Jonsson’s presentation. Photo: Kristinn Ingvarsson.

Two experts in finance, Professors Asgeir Jonsson and Hersir Sigurgeirsson of the University of Iceland, presented the main findings of their new book,  The Icelandic Financial Crisis: A Study Into the World’s Smallest Currency Area, at a conference at the University of Iceland 1 March 2017. Among many interesting facts and figures in their book are the following:

• By the Emergency Act of 6 October 2008, passed under the then coalition government of the Independence Party and the Social Democrats, but initiated by the Central Bank, Iceland chose not to “socialise” the cost of the 2008 collapse of all three main Icelandic banks, or in other words to pass the cost over to taxpayers. Bank shareholders lost the whole value of their shares, and bondholders lost a lot of the value of their bonds, whereas depositors lost nothing.
• It turned out that in the end, the Treasury lost nothing either. Indeed, it made a gain. The reason was that the Treasury was, because of the currency controls imposed in the beginning of the crash, in a strong bargaining position against the creditors to the old banks (mainly hedge funds) who were willing to accept heavy discounts on their claims in order to have the remainder paid out in foreign currencies. The centre-right government which came into power in 2013 regarded it as fair that the old banks (or rather their estates) should bear the costs that they had imposed on the nation.
• The Emergency Act, by giving depositors priority over other creditors of the banks, brought about a transfer of about €10 billion from those creditors—not least German banks—to the depositors—not least affluent Englishmen. There was a widespread misunderstanding abroad that the Emergency Act discriminated between foreign and domestic depositors which it did not do: it discriminated between depositors and bondholders.
• The outlook for Iceland was pretty bleak, however, in the beginning of the crash. Public debt increased by 70% of GDP as a result of the crash, more than in any other European country except Ireland. Iceland was widely, if wrongly, regarded as bankrupt.
• The British and Dutch governments, having unilaterally compensated all depositors in Landsbanki’s branches in their respective countries, demanded that the Icelandic Treasury pay them back, with interest. This would have amounted to an obligation of about €4 billion, or about half of Iceland’s GDP. Ultimately, Landsbanki’s estate could reimburse the two governments. While their demands caused a bitter dispute with Iceland, they were eventually rejected by the EFTA Court.
• The main costs for the Treasury of the crash stemmed from the loss the Central Bank made on its loans to the banks—around €2 billion, €1.7 billion because of non-secured loans to the banks and €245 million because of an emergency loan to Kaupthing with collateral in Danish FIH Bank—and from the collapse of a savings association in Keflavik, €140 million. Even if the authors refrain themselves from political judgements, these losses could have been less if Mar Gudmundsson, CBI Governor from 2009, had not made a bad deal in selling FIH Bank and if Steingrimur J. Sigfusson, Finance Minister 2009–11, had not insisted on helping the savings association in Keflavik.
• Despite Iceland’s success, it is not necessarily a model which should be imitated elsewhere, the authors persuasively argue in their book. Iceland’s special circumstances facilitated the two-fold strategy of “ring-fencing” by establishing new domestic banks on the basis of domestic deposits and putting the foreign operations of the old banks into resolution and of transferring the costs of the crash from depositors to bondholders (largely foreign).
• The rapid recovery of Iceland should not surprise people as much as it did: The Icelandic economy is basically sound, resting on the pillars of profitable fisheries, ample energy resources and considerable human capital, to which was added a sudden and unexpected tourist boom after the crash. Moreover, the banks’ assets turned to be much more valuable than originally expected.

Heimisdottir makes a point to Jonsson, Sigurgeirsson and Hannesson. Photo Kristinn Ingvarsson.

Participating in a panel after the authors’ presentations were Dr. Sigurdur Hannesson, special adviser to the 2013–6 government, Kristrun Heimisdottir, Assistant to the Foreign Minister during the crash (Ingibjorg S. Gisladottir from the Social Democrats) and Johannes Karl Sveinsson, legal adviser to the government. Heimisdottir lamented the fact that the Icelanders did not stand together in the face of adversity as did the Danes, for example. Instead, some politicians used the opportunity to seek vengeance for old grievances. She also emphasised that Iceland had to reconsider her foreign policy in light of the fact that she had very few real friends. The Americans were not any more protecting Iceland as they had done during the Cold War, as shown by their refusal to make dollar swap deals with the CBI before the collapse, at the same time as they made such deals with the three Scandinavian central banks, enabling those central banks to rescue local banks.

RNH has taken on the project of putting online scholarly works on economic freedom and enterprise, some of which have long been out of print and inaccessible. Partners in this project include Atlas Network and ACRE, Alliance of Conservatives and Reformists in Europe. Already, five works in the series are accessible on Google Books, and they can be read by clicking on the book titles:

• Individual Transferable Quotas in Theory and Practice, published in 1999. One of the authors is Professor Anthony Scott, one of the pioneers of fisheries economics. The nature and development of the fisheries systems in New Zealand and Iceland are described and discussed. Edited by Professors Ragnar Arnason and Hannes H. Gissurarson.
• Cutting Taxes to Increase Prosperity, published in 2007 as a part of a research project on taxation and welfare for the Icelandic Ministry of Finance, supervised by Professor Hannes H. Gissurarson. The authors include distinguished economists, such as Nobel Laureate Edward C. Prescott and Professors Pascal Salin, Brendan Walsh and Ragnar Arnason. Edited by Dr. Tryggvi Thor Herbertsson og Professor Gissurarson.
• Ahrif skattahaekkana a hagvoxt og lifskjor [The Impact by Tax Increases on Economic Growth and Living Standards], published in 2009 as a part of a research project on taxation and welfare for the Icelandic Ministry of Finance, supervised by Professor Hannes H. Gissurarson. The author, Professor Gissurarson, discusses Hegel’s and Rawls’ theories of the welfare state, the relevance of the index of economic freedom and the impact of taxation on economic growth and welfare.
• Tekjudreifing og skattar [Income Distribution and Taxation], published in 2014. Written by experts on these issues, including Professor Ragnar Arnason, statistician Dr. Helgi Tomasson and economist Dr. Axel Hall. Edited by Professors Arnason and Birgir Thor Runolfsson. With an English Summary.
• The Icelandic Fisheries: Sustainable and Profitable, published in 2015. The author, Professor Hannes H. Gissurarson, describes the Icelandic system of ITQs, individual transferable quotas, which has been a resounding economic success, while other nations have to subsidise their fisheries.

RNH is, in cooperation with Atlas Network and ACRE, the Alliance of Conservatives and Reformists in Europe, supporting the republication online by AB (The Public Book Club) of many books relevant to individual and economic freedom. In early 2016 a recent book by RNH Academic Director, Professor Hannes H. Gissurarson, was published, The Icelandic Fisheries: Sustainable and Profitable. In January 2017, a 2009 book by Professor Gissurarson was made available online, Ahrif skattahaekkana a hagvoxt og lifskjor (Impact of Tax Increases on Economic Growth and Living Standards). In February 2017, a collection of articles, Tekjudreifing og skattar (Income Distribution and Economic Growth), edited by Economics Professors Ragnar Arnason and Birgir Thor Runolfsson, was published. Other authors were economists Arnaldur S. Kristjansson and Axel Hall, Hannes H. Gissurarson and statistician Helgi Tomasson. While the book is in Icelandic, there is a five pages Summary in English at the back. The authors discuss the problems of measuring income distribution (for example by so-called Gini coefficients) and of defining the poverty. Paradoxically, an increase in life expectancy, an earlier retirement age and a longer time spent in school can all lead to income distribution being measured less equal. Two of the conclusions in the book are that poverty, both absolute (in dollars or kronur) and relative (as a proportion of median income), is on the same low level in Iceland as in the other Nordic countries and that income distribution is also similar to that in the other Nordic countries. Professor Arnason submits that the net tax burden (tax payments less government services and benefits) should be considered, and when this is done, the income tax turns out to be much more progressive than usually envisaged. Professor Runolfsson presents the unequivocal results of measuring economic freedom internationally: Everybody, both rich and poor, are better off in the freer economies. Some of the authors discuss the fact that welfare benefits are means-tested in Iceland which can create tax wedges when it does not pay for individuals to increase their work hours because then they lose benefits. These traps have to be abolished without directing benefits to those who do not need them.

RNH is, in cooperation with Atlas Network and ACRE, the Alliance of Conservatives and Reformists in Europe, supporting the republication online by AB (The Public Book Club) of many books relevant to individual and economic freedom. In early 2016 a recent book by RNH Academic Director, Professor Hannes H. Gissurarson, was published, The Icelandic Fisheries: Sustainable and Profitable. In January 2017, a 2009 book by Professor Gissurarson was made available online, Ahrif skattahaekkana a hagvoxt og lifskjor (Impact of Tax Increases on Economic Growth and Living Standards). In the latter book Professor Gissurarson discusses the two most important philosophical cases for the welfare state, Hegel’s emphasis on social inclusion and Rawls’ concern for the worst-off. He argues that the “Icelandic model” pursued in Iceland under the leadership of David Oddsson in 1991–2004 met both Hegel’s and Rawls’ criteria. It provided for more social inclusion than most other societies because unemployment was insignificant, the poverty level was low, pension funds were strong and retirement age was relatively high. The worst-off in Iceland were better off than in most other countries and had the opportunity to better their conditions. In fact, during this period the income of the lowest-income group increased more rapidly in Iceland than in any other European country with the exception of oil-rich Norway. Professor Gissurarson presents evidence from the Fraser Institute’s Index of Economic Freedom that generally speaking the worst-off are best-off in free economies. Therefore, a Rawlsian social democrat ought to support the market economy, free trade and the rule of law. Professor Gissurarson also describes the success of comprehensive tax reductions in Iceland in 1991–2004, warning against tax increases.