Thread: Iceland points to the future

Iceland points to the future


By Julian Delasantellis
Asia Times
Jan 13, 2010


When I was a young, nerdy little thing, the 1972 World Chess Championships between Russian communist Boris Spassky and American psychotic Bobby Fischer excited me far more than any traditional American sporting event. Particularly thrilling to me was the exotic and cosmopolitan venue for the contest, Reykjavik. I was crushed when I read some wag's justification of the Icelandic capital as the Coliseum of these mental gladiatorial games - that the city was so boring as to not tempt the players with unfortunate distractions.

About 10 years ago, Icelandic Airways offered US flyers departing from northeast airports a really cheap - under US$100 - weekend round trip to Reykjavik. My wife and I were going to go, but then one of her co-workers from Norway told us of the city's main, and basically only tourist attraction.

"Well, if you've got a nice hotel room you can drink all through the weekend in it." We passed.

Lately, the place seems to have gotten much more exciting. They seem to be well on the way to finding a way to take money from people, promise to give it back with interest, and then keep it, as if the waiter was going to bring you back $10 million in change for your vodka tonic.

Nice work if you can get it - unfortunately, it seems like you have to be Icelandic to get this to work right.

In case you haven't noticed it yet, this is a column of economics, not morality. If you want to figure out how to save a baht or a buck read here; if it's your soul that needs some, or a lot of, salvation, you probably should first look elsewhere.

Questions in economics are usually couched in terms of maximizing, or even assigning, some sort of numerical, marginal monetary value, or utility, to different policy actions under consideration. An example of this would be how much economic growth will x stimulus engender, or is it worth losing y number of jobs for a z reduction in atmospheric carbon.

A noted exception to this approach is taken by University of California at Berkeley economist Brad DeLong, an influential and informed voice in the macroeconomic debates to get the national economy moving again, but perhaps even wider known for his fairly quixotic attempt to deny George W Bush Justice Department official and torture defender, John Yoo, a comfortable return to his teaching sinecure at Boalt Hall School of Law at Berkeley.

Whether they wanted to admit it or not, both major current world economic systems - free-market capitalism and what's left of state socialism - recognize as part of their own moral code the absolute centrality of private property in the economic and social affairs of the human race. Socialist systems recognize and respect private property by stealing it from its rightful owners and making it public property; in the capitalist world, private property is so sacrosanct that for at least the past 3,600 years it would be codified into its faith's most sacred, metaphysical guidance - the eighth of the 10 Mosaic commandments that "thou shalt not steal".

Yet, just as parents scare children with the prospect of a howling bogeyman should they ever stray, is the command not to steal a real moral prohibition of the human race, or just one more "do as I say, not as I do" privilege that society's powerful reserve for themselves?

This issue is taking on particular urgency. In the United States and elsewhere, millions of Americans and huge numbers of Britons, Irish, Spanish and others who drank from the poisoned chalice of financial deregulation these past 10 years are being, or soon will be, faced with a decision of massive financial and apparently moral import, whether to "walk away" from the homes and the attendant loans they used to purchase or refinance their properties.

It was not supposed to be like this. No more than five or seven years ago, these homeowners willingly loaded up on huge mortgages, many with payment schedules that required gargantuan increases in the required monthly payment, the deadly so called "Option Arm" loans. This they did in order to possess a ticket to the hottest game in town, the great real estate frenzy and bubble of the last decade, the one that promised boundless riches flowing like blessed manna from heaven - but only to those that had that ticket.

For most people, the issue of whether to stay and keep making mortgage payments on a property whose current mortgage balance exceeds its market value starts as an economic, personal finance question, and then gets grimmer from there.

In most cases, it costs more to make a mortgage payment on a house than a rental payment, for a significant portion of that mortgage payment always includes a paydown on the actual remaining ownership cost of the property, otherwise known as the "principle". When a principle exceeds the market price of a house, it means that the market value has plunged so far and so fast, in a relatively short amount of time, to put the homeowner in great distress.

An example of this would be a homeowner who bought a $500,000 house, putting 5% ($25,000) down. When, say two years later, the house value has declined by 40%, it is now worth $300,000, but the homeowner may then only have paid down another 5% of the mortgage, meaning that he still owes $400,000 on the loan.

Without coming up with that extra $100,000 in some manner, the homeowner will not be able to sell the house and move; the mortgage must first be paid off. Also, there's no guarantee that the house will not keep declining in value. If the investment continues to perform badly, many people would be hard-pressed to come up with further reasons to keep funding it and not fulfill the requirement of roof and shelter through renting a residence at a cheaper price.

Not that this is going to be easy. Defaulting on a home mortgage places a black mark as dark as that suffered by Nathaniel Hawthorne's Hester Prynne in his novel, The Scarlet Letter, on your credit for seven long years. This, essentially being cast out of the credit economy to live in the dark domain of cash, could complicate one's ability to get a future job, apartment, rental car or hotel room - you can forget about trying to get a credit card.

It is here, with the homeowner judging the desirability of the competing prospects of financial exile versus financial exsanguination, that the guardians of the current moral order open up with the guns of guilt. Isn't "render unto Caesar what is Caesar's", from Mark 12:17, a fairly explicit command to pay back earthly debts before expecting a return in the next world, as is the prohibition against stealing? On a Christian personal finance web site, the commandment to stay in a bad mortgage is equated with something seen equally rarely these days, the need to stay in a bad marriage:

The way I see it is that when you borrow money from the bank, or anyone, you agree to pay it back. It isn't a conditional agreement that lets us off the hook if things are working out for our benefit. Just like with a marriage, raising kids, or serving God, it isn't always easy, and sometimes it feels like we are getting the short end of the stick, but we made a commitment, so we should stick with it! We are living in a world that is forgetting what personal responsibility is. The government and big corporations aren't setting much of an example for us either - but just because someone else is doing it, doesn't make it right!

Now that the fear of default leading to a roasting upon the Devil's horns has been sufficiently inculcated into the middle classes, you'd think that similar sentiments would be seen in the upper classes, where most of the economy's actual borrowing and lending occurs. That's not happening; it appears that all too few whose blood flows that royal blue are taking the time to attend to the message now being heard down there in the pew.

In December, it was announced that Morgan Stanley Real Estate was walking away and sending in the keys for five major San Francisco downtown office properties, totaling about 112,000 square meters, that it acquired from the Blackstone Group at the boom's 2007 apex. Last week, it was announced that Tishman Speyer Properties and BlackRock were going to miss an interest payment, the traditional first step in a walkaway, for the massive Peter Cooper/Stuyvesant Town Apartment Complex on Manhattan's East side that the partnership acquired from Metropolitan Life for $5.4 billion in 2006. Then, there's the example of Iceland.

By the end of the 20th century, Iceland finally found something to do. That was to suck capital out of Europe, most especially the United Kingdom, by offering much higher deposit savings interest rates than those domestic financial institutions were paying.

When the world financial crisis hit Iceland in the momentous September of 2008, many rounded up the usual suspects to pin the blame on US subprime lending, a not entirely unreasonable conjecture in those dark times. We've since learned better, but knowing more has not provided the world with any cause to feel any better about the situation.

More so than in the US or Britain, or Spain or New Zealand, what you seemed to have in Iceland was the nation that drank the fullest possible draughts of the financial deregulation Kool-Aid. All prudential regulations for the nation's three major banks were suspended; as a result, the banks soon grew so much, partly by offering savers in other European countries high interest rates, and partly by swallowing every junk financial nightmare that the twisted MBAs of Wall Street were creating, that they were soon larger than the Icelandic Central Bank itself.

But it was in that early fateful autumn of 2008 that, worldwide, the high and mighty were brought down low. In the space of one month, all three of Iceland's major banks - Glitmar, Landsbanki and Kaupthing - went insolvent and were seized by the government.

When the stock market opened after a forced week of closure on October 14, the benchmark share index immediately fell 77%; after a week of trading, it would be down 93% from its summer 2007 highs.

Last July, the Icelandic parliament voted to seek full membership in the European Union. The country's fathers must have realized how that process would go a lot smoother if Iceland made at least some effort to pay back some of the bank depositors in the UK and the Netherlands reduced to penury through the looting of their savings. In late December last year, the Icelandic parliament voted to approve 3.9 billion euros (US$5.6 billion) in payments to the UK and the Netherlands.

Then, on January 5, Iceland's heretofore mostly ceremonial president, Olafur Ragnar Grimsson, handed in the keys and walked away from the debt. Sometime this year, possibly on February 20, the issue of the repayment deal will be put to the Icelandic people in a national referendum, a vote the "no pay" forces are overwhelmingly expected to win.

Whatever is going to happen up in those cold northern waters, one wonders if what we are seeing in both the Icelandic debt market and the US housing finance market is the first glimmer of the last possible significant solution to the financial crisis - the repudiation of the payments on the private sector debt taken on during the boom, and the, in many cases, even greater levels of government debt being taken on in Western societies to combat it.

This is the ultimate apostasy of the capitalist canon - debt defines the operation of life in a capitalist society; repudiating it is like society turning from priests and prelates to a Jim Jones/People's Temple style death cult. Also, debt repudiation is one of the few ideologies that conservative free marketers seem to be willing to die to prevent, so with conservatives now in electoral ascendency in both the US and UK, with the very real possibility that conservatives could be enjoying newly won political power in both by year's end, the debt repudiators will, at the very least, have to march through Pennsylvania Avenue and Downing Street to conquer the kingdom.

Then again, if the corporate, political and even spiritual elite are against debt repudiation, then who's left to favor it? That's easy - the people, the enraged, furious, choleric, absolutely apoplectic middle classes who watched as their dream of real estate fortune and glory was seemingly snatched away from them through no seeming fault of their own. They're the people who will show up at the Icelandic polling stations with their purses firmly clasped shut; the number of them who show up at American polling stations in November will determine where on the political continuum this autumn's congressional and senate elections will find themselves, from fairly standard US mid-term elections to something approaching an American coup d'etat.

The standard textbook economics objections to debt repudiation is that, like the mortgage defaulter sentenced to seven years of debt purgatory, so an international borrower will have to pay a higher, penalty rate on its debt for some extended amount of time. For the short term, that is certainly true; then again, after partial defaults in the 1990s, both Russia and Argentina were being flooded with foreign capital by the middle years of the just-concluded decade.

Both of these had raw materials and commodities greatly desired by world markets; then again, the US has the dollar, continuing to be the most popular currency on Earth, along with an investor class in a continual, bare-knuckle brawl with each other looking for the higher yield a borrower just returning from default would offer.

In the long run, those opposed to debt repudiation may have to answer a very difficult question. Just how much national wealth and treasure, how much future productive capacity, are going to be called on to right the policy wrongs of the past? Much as in the manner of the "debt holidays" mandated for every seven years by the Old Testament, debt repudiation may eventually come to be seen as the only real solution to the gross misallocation of national wealth and income that has attended the past three decades of world capitalist excess.

An Iceland crisis jokes website asks "what's the capital of Iceland?". The answer is not Reykjavik, but 1.3 euros, or about $1.88. Let's see how funny the idiot offspring/coupon-clipping class finds it when the monthly interest checks fail to arrive, and they're forced to work mucking out the stalls rather than oh so nobly riding the horses stabled there.

Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.

http://www.atimes.com/atimes/Global_Eco ... 3Dj02.html

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