inability to get more loans.  Isn't that what would happen to any other defaulter?  The bottom line is, the choice belongs to the people not to the elites.

Back home in America, massive Tea Party protests demonstrates America's fury at Mr. Obama's "porkulus", mindboggling deficits, and inevitably disastrous government takeover of health care.  Despite the opposition of more than 60% of Americans, the Democrats have signaled their intent to cram their agenda down our throats anyway.

If that happens, will we just swallow and put up with it?  Or will we, like the people of Iceland, demand that The Will of the People be obeyed?  It may make the difference between being a free country and becoming an aristocratic oligopoly.

Donald Rumsfeld once said, "Democracy is messy."  He may have chosen a poor time to point it out, but he's absolutely right.

A police state is neat, orderly, predictable, well-regulated, and the exact opposite of freedom, but the trains run on time - or else.  Is that the America we want?  Maybe we should move to Iceland.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments
as usual I will take offense at the statement "Back home in America, massive Tea Party protests demonstrates America's fury at Mr. Obama's "porkulus", mindboggling deficits..."
Too bad Mr Bush saw fit to increase the deficit some 7-8 trillion during his term of office.. the party of more-government-is-less oozes lies, stupidity, arrogance.. and the Democrats are no better, just as self-righteous, and think the American voter deserves no less.
Republicans got Obama elected thru their ignorance and denial.. let's hang 'em all.

January 12, 2010 12:53 PM
As we have pointed out before, Scragged was not shy about expressing our disgust with Bush deficits. However, Obama's deficits make Bush's look like spare change. Take a look at the graph in this article and then say there's no difference.

If you'd like to hang them all, though, we'd be happy to hold the rope.
January 12, 2010 1:59 PM
Ha ha.. ok, I'm game.. learning beats the alternative
January 12, 2010 2:14 PM
1. Iceland's government was not on the hook for the money held in the failed banks. They had set up a insurance fund which should have covered bank failures, but ran out of money. This fund was not government guaranteed, at least not unambiguously.

2. GDP and net worth are two different things. You say their banks lost "six time more than their [] country was worth" after referring to the size of Islands economy. That's like saying that I could buy you for your yearly salary (if you were for sale). You'd probably tell me that your not worth has a little more to do with what your house is worth, your car, etc.

3. I'm not really sure why you keep mentioning Denmark... It certainly doesn't fit here. Maybe you mean Holland?

4. Yes, England (the UK, to be more precise) and Holland (not Denmark) DID have enough money to cover the losses, and did indeed do so, at which point Iceland promised to pay the money back. Oh wait, you do say that the UK payed... right after you say that they couldn't afford to. Hm.

It seems to me that you are pushing a much larger degree of direct democracy. That's a much larger discussion, but direct democracy certainly isn't without it's problems.
January 13, 2010 7:05 PM
Charlemagne, you are quite right about Denmark vs the Netherlands. We remember reviewing the sourcing and could swear the WSJ said Denmark; as of now, it does say the Dutch, and the article has been updated accordingly.

England did pay, even though they couldn't afford to. In other words, they themselves had to borrow the money.

You have a point about the meaning of GDP; we'll make it a little more clear.

Regarding point 1, that's really the crux of the matter, isn't it? The Brits thought that the Icelandic government was guaranteeing their banks, whereas the people of Iceland thought no such thing. Sounds a little like Fannie, Freddie, and Wall Street, which theoretically had no government guarantee... until they needed one, whereupon it magically appeared to the fury of the taxpayers.
January 13, 2010 7:41 PM
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