Tuesday, 19 April 2011

Icesave - Engagement & Enlightenment






Due to the recent birth of my son and the reduced thinking abilities that have resulted from this otherwise joyous occasion, I have taken to re-reading an old favourite classic, as opposed to the now futile attempting at taking on the armfuls of new stuff on my desk and on lists that I still have the good intention of getting through. And how interesting and ironic it is, I thought to myself, that when the main protagonist of Aldous Huxley's Brave New World, Bernard Marx, is revealed to be too much of a natural, flawed individual to conform to the sterilised, eugenically manufactured, drugged society of the novel, his punishment is being sent to Iceland. Iceland is the place designated for the rare people (of the two higher castes, for in a world without reproduction, the three lower classes are genetically engineered to be too stupid to think freely) who realise that the utopia they inhabit (that is in fact a dystopia) without pain, without heartache, without aging, without dirt and disease, without natural reproduction, without books, without unique culture, and without thrift cheats the human experience out of something fundamental despite all the problems it claims to have eliminated. They are of course very few, but their realisation is a severe enough threat to require their relocation to somewhere totally remote and totally unique. Little wonder that Huxley thought of Iceland to serve this purpose in his 1932 novel; then as now, there are few places on Earth that fit this description so well. And the case of Icesave, which I had already planned to write about today, illustrates that perfectly.

To bring you up to speed in case you don't know the story, the small nation of Iceland (population 300,000) discovered the power tools of steroid economic growth in the mid-2000s. Cheap credit, leveraged buyouts, real estate bubbles, ponzi schemes. In a country so small that last names are an absurdity (your last name is merely your father's first name, plus "son" or "dottir", depending on your sex) that depended almost entirely on tourism and fishing before this massive magic financial drug binge, the change was so drastic and the ensuing fallout so dramatic that it made international headlines. The details are an essay themselves so I will just post the excellent April 2009 Vanity Fair article on the subject here, if you want more detailed information (the full article in a 17 page PDF is the fourth link if you google "Vanity Fair Iceland").

Something really interesting and still making news two years later is a debacle inside this debacle, the ongoing case of the defunct Icesave bank. In a flurry of bold-faced bullshitting that would make Bernard Madoff blush, this bank that started as a little subsidiary of one of Iceland's three banks took in approximately 5 billion dollars of deposits for its high interest savings accounts between 2006-2008, which paid 2-3% above market rates. Savers could earn up to 8-9% as opposed to the frustrating 1-3% we've been contenting ourselves with for years now from the likes of ING, PC and the like. Better, as simple online accounts they were able to attract capital fast and furiously, because who wouldn't take a guaranteed investment with that rate of return? And with their domestic market so small and ill-suited to rapid growth, it was not Icelanders' capital they were harvesting, but that of the citizens' of two unlucky members of the European Union, England and Netherlands.

As you may or may not have noticed in these past few years, smaller players have been the first dominoes to fall as the limits of global fractional reserve banking and currency systems in which all new money generated carries an eternal obligation of compound interest debt are placed under increased strain. So even though every nation state (who has to sell its treasury bills to banks and investors with the promise to pay interest even though it is already massively in debt from doing this for 100 years) and every bank (who funnels all this money into the commodities market, the stock market, real estate, bonuses, and other financial institutions or "FIs" in their smooth lingo, except for required "10% capital reserves". This means the money you think is sitting there isn't sitting there at all, and despite the bank collecting interest on the t-bills issued by your government plus all your interest and all your fees, they could never put out everyone's cash because it doesn't exist) is technically insolvent, it is the ones who have nothing to hide behind that have failed first. Greece and Ireland have small populations, which means few financial institutions, plus old populations, high unemployment, and low tax revenues. When their banks, or nation states, or both, went bust, their governments could not intervene credibly with a bailout because they were exposed. They had nothing to hide behind. Portugal is next.

Bigger countries may survive longer because they may bring in more tax revenue from more diversified economies or have younger populations, but also because their size allows greater opacity. Consider the previously unthinkable scenario that really happened: Bear Stearns and Lehman Brothers, two venerable Wall Street investment banks with billions of dollars in investments, cash flow, and market cap were engulfed in a matter of weeks. Lehman was left on its own to wither and die while Bear's remains were slushed into JP Morgan's operation with who knows how many extra tens of billions funnelled in by the U.S. Treasury.

Yet the fed and the treasury seem able to dance this supernatural two-step of creating magic money infinitely, which is why Iceland has had two referendums on how they might pay back this outstanding 5 billion dollars, and the U.S. voters have had nothing of the sort over TARP. You will see the game is already up, however, if you read this excellent and clear explanation of the greatest con ever.

In sum, the market for treasury bills has already dried up because the U.S. government's finances are just about as credible as Greece or Ireland's, although on such a greater scale that it is more difficult at first to wrap our merely human minds around, so the fed has replaced the market as the sole purchaser of these bills (that "QE2" you're always hearing about). In other words, America is in so deep at 15 trillion national debt that it cannot obtain financing any more and has resorted to going in debt to itself, more, somehow. Anyway, Iceland, with one one thousandth of America's population, does not have the luxury now of creating a position for a federal reserve chairman who can engage in this type of cheating. Come to think of it, who ever did?

As the scale of the fraud applies to a much smaller group of people, so then does the length of the cycle. There were barely any kilometres on the Hummers in Reykjavik driveways when the bubble burst in 2008, and Iceland's three banks went under. The three previously nationalised entities had only taken a couple of years to collapse from their unregulated private sector speculation binge, and left a $30,000 debt on the shoulders of every man, woman and child of a nation that had almost no debt in 2004 before they were nationalised again. And this is excluding Icesave.

Britain and the Netherlands, much bigger and much more experienced in finance, had these things called public deposit insurance corporations in place to protect their citizens who invested in a too good to be true ponzi scheme. But now they want their $5 billion back. Damned if they were going to be footing the bill for the reckless idiocy of the perpetrators, the founders of Icesave, who were a couple of twenty-something Hummer drivers in Reykjavik with American business school MBAs.

Now the Icelandic people have been drawn into the long and arduous discussion about what to do about their wayward sons. Although they sound like they could be on the cover of people magazine or the subject of a reality show, the young Icelandic guns of greed would probably not attract $5 billion worth of public attention. Thus the electorate, through two referendums on whether to pay the British and Dutch deposit insurance corporations back (In both cases, the answer was an obvious no) has undergone two processes with capitalism and finance that no other in the west has: Enlightenment and engagement.

Enlightenment that the actions and scheming of bankers and snakes in suits do have repercussions and consequences for regular people who have no idea what these people are doing. Enlightenment that people who comprehend nothing in the slightest about risk, finance, or financial regulation can be on the hook for billions of dollars (as we all are, but unlike Iceland we are citizens of countries who have been big enough, up until now, to defer these payments into the future). Other than some vague idea that there was a "recession" way back before the last season of Cake Boss, North Americans in general have not been enlightened to these realities because they have not been forced to as Icelanders have to confront them directly.

And by participating in referendums, the nation was forced to engage with the issue by taking part in the decision making process. The question was put to them whether they wanted to do the responsible thing and pay it back. The answer is of course no, and will always be no, just as it always is to higher taxes, additional fees, bailouts and collective efforts. Despite the rhetoric about stability and responsibility, a human will not respond well to and see through the bullshit of people who clearly couldn't give a damn about consequences or responsibility of its actions the rest of the time and now come to them demanding money because its "in their own best interest". It is not hard to see what a blatant con this is, what a pathetic and insulting demand for humiliation and slavery from financial interests and their lackeys in governments, and Icelanders will continue to respond how I'm confident everyone will eventually respond when the question is put to them. That sets up the great unknown - what the nature will be of the confrontation that comes next. We don't know because all the politicians and business leaders around the world are stuck in a terrible rut of myopia and narrow mindedness in which they believe the realities of yesterday still apply. But look around at develop countries and the banks your money is sitting in, and you will realise that Icesave is the future. The question as always with the future is when it will become the present.

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