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Meltdown Iceland

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Meltdown Iceland bækur Hannes Hólmsteinn Gissurarson Roger Boyes: Meltdown Iceland Many of Thjodmal’s subscribers are asked by their foreign friends and business associated what really happened in Iceland during the bank collapse and afterwards. This is the first of a series of articles where Professor Hannes H. Gissurarson corrects some errors, misconcep- tions and omissions in English about the collapse. This article will be available online as well. In 2009, journalist Roger Boyes published Minister in 1991-2004 and Governor of the Meltdown Iceland, the rst full-length book CBI, Central Bank of Iceland, in 2005-9. in English on the Icelandic bank collapse. Some „Dissident” Economists While the author had spent some time in Iceland writing the book, he does not speak The three Icelandic economists on whom Icelandic and does not seem to be familiar Roger Boyes mainly relies, Professors Thor- with Icelandic history or society: Although valdur Gylfason, Gyl Magnusson and Katrin readable, his book is not reliable. Often Boyes Olafsdottir, were according to him amongst quotes anonymous sources, but he acknowl- the “dissident economists” (221-222) uttering edges the help of a few Icelanders, includ- warnings against the expansion of the banks. ing Professors Thorvaldur Gylfason, Gyl This is not entirely accurate. In the years Magnusson and Katrin Olafsdottir (217). 1 It is leading up to the bank collapse, Gylfason, possible that they rather than Boyes himself Magnusson and Olafsdottir could not be are responsible for some of the factual errors, regarded as vocal critics of the leading misconceptions and crucial omissions in the businessmen in Iceland or of the owners and book and especially for the extreme hostil- managers of the banks, even if they certainly ity shown to David Oddsson, Iceland’s Prime were very critical of David Oddsson as a poli- 66 ÞJÓÐMÁL vorhefti 2017 The three Icelandic economists on whom Roger Boyes mainly relies, Professors Thorvaldur Gylfason, Gyl! Magnusson and Katrin Olafsdottir, were according to him amongst the “dissident economists”. tician and central banker, especially Gylfason distributed free of charge to almost all urban who seems to have held a long-standing households in Iceland. Johannesson was not grudge to him (perhaps dating all the way only the biggest debtor of the three main back to 1969 when Oddsson defeated Icelandic banks but also, from the spring of Gylfason in elections to the president of the 2007, in control of one of them, Glitnir. In the students’ association, inspector scholae , at summer of 2005, when Johannesson was Reykjavik Grammar School). For example, charged with ve other businesspersons shortly after Oddsson celebrated his ftieth by the authorities for book-keeping irregu- birthday in January 1998 with a reception larities and several other alleged o!ences, followed by a large and sumptuous dinner, Gylfason wrote in one of his columns: Gylfason wrote a newspaper article about It seems that now the aim is to go after corruption, complaining about secrecy: Johannesson and ve other people before This problem is gravest in the countries the courts. What is behind this? Perhaps where politicians seek the hardest to fur- just a lack of respect for the free market ther their own interests, and those of their and the division of power that goes with personal friends and of tiny special interest it, and also for the necessary separation of groups by handing over to them on a executive, legal and judiciary powers. Who silver platter valuable goods owned by the knows? 5 public (for example shing quotas), at the The case against Johannesson will be dis- same time as they refuse to reveal who are cussed later in more detail, but in his defense nancing their private consumption, for of Johannesson, Gylfason ignored the fact 2 example their anniversary celebrations. that the case against him was initiated by a The reference to Oddsson’s recent birth- disgruntled former business associate, Jon day celebrations was unmistakable. When Gerald Sullenberger, who had a strong per- Professor Gylfason was asked to whom he sonal motive to go against Johannesson and had been referring he refused to name them who was in no way connected to Oddsson or (having himself complained about secrecy). 3 to other Independence Party leaders, having But the birthday reception had been paid for lived abroad for many years. It should also by the Independence Party, and the dinner be noted that both Jon Asgeir Johannesson following it was paid for by the prot made and Jon Gerald Sullenberger were eventually from a Festschrift for Oddsson. 4 found guilty of the charges brought against In the years prior to the bank collapse, them based on Sullenberger’s report to the Professor Gylfason was a regular columnist police. for Jon Asgeir Johannesson’s The Newspaper , Whereas Professor Gylfason strongly sup- ÞJÓÐMÁL vorhefti 2017 67 ported some of the businessmen who domi- On Sunday October 5 th 2008, as the banks nated the Icelandic economy in 2004–2008, were beginning to collapse, Professor he certainly was a harsh and relentless critic Gylfason appeared on a television show on of the CBI. He can therefore be regarded in current a!airs in Iceland. There he repeated a sense as a “dissident economist“, as Boyes his criticisms of the CBI and demanded that puts it. However, Gylfason did not foresee its governors should be dismissed and pos- or predict the bank collapse. At the end of sibly sent to prison alongside some of the a paper he published in April 2008 he said: bankers. He also suggested that Reykjavik “Will Iceland go under? No! Don’t get me airport should be relocated and the land on wrong: Iceland’s fundamentals are strong.” 6 which it was built on be sold, as a means to At the end of a paper he published three alleviate the present crisis. 8 Quoting o$cial months later, in July 2008, he wrote: reports, he said that the land was probably [T]he LSP agenda – liberalization, stabi- worth 78 billion ISK, then equivalent to $0.9 lization, privatization – of recent years billion or £0.5 billion.9 But the very sugges- was carried out in ways that allowed the tion that Professor Gylfason made showed banks and their debts to grow far out that he had no awareness of the immediate of proportion to the size of the country collapse of the banking sector taking place while the Central Bank neglected to raise and of its repercussions, one of them being, reserve requirements as needed instead of as in all such dramatic downturns, that the reducing them to accommodate the banks real estate market came to a total standstill. and neglected also to build up adequate Moreover, Ingibjorg S. Gisladottir, Minister of foreign exchange reserves. These mistakes Foreign A!airs in 2007–2009 and leader of rendered the Central Bank unprepared the Social Democrats, said in her testimony to guarantee the stability of the nancial to the SIC (Special Investigation Commission system, let alone low in#ation, as required on the bank collapse) that she had some- by law. Lax scal policy did not help. Even times sought Gylfason’s advice on economics so, thanks in part to its young people who and that he had never suggested anything keep returning home from abroad, Ice- such as an imminent bank collapse.10 As an 7 land’s medium-term prospects are bright. Icelandic poet, Thorarinn Eldjarn, quipped: This statement about Iceland’s bright “It was only after the collapse that everybody medium-term prospects was uttered only foresaw it.” three months before the bank collapse. It Nor is Professor Gyl Magnusson entirely should be noted though, that the reserve plausible in the role of a prescient or “dis- requirements were brought down in 2003 sident” economist prior to the bank collapse. (two years before David Oddsson became In 2005–2009, at the height of the banks’ CBI Governor), to the same level as in other expansion abroad and during their collapse, EEA countries, so that the Icelandic banks Professor Magnusson was Chairman of the would not be at a disadvantage in competi- Board of the Icelandic Competition Authority tion with other banks in the EEA. It should where he would have been in an excellent also be noted that in the paper earlier position to work against increased concen- mentioned, Gylfason advised the CBI to build tration, for example in the media where “up adequate foreign exchange reserves” almost all the private media was controlled which could only mean that he thought the by Jon Asgeir Johannesson and his busi- CBI should take responsibility for the rapid ness associates, and in the retail market growth of the banks and to bail them out if where between one half and two thirds of necessary, irrespective of the increasing cost the market was controlled by Johannesson of borrowing during the 2007–2008 credit and his associates. After being appointed crunch. to this position he took no initiative in that 68 ÞJÓÐMÁL vorhefti 2017 direction, as far as is publicly known. Moreo- Perhaps Magnusson was a reluc- ver, in 2005, Magnusson was a member tant cheerleader, but these were of a committee for selection of a special export award. 11 That year, the award went to certainly not the words of a “dis- Kaupthing Bank. In a news release, Magnus- sident economist”. Indeed, Profes- son and his fellow members of the commit- sor Magnusson was, like Professor tee said that the bank “was the frontrunner Gylfason, one of the economists who in a forceful expansion abroad of Icelandic criticized the CBI for not increasing its nancial rms, being noted for its dynamic currency reserves enough to make life and protable operations.
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