Some thoughts on Meltdown Iceland and Iceland in general

Reykjavik - Borgartún

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I finished Meltdown Iceland a while ago, and have been meaning to post some thoughts on the book.  Compared to the epic by Andrew Ross Sorkin, which I’m slowly munching through now, Roger Boyes’ story of the Icelandic collapse is a fast read at only 200+ pages.  The actual events surrounding the financial collapse in Iceland happened quickly, but the lead-up much longer. Outside of war time reports and travel journals, this is probably one of the closest examinations of this small island by an outsider in a pretty long time.

Boyes offers a number of explanations for Iceland’s collapse, and much of it to do with the incongruence between its attempt to modernize its economy, and its inability to modernize its political system first.  This was in stark contrast with Michael Lewis’ portrayal of Iceland last year, where he squared the failure on pride, arrogance and lack of diversity of the islanders.

Outsized ambition

Can the Icelandic be faulted for being ambitious?  Michael Lewis attacked the country on its most rampant expansion of the banking industry in the history of mankind, amassing debts amounting to 850% of its GDP.  And he asks point blank:

Why should Iceland suddenly be so seemingly essential to global finance? Or: Why do giant countries that invented modern banking suddenly need Icelandic banks to stand between their depositors and their borrowers—to decide who gets capital and who does not? And: If Icelanders have this incredible natural gift for finance, how did they keep it so well hidden for 1,100 years? At the very least, in a place where everyone knows everyone else, or his sister, you might have thought that the moment Stefan Alfsson walked into Landsbanki 10 people would have said, “Stefan, you’re a fisherman!” But they didn’t. To a shocking degree, they still don’t.

In a country that has whole-heartedly embraced privatization, from its fishing stocks to its banks, and one that has managed to go from one of the poorest countries in Europe to one of the richest in a matter of a decade, there’s no dream too large.  In a country where almost everyone knows, is related to, and can see the Prime Minister any time, ego and a fierce sense of individualism nurture the island’s sense of “specialness”.

Similarly to the way its political culture can be at once transparent and rampant with cronyism, it’s social structure, when it comes to gender, is equally contradictory.  The country may deserve a pat on the back for sitting on top of every international survey that measures gender equality and human development, but in a parallel dimension, it is a culture where the men are wholly disconnected from its women. In a history where taking outsized risks is memorialized and idealized, where arrogance passes as confidence, it is a history of men.  With no checks built in a culture to prevent itself from self-destructive behaviour, the country head-dived into something it didn’t understand.

Pride and homogeneity

Surveys find Icelandic much more sensitive to the concept “independence” than its Scandinavian neighbours.  And why wouldn’t they be concerned?  Just like how statistics become overwhelming when one discusses countries the size of China, India or the US, it is equally overwhelming – overwhelmingly underwhelming, when one discusses Iceland.  This is a place where putting 1,000 workers out of work will exert unbearable pressure on its welfare system – its mentality and worldview more closely resembles that of a Midwestern town, than a country.

The Icelandic nation, and later, the Icelandic state, persevered despite its meager population, not because of the depth of its culture or history, as both can be easily obliterated with one stroke of military prowess, but because of its unique location. Isolation from mainland Europe meant it could be ruled by an outsider in only the most marginal sense.  Indeed, it was first controlled by the Norwegians and the Danes, until the Germans and the British, then the Americans saw it as a place of strategic interest and moved in.

Throughout much of the ongoing reporting on Iceland, the running theme is that the Icelandic reached above its station in life and in the process of doing so, endangering its own very survival.  But I would put forth the idea that the survival of such an isolate, remote society based on tribal lines, has little legitimacy outside of its geography, as a state to begin with.

Add to that a layer of paranoia that makes the Icelanders recoil from outsiders and the increasingly in-suppressible pressures of globalization, it is a culture is not only somewhat xenophobic, but one that is suspicious of outside criticism.  Boyes says:

The effect of having a society based so transparently on intermarriage among a few families, with bloodlines that can be traced back centuries, is a paralyzing fear of the Other, the outsiders.  Foreigners are treated generously, as guests, but they are also a source of nagging anxiety.  And of course the isolation of Iceland had always been its true line of defense.  The plague had come twice to the island in the fifteenth century, each time brought in by a foreigners in a ship.  The feeling prevailed that all that is bad comes from across the water from outside the island family.

The very strain of its attempt to resurrect and glorify its Vikings past, its insistence in the superiority of its cultural heritage as a major contributing factor to its sudden and successful debut on the international banking stage, is almost delusional, were it not too ludicrous to be acknowledged by the wider banking community.

But despite its weariness of Norwegians and Danes, Iceland alarmingly coat-tailed on Scandinavian reputation for prudence and conservativeness, and attracted much attention when it ventured out to raise capital.  Nobody questioned the assumption, because really, with so few of them around, nobody knew anything about the Icelandic, except the very occasional eccentric tale or two.  One of the things outsiders did not realize: Iceland is extremely homogenous, a generous term, considering the level of inbreeding that exists on the island.  Where diversity is not welcomed nor possible to achieve without major social upheaval, groupthink is the logical outcome.

… Icelanders tend to grasp for a single solution – the one fix that will save them from poverty and economic chaos – then pump it up like a pneumatic tire until it either bursts or becomes unusable.

Most Icelanders had an extraordinary sense of catching up with the rest of the world”, was how Boyes described the bubble-licious mentality at the time.  It was a widely held belief at the time that Icelandic progress had been held back by its geographic isolation. But once the movement of global capital and information made its way to the island, the playing field was finally leveled, and the same no-holds-barred and recklessness ambitions that set Icelandic fishermen above their rivals would conquer the financial world as well.

Shrouded in ignorance, the outsider world did little to question the outsized ambition exhibited by the New Vikings.  At least not at first.  Worse still, the Icelandic had little inkling of their own shortfalls – after all, it’s outsiders that are most ready and able to hold up the mirror for a people to see itself.  And outsiders that saw their interests intertwined with that of the Icelandic, were few and far in between.

False promises of transparency

The business world of Iceland was compared to that of the Italian mafia, sans violence. Not exactly a flattering portrayal, given its perennial seat atop the Global Transparency Table.  It came in number 8 in 2009, sharing the position with Australia and Canada, but no doubt a disappointing drop from its number 3 position back in 2007.  In effect, what propelled Iceland to transparency was the very attribute that muddled everything up in the end.

Iceland’s transparency was in a large part driven by the cold, hard fact that in a country of 300,000, all stuck on a barely inhabitable island, secrets were next to impossible.  And as Boyes describes it:

Iceland was always proud of its rough-and ready egalitarianism.  That was largely because almost everyone is interrelated; in a micro-world where a teacher has cousins working in television, in government, on a farm, in a restaurant, and on the trawler fleet, it is little wonder that ministers do their own shopping in the supermarket.  Anything else would smack of arrogance – the one quality that relatives cannot forgive.

But it also imposes huge regulatory challenges for such a small group of people.  Boyes rightly questioned whether it is reasonable, or meaningful to expect all the organs of a functional democracy to exist, for a group this small.  The answer is, hardly.  The Icelandic nation may be ancient, but organizing its society around the idea of a modern state is a new concept.  On paper, there are four political parties in a country little more than 300,000, most of whom are related by blood.  But in reality, the nation has long done so, and continues to run through tribal lines.

The concept of state power is shaky in Iceland.  How could it be otherwise? The country has no army; the police force is tiny, overstretched; the individualistic culture dislikes swagger in the country’s civil services; and an informal system of favours within families and clans keeps the place moving.  In a society of three hundred thousand, something is slightly opt-heavy about the trappings of power: a president, a prime minister, a cabinet, a national health service, a central bank.  All the makes for imbalance, a feeling that there are more chiefs than Indians, and it stirs skepticism about the true clout of institutions.  So the will of the state can easily be replaced by the will of political clan.

On one hand, this forces the country to be transparent, but on the other, without the means to disappear and start over, familial feuds and grudges can drag on for generations. With a lack of willpower, and most likely, a lack of qualified candidates to keep its state institutions and their representative politicians within the appropriate sphere of influence, it is not altogether surprising that once in a while, a strong personality can manipulate the so-called state institutions to curry favours and hold court based on its friends-and-foe list, not like ancient rulers of its land.

It is estimated that the disaster was caused by a mere thirty people, which counts the country’s decision-making elite. Many of the elites on the island have known each other since childhood, and many have family ties, and is collectively known as the Octopus.  With a ruling class so tightly bound by obligations, family and money, independent decision-making has become next to impossible in times of crisis or disputes.  Political cronyism was rampant despite outward appearance of transparency.

What David Oddsson (ex-PM and Central Bank Governor) didn’t understand, or at least did not deem important enough to act upon, was his failure to modernize Icelandic politics before attempting to modernize its economy.  His idols, Margaret Thatcher and Ronald Reagan, could not break away from their personalized style of governance, a mistake that Tony Blair saw to remedy during his time in office. In effect, much of Oddsson’s effort in instituting market mechanisms to pillar-ize the economy was undone by his own petty grudges.  Once books were forced open, corrupted insider deals appeared everywhere.

Lessons learned?

We know too little about countries like Iceland. In days of globalization, where leverage can bring not just one country to its knees, but a whole interconnected group of casualties, it pays to pay more attention to the social, historical and cultural underpinnings of those oddball countries that suddenly debut on global radar.

I generally distrust the particulars of international surveys. I don’t doubt the general gist of the rankings are roughly right.  For example, the bottom third countries on the International Transparency Index, or the Happiness Index, or Human Development Index, are most certainly worse off than the middle third.  But I do think indexes has a lot more bullshit built in than people realize.

In largely homogenous nations, I would imagine the preservation of the overall image of someone’s homeland features a lot more prominently on their mind than someone from a more heterogeneous pot.  Self-reported statistics are hardly objective.  Highly successful marketing campaigns (one that Iceland participated in enthusiastically, projecting the country aboard as the ultimate Cool place to be), and a genuine lack of understanding when it comes to the actual inner functioning of those smaller countries, might obscure results more than people realize.

Elitism exists everywhere, even in those self-proclaimed egalitarian societies.  Greed corrupts all.

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