From left: Daniela Becker, Hermilio dos Santos Filhos, João Espada, Yaron Brook, Leonidas Zelmanovitz, Gabriel Gimenez-Roche, Flavia Vera, Jorge Monteiro, Hannes H. Gissurarson, Cesar Santolin, Giacomo Neto, Jairo Procianoy, André Alvez, Gabriel Calzada and Randy Simmons. Sitting: Carlos Julio and Andre Loiferman.

Professor Hannes H. Gissurarson, a member of the RNH Academic Council and the centre’s academic director, attended a colloquium on public choice theory 4–7 April, organised by the American institution Liberty Fund in Petrópolis in the State of Rio de Janeiro in Brazil. The topic was a book by economist Randy T. Simmons, Professor at Utah State University, Beyond Politics, where the economic analysis of politics is clearly described and applied. According to Simmons, one cannot presuppose informed, altruistic persons in politics, and shortsighted, selfish persons in business. Instead, the same model of man should be used in the two walks of life—in pricing or taxing; in coordination by trade or commands from above. Professor Simmons was discussion leader, but participants included Dr. Yaron Brook from the Ayn Rand Institute, Irvine, California, Professor João Carlos Espada from the Catholic University of Portugal in Lisbon, and Professor Emeritus Jorge Vianna Monteiro, PUC-Rio (Pontifical Catholic University of Rio).

RNH works with, and supports the publishing house AB, Almenna bokafelagid. In mid-March AB published a book by a young historian, Stefan Gunnar Sveinsson, on the street riots of 2008–2009 in Iceland. The book is called Busahaldabyltingin: sjalfsprottin eda skipulogd (The Pots and Pans Revolution: spontaneous or organized?). Professor Thor Whitehead calls the book “a readable, informative and interesting work”, and the publisher writes:

The 2008–2009 “Pots and Pans Revolution” was indeed a truly extraordinary chapter in Iceland’s history. This previously peaceful society, not even with an army, suddenly seemed to collapse. Government House, the Central Bank building and Parliament House were under siege, government ministers had to use bodyguards, an attempt was made to wrest prisoners by force from the hands of the police, there were fights of life or death in the streets of Reykjavik, many policemen were reaching their endurance limits, a government was thrown out of office. Historian Stefan Gunnar Sveinsson has had access to unpublished confidential material, including police reports and personal recollections, and he has interviewed several participants in these memorable events, policemen, protesters, government ministers and members of parliament. The result is a remarkable book about a remarkable period. There is much new information in the book, not least about the part played by the Left Green party leaders in the riots.

The new book is the second one in a new series of AB studies of Icelandic society, the first one being The Icesave Deals: The Blunder of the Century? by journalist Sigurdur Mar Jonsson, published in the autumn of 2011 to great acclaim.

Booth giving his Iceland paper. Photo: Haraldur Gudjonsson.

In a lecture at the University of Iceland 13 March 2013, sponsored by the School of Business at the University of Iceland, and by RNH, Professor Philip Booth of Cass Business School and the London IEA discussed the causes of the 2008 international financial crisis. It was widely believed, according to Professor Booth, that the crisis was caused by capitalism, especially the greed of bankers, and that consequently financial markets had to be more closely regulated and monitored. Professor Booth argued however that this was a great over-simplification. One cause of the crisis was unsustainable mortgage lending in the US, to individuals belonging to designated minority groups, but with no proven ability to meet their obligations, often even without registered assets or regular jobs; this was encouraged, and sometimes enforced, by government. Another cause was the lax monetary policy of the American central bank, the Fed, under Alan Greenspan, after 2001, in an unfounded fear of stagnation after the dotcom crisis. In the first few years of the new century, international financial markets were full of cheap money, and finally the bubble had to burst.

There were however two basic systemic causes of the crisis, Professor Booth argued. One was the moral hazard of the “Too Big to Fail” approach. Bankers knew that in good times, the profits were theirs to enjoy, whereas in bad times, the losses would almost always be transferred to the taxpayers. Government did not even charge the banks for, in effect, insuring deposits. Recklessness did therefore pay. The other systemic cause of the crisis was that uniform rules on assets, equity ratios and risk estimates, had been imposed internationally on commercial banks, with the unintended consequence that the risk for individual banks may have been reduced, while the risk to the whole system, given a possible flaw in the structure, had been increased.

Professor Booth expressed doubt about proposals to increase regulation in the financial sector, saying that a better way of dealing with risk was to maintain several types of banks, competing for customers, surviving if well-run, failing if badly run, but without bringing down others. The most important task ahead was to change the framework in finance in such a way that banks could fail individually, instead of taking either government or their competitors hostage, in the fear of banks failing collectively. Professor Booth added that it seemed sensible to give deposits priority over other claims on banks which should imply that providers of capital to the banks would become more cautious. He also suggested that present rules about taxing bank equity and bank debt very differently should be changed in order to reduce risk.

The lecture was well attended, with a lively discussion following it, moderated by Professor Ingjaldur Hannibalsson, president of the Icelandic School of Business. Skafti Hardarson, chairman of the Icelandic Taxpayers Association, asked whether the idea that central banks should be lenders of last resort made any sense. Professor Booth replied that the best proposal he had seen on this issue was that banks should be free to choose whether or not to be supervised by a central bank. Should they choose to do so, the central bank would undertake to be their lender of last resort. But if they did not want to participate in such a scheme, they would be neither supervised nor supported by the central bank. Professor Stefan Olafsson asked Professor Booth whether he concluded, on the basis of research done by Reinhart and Rogoff, that the crisis was caused by deregulation. Professor Booth replied that regulators did not possess perfect information or the right incentives to control banks. There was, he pointed out, no clear causal connection between the lack of regulation and instability. For example, in the third quarter of the 20th Century, English banks operated under very light rules, not even having deposit insurance. Nevertheless, they were quite stable.

This event, which formed a part of the lecture series jointly organised by RNH and AECR, Alliance of European Conservatives and Reformists, on “Europe, Iceland and the Future of Capitalism”, was widely reported in the media. The daily Morgunbladid gave an account of the lecture 14 March. Vidskiptabladid, a business weekly, also reported on the lecture 14 March, and on its website an interview with Professor Booth, taped after the lecture, can be watched. Vidskiptabladid also wrote an editorial quoting approvingly Professor Booth’s analysis of the financial crisis. Professor Stefan Olafsson wrote a blog about his experience at the meeting. Professor Booth’s talk in Iceland can be watched here on Youtube.

Booth Slides

Photo: Haraldur Gudjonsson.

Professor Hannes H. Gissurarson, a member of the RNH Academic Council, gave a paper in the Hall of Ceremonies at the University of Iceland 19 February 2013, called “Liberty, Crisis and Capitalism”. He said that recent reports of the demise of capitalism were greatly exaggerated. According to the Index of Economic Freedom, on average economic freedom had not decreased in the last few years. The really big news in the first decade of the 21st century was that China and India had joined world capitalism, 2.5 billion people. Then, Professor Gissurarson turned to four arguments against (classical) liberalism and capitalism.

The first argument was that capitalism was unstable, subject to economic fluctuations or business cycles. Gissurarson agreed that capitalism was not “depression-proof”, but pointed out that government was the source of much more instability than capitalism. The financial crisis of the last few years was mainly caused because excessive risk-taking in the financial sector was encouraged. If you won your bet, you pocketed the profit. If you lost, you passed the bill on to the taxpayer. New financial techniques had been supposed to spread risk more widely, but instead it worked to obscure risk. It was obviously wrong, also, to regard real estate and government bonds as almost riskless assets. Moreover, banks had been legally prohibited to form large funds against possible losses.

The second argument was that the Icelandic “neo-liberal” experiment had failed. Gissurarson replied that no “neo-liberal” experiment had been conducted in Iceland: in 1992–2004 the economy was simply brought closer to that of the neighbouring countries which meant increased economic freedom. The 1991–2004 period was that of market capitalism, but the 2004–2009 period that of crony capitalism. In 2004, a small group of adventurers had basically taken the Icelandic economy over, hiding its reckless debt accumulation behind several names and identification numbers. Thus, to the systematic undervaluation of risk in the international financial sector, there was added a systematic undervaluation of risk specific to the Icelandic economy.

Photo: Haraldur Gudjonsson.

The third argument was that liberalism was inhumane. According to Gissurarson, this argument was based on ignorance about the real message of classical liberals such as John Locke and Adam Smith. There were basically two ways of getting those things which you covet from your neighbour: either by force or by offering a mutually acceptable price. Liberalism was about the second way. Moreover, capitalism has proven to be the most effective mechanism developed by mankind to turn poverty into affluence, and thus to eliminate many of the worst problems of life.

The fourth argument was that the Icelanders should follow the European rather than the American model. Against this, Gissurarson argued that the United States was by no means a free-market utopia; it had only the 18th freest economy of the world in 2010. Switzerland was the country in the real world which came closest to being organised on liberal principles, not only because of its relatively free economy, but also because the possibilities of one group coercing another one were severely limited. However, Gissurarson found it interesting that living standards in three “Nordic countries” in North America, namely South Dakota, Minnesota and Manitoba, were better than in the four Nordic countries, namely Denmark, Sweden, Iceland and Finland (excluding oil-rich countries in both groups).

After the lecture, Thorolfur Thorlindsson, Professor of Sociology, asked how the Icelanders could get out of their present quandary. Gissurarson responded that it was essential to reduce taxes in order to stimulate the economy. Asset manager Gunnlaugur Jonsson asked which kind of a monetary system the Icelanders should adopt in the future. Gissurarson pointed out that the problem was irresponsible behaviour, living beyond your means, not really the monetary unit. If the Icelanders had sufficient self-discipline to live under, and adjust to, an external monetary regime, then they would presumable also have the self-discipline to do without it and to manage their own currency. However, it was necessary to keep an open mind about this issue, and if the Icelandic crown was abolished, then one interesting possibility would be a currency board with the English pound as the monetary unit.

While the well-attended lecture was held by the Institute of Public Administration and Politics at the University of Iceland, it formed a part of the lecture series organised jointly by RNH and AECR, the Alliance of European Conservatives and Reformists, on “Europe, Iceland and the Future of Capitalism”. The meeting was chaired by Professor Omar Kristmundsson, president of the Politics Department. After the meeting, Professor Gissurarson invited the audience and many others guests to a reception in the University Canteen, on the occasion of his sixtieth birthday the same day. The reception was directed by City Councillor Gisli Marteinn Baldursson, with Professor Kristmundsson and Bjorn Bjarnason, former Minister of Justice, giving short talks, and a jazz band directed by P. E. J. Gunnlaugsson performing. In the evening, friends and colleagues of Professor Gissurarson held a dinner in his honour, the organising committee being the RNH board, Gisli Hauksson, Jonmundur Gudmarsson and Jonas Sigurgeirsson. Kjartan Gunnarsson directed the dinner, and the main speech was given by David Oddsson, editor of Morgunbladid and former Prime Minister of Iceland.

Morgunbladid gave an acount of the lecture 20 February 2012. It was also reported in an online student magazine. Styrmir Gunnarsson, former editor of Morgunbladid, said in his weekly commentary 22 February 2013 that finally, with Gissurarson’s lecture, the silence of the academic community about the Icelandic bank collapse, its causes and its consequences, had been broken. Professor Gissurarson discussed the content of his lecture in a television interview with Bjorn Bjarnason 27 February 2013 at INN-station. On the occasion of Gissurarson’s 6oth birthday, Morgunbladid published an analysis of his origins and career, and an interview with him as well. Vidskiptabladid also published an interview with Gissurarson 16 February and a photo series of his birthday party, as well as an interview on its Internet television. The weekly entertainment magazine Sed og heyrt also published an interview with Gissurarson, with photos from his 30th, 40th, 50th and 60th birthday parties.

Gissurarson Slides 19.02.2013