Developing a resilient financial system lessons from iceland

Developing A Resilient Financial System:

Lessons from Iceland

By Raf Manji

Outline

• Global Financial Crisis

• The Iceland Story

• Could It Happen Here?

• Problems for NZ

• Lessons from Iceland

Global Financial Crisis - Overview

• Collapse in House Prices

• Credit Markets Freeze

• Banks collapse in US, UK and Europe

• Collapse in Global Stock Prices

• Global contagion

• Global Recession

• European Sovereign Debt Crisis

Ground Zero – The US Housing Bubble

Irrational Exuberance? Prices vs. Rent

Driven by the Debtmobile

Financialisation of the Economy

Causes – The End of History?

• Excessive Credit

• Speculation

• Predatory Lending

• Deregulation

• Fraud

• Risk Modeling

• Complexity

• Hubris

Neo-liberalism: there is no alternative!!!

• Open markets for capital and trade (not labour!)

• Privatization of public assets

• Deregulation

• The “Free Market”

The Smartest Guys in the Room – Exhibit A

• Long Term Capital Management

• Nobel Prize Winners

• “Finest Finance Faculty in the World”

• $4b loss

• Not so smart after all

The Smartest Guys in the Room – Exhibit B

• Enron

• Fortune’s “America’s Most Innovative Company” 1996-2001

• Innovative and complex accounting fraud

• One of the biggest Corporate bankruptcy cases in history

• Shareholder loss of $11b

• Not so smart after all

The Smartest Guys in the Room – Exhibit C

• The Famous Five

• Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns.

• 2004: Self-regulation please

• 2008: System Meltdown

• 2008: $700b taxpayer bailout

• Not so smart after all

The New Vikings: From Fishing to Finance

• Dominant Neo-Liberal ideology

• Bank Privatization

• Political and Business Elites

• Banking and Media Oligarchy

• Low level of regulatory oversight

The New Vikings: European Invasion

• Huge leveraging of balance sheets

• Related party lending

• Cross shareholdings

• Debt financed buyouts

• Major expansion into UK

• Arthur Laffer: “Iceland should be a model to the world”

• Icelandic banks over 75% of total market value (2006)

Mania Takes Hold - Iceland

• Population 320,000, GDP $13 billion, Bank losses $100 billion

The New Vikings: In the Kreppa

• Icesave: Desperate for deposits

• £4.5b from the UK, €1.7b from the Netherlands

• Credit Squeeze

• The Great Unraveling

• Bubble finally bursts

Iceland: Surviving the Crash

• Took over the banks (Oct 2008)

• Icesave Resolution on Deposit Guarantees (2008-2011)

• UK Reaction: Anti-Terror Bill

• The Icesave Bills

• Referenda

• EFTA case

Iceland: The Cutlery Revolution

• The Peoples’ Voices

• PM and Government Resigned

• Board of Supervisory Authority Resigned

• Central bank Governor Resigned

• Special Investigation Commission

• New People Driven Constitution

• New Mayor: A Comedian

Iceland: 2013

• Recovering Slowly: GDP 2.7%, Inflation 4%, Unemployment 6%

• Still Major Household Indebtedness and Currency Index Loans

• Government Debt still high 80-100% of GDP

• Capital Controls Still in Place

• Lack of new Investment

• Still Better than Most: PIGS and Cyprus

New Zealand – Too Small to Fail?

• “Well managed and regulated financial system” – Yeah Right!

• Finance Company Collapse: $8.5b funds affected

• External debt $147b (71% of GDP) set to grow to 84% by 2017

• Net Public debt $41b (20% of GDP) set to grow to 29% by 2017

• Bank Assets 160% of GDP

• Household Debt 140% of Disposable Income

New Zealand – Too Small to Fail?

Spending more than we earn - since 1973

New Zealand – Too Small to Fail?

• Living Beyond Means

• Cowboy Capitalism

• Sub Prime NZ style

• SCF Bailout

• Addicted to Debt

Problems for NZ

• Excessive Credit

• Speculation in Housing

• Poor regulation

• No capital taxes

• Complacent Governance

• Overseas Ownership

• Debt Addiction

Lessons From Iceland

• Sovereign Currency

• Proper oversight and regulatory authorities

• Stable and well capitalised banking system

• Simple financial products

• Low external debt and balanced budgets

• Transparent Political Interests (Oddsson and Brash)

• Improved Financial Literacy

• Diversified Economy

Mea Culpa

“With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called light regulation hadn’t prevented any of this”

Governor, Bank of England, Mervyn King, May 2012

Real problem

“The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.”

Adair Turner, Chairman, FSA (UK), Nov 2012

And Finally…

“Why are banks considered to be the holy churches of the modern economy?”

Olafur Ragnar Grimmson, President of Iceland, January 2013