“Students interested in economics and finance should closely follow this new Iceland saga, for it is the most dramatic story yet to illustrate how reckless bankers let loose in a free market can destroy entire economies.” – Uwe E. Reinhardt November 3, 2008
Democracy in the western world has a new fight on its hands.
After defeating emperors, dictators and monarchs it now has to rid itself of the tyranny of political parties.
It is time for individuals voting for individuals.
That could be the Internet’s next great thing.
He had been on the job-market since leaving high-school without a diploma ten years ago. He bought a car in 1998, a small Volkswagen that he drove into the ground nine years later. He was a talented salesman who never had a high-paying job, but on the other hand didn’t have any monthly payments apart from rent.
He got a job as a salesman at a bank in 2005, and did really well. Didn’t make big amounts but enough for himself. He spent it on rent, his car and his hobbies. He had some savings. Then the Volkswagen reached the end or the road. He considered his options. He had been passionate about cars his whole life. A new Volkswagen would cost around 2 million ISK, a shiny two year old Mercedez C240 imported from the US would cost 2.3 million ISK.
He didn’t rush into things. He was 30 now, and he figured monthly payments of 30-40.000 ISK would be very manegable. He found the car and checked into what loans were available. He could get 100% financing through a currency loan for 2.3 million. The car’s market price in Iceland was 3.5 million.
He called two persons in the bank he was working for, one in the analyst department and the other in risk management and asked them for advice. They had both told him that he should take a currency loan. If he could handle fluctuations up to 20-30% in monthly payments then he would be fine. He borrowed the money and got the car in November 2007.
Today the car is worth 3 million ISK on the Icelandic market. The loan is around 5.5 million ISK and the monthly payments have reached around 100.000 ISK. He lost his job last month.
If you ask politicians and business leaders who is to blame for the economic situation in Iceland you will invariably get the answer that we are all to blame. We borrowed too heavily, bought cars and flat-screen TV’s on credit.
It is a distraction, to make you feel guilty about the small pleasures and necessities you want to allow yourself because you belong to the nation that works from dusk to dawn. There a big difference on the other hand when you borrow billions to leverage businesses that you rip apart the goods from in the form of dividends and bonuses, then leave with blanket companies that go bankrupt.
So there is a big difference between him and Bjorgolfur Gudmundsson. He doesn’t hurt anyone else than himself. And he certainly doesn’t run away from the crash site like Hannes Smarason and Bjarni Armannson or tries to play the ambulance like Sigurdur Einarsson and Jon Asgeir Johannesson.
He’s got to live with it, and his life will suffer because of it.
I spent last weekend in the UK. Even though the GBP is at an all time high (220 vs. ISK when I was there), the UK is still much more competitive when it comes to retail and therefore it still makes sense looking for Christmas presents there.
We were wandering around in a clothing-store on December 1st when we noticed that all shelfs and hangers had handwritten notes with new prices. Immediately we started panicking that prices were being raised and beating ourselves for not having bought what we needed the day before when we were in the same store browsing.
Then we realized that prices weren’t rising, they were falling. We had forgotten about Alistair Darling’s new VAT cut, from 17,5% to 15%, effective from December 1st.
And then we felt incredible sadness at the fact that we are from a country where we have been so burnt by lack of competition and trade barriers that we never believe that prices can ever come down.
It surely is a different world.
I had some elderly women looking funny at me when I snapped this photo.
In the midst of all the economic chaos, we seem to have lost something.
What on earth happened to Olafur Ragnar Grimsson, President of Iceland?
Has he been on a “Bush-vacation”? Or didn’t he get the memo and is still abroad helping Hannes Smarason and Bjarni Armannsson win investment opportunities?
Or is he deliberately keeping a low profile? Why?
At least one Icelander is coming out on top of something. Arni Matthiesen, Finance Minister is # 1 in the Huffington Post’s vote for the World’s Worst Banker.
He’s even got Alan Greenspan beat.
A month ago I wrote a post about the situation facing people I know. Above is a well known economic cliche attributed to Harry S. Truman. What would Truman make of what is happening in Iceland. Text in italics is from last month’s update.
A friend in his forties lost three jobs in the last year. A year ago he held a top level management position at a big financial institution. Now he says he is applying for every single job there is, jobs like managing a pizza joint.
A friend in her thirties lost her management position at a computer company. She is preparing to leave the country.
A relative in his fifties lost his job as a salesman.
Four acquaintances who lost their jobs at a bank have fled to Europe to work as unskilled labor.
A relative lost his job at a bank.
A friend who could count on 40-50 extra hours each month at his job has lost all the extra work, plus his regular work being cut down to 85%.
Another friend has had to accept a 15% pay-cut at a computer company.
A business that employed more than 30 people earlier this year has been shut down, everyone losing their jobs.
A girl in her twenties, saddled with debt on her apartment, who also lost her job has begun charging for sex to make ends meet.
I went to a party where 12 people in their twenties had lost their jobs, all with financial obligations. Many were extremely bitter, most were in shock. One guy cried. Their world had collapsed.
One girl in her twenties with three small children has been laid off from her bank call-center job. Her husband, a builder as well. They had taken a home-loan in a foreign currency and the payments had gone up to 230.000 ISK, a monthly wage. She was rehired in a smaller capacity but has to postpone her graduation from Engineering at the Unversity of Iceland. She is thinking of sending her husband to get a job abroad. I suggested Poland.
My friend, 32 has been laid off from his job as a car-salesman. This summer, he and his girlfriend bought a new home. They didn’t manage to sell their old one. He is seriously thinking about moving abroad but he has lived in the same area in his whole life and has had a good life there. His other source of income, laying parquet-floors is non-existent as well. They have an eight month old daughter.
A friend is going through bankruptcy proceedings. He is 31 and has basically lost everything.
Another friend’s car-payments went from being 33.000 ISK per week last Christmas to being 105.000 this month. His car was worth 3.5 million ISK last year and his loan was for 2.3m ISK in foreign currency. It is now 5.6m and he lost his job last week. He wants to go to school but probably will not afford it.
My girlfriend is studying in the UK. On October 8th she transferred her student loans to her British bank from her Icelandic bank, as you do. She had to pay tuition, rent, telephone, living expenses etc. She received the money a month later and had to use her savings to survive. Last year the GBP was around 130-140, now it has been between 190-220. Her tuition and living expenses have almost doubled, not because she is receiving better schooling, more classes or living more luxuriously, but because she was unlucky enough to have been born in the same country as the Icelandic Krona.
Another friend in his twenties bought a house in August, with a loan in a foreign currency. He and his wife cannot sell their old home. His job is in danger, their payments are through the roof. They have two young daughters.
A former workmate in his early thirties had to take a 10% paycut. He was one of the staff that kept their job at a computer processing company.
I met a buddy from soccer who lost his job at one of the TV stations. He has worked there forever.
I met another former workmate from a bank who lost his job. And then another. Both are in their forties, prime of their lives.
A relative lost her job at a real-estate agency.
I met a former workmate who lost his job at a bank but was hired to another company to clean up in there by firing just about everybody.
My friend’s father in law lost his CEO-job as well.
I met a cousin last month who went to college in the UK and has lived there since, starting a family, worked and bought a home. She is visiting Iceland and I tried explaining price indexation to her which is the common form of home loans in Iceland. She grasped for air and realized how royally screwed everyone in the country is.
And this is the second month of the crash. How is January 5th going to look?
Economic Disaster Area 