In the national referendum Saturday, Icelanders sent a resounding message to the rest of the world: We are not paying the debts of reckless financiers. While we are few and powerless, we refuse to be bullied by our European neighbors. Some 93% said "No" to a recent deal negotiated by their government with its British and Dutch counterparts; only 7% voted for it. The deal concerned the so-called Icesave accounts that an Icelandic bank, Landsbanki, operated from 2006 in the U.K. and later also in the Netherlands. When the Landsbanki collapsed in October 2008, the British and the Dutch governments rushed in to pay depositors in their respective countries the amount insured under EEA (European Economic Area) regulations. They then demanded reimbursement from the Icelandic government, which reluctantly agreed to pay, against the wish of the great majority of Icelanders. The Icelanders argued that there was no legally binding government guarantee of the deposits. The Icelandic government had fully complied with EEA regulations and set up a Depositors' and Investors' Guarantee Fund. If the resources of that fund were not sufficient to meet its obligations (which was almost certainly the case), then the Icelandic government was not legally bound to step in with additional resources. Thus the British and the Dutch governments had no authority to create new obligations on the part of the Icelandic government by paying their nations' depositors. This legal position is indeed also that of the Norwegians, who are, with Iceland and Liechtenstein, the only non-EU members of the EEA. Arne Hyttnes, chairman of the Norwegian Depositors' and Investors' Guarantee Fund, is adamant that there is neither by law nor international agreements a government guarantee of deposits in Norwegian banks; there is only the guarantee of the fund itself. Moreover, Jean-Claude Trichet (pictured left), president of the European Central Bank, and Wouter Bos, the Dutch minister of finance, have both publicly admitted that European regulations on depositors' guarantees were not designed for the collapse of a whole banking sector – such as occurred in Iceland in 2008. – Wall Street Journal
Dominant Social Theme: A few more votes will be needed before Iceland falls in line.
Free-Market Analysis: Let's try to boil down the Iceland saga. Iceland was a fairly socialist entity until the 1990s when its government went on a privatizing spree and sold off almost everything under the theory that Iceland would be more prosperous if the government ceased to interfere with every Icelandic entrepreneurial decision. This was perhaps a very good idea. But in practice what happened was that Iceland's three big banks were privatized as well and this has proven more questionable, mostly because of the timing and because of the global financial system itself.
Privatizing Iceland's banks was a bad idea, then, if it was, because the fiat money system that the West operates under is an unforgiving and unfair model. If Iceland's banks had been privatized in the 1980s or even the early 1990s, Iceland would have enjoyed more prosperity and its financial entrepreneurs would have attracted the legendary status of, say, Dubai's most brilliant economic minds. But Iceland's big three banks were unfettered in the late 1990s and really only got on their feet in the early 2000s. And then, like Icarus, they brushed the sun.
What happened to Iceland? Well, first the country's central bank kept interest rates high to attract money from overseas. Second, Iceland refused to join the European Union, which likely gave both business and the banks some significant flexibility when it came to pursuing economic opportunities at home and abroad. Finally, Icelanders with their creativity unleashed by privatization went on a phenomenal business acquisition and business-building spree. And Icelanders themselves indulged for more than half-a-decade in the finer things that life had to offer, courtesy of all the hot money pouring into Iceland.
It had to end of course. But it WAS NOT, so far as we can tell, Iceland's fault that it did. The financial crisis was a crisis of fiat money and the latest trigger was first pulled in America, perhaps the most profligate, militant and badly run Western power in the world (and that's saying something). Iceland was pulled into the crisis because it had stayed out of the euro, because its banks had been really active in building up business around the world and because its central bank had been efficient about attracting foreign funds.
When the crisis hit and Iceland's big banks began to feel pinched, Iceland's leadership did whatever it could to find the euros it needed because its own currency ceased to be in demand worldwide. The leadership apparently had just about figured out how to save two of the three large banks when Gordon Brown, prime minister of Britain, froze overseas Icelandic assets and basically put Iceland – and its banks – out of business. Not only that but both the British and Dutch governments then reimbursed their own citizens illegally for the "failure" of Icelandic banking enterprises and insisted that Iceland's government pass a law requiring all Icelandic citizens to repay the costs of bailing out British and Dutch citizens.
So let us try to sum up. Iceland privatized its banks, which immediately began to pursue global business and were so good at it that the banks soon became world-spanning entities. Once the global financial crisis hit – a fiat money crisis that ruined companies and damaged governments and banking systems throughout the Western world – the British and Dutch illegally seized Icelandic bank assets overseas, causing a failure of Iceland's banking system. It was then demanded that Iceland's citizens reimburse the British and Dutch governments for the costs of illegally seizing the assets.
Judging from the above summation, accurate to the best of our knowledge, Iceland's citizens are right to vote against the demands made by the British and Dutch. It is a mercantilist system of fiat money and Gordon Brown's illegitimate actions that caused Iceland's collapse. Thus, we wish the citizens of Iceland would go further than voting against taking responsibility for British and Dutch debts. We would love to see Iceland's voters address the core of the problem. What's that? It is not free-banking but an obscenely irresponsible fiat-money system linked to a mercantilist private/public international banking cartel/network that enriches a handful of "controllers" while impoverishing hundreds of millions and even billions.
Of course, we don't know if the voters will get that far. They will probably be bought off. Faced with Icelandic intransience, we have read that the British and Dutch governments are suddenly becoming more reasonable. One gambit already underway is to try to involve Iceland in the EU, which doubtless would result in the entire matter of Iceland's insolvency being efficiently dealt with at the highest levels of European diplomacy and with the most secrecy possible. However, we are not at all sure Iceland is going to join the EU. Nor are we sure the IMF will step in quickly.
So … we are not sure how this saga will end. Does Iceland repudiate its debts (as Argentina once did)? Does it somehow remove them legally as an encumbrance. An Iceland unencumbered by Dutch and British banking debts might get back on its feet fairly quickly – especially if the government collapses and there are few funds to pay for additional government activism.
Maybe, just maybe, Iceland could collapse all the way back to a private communal status. The government would essentially be bankrupt and those in Iceland would soon discover that they really didn't need the government for much if anything – not second rate schools, not roads that are built but not kept up, not health care that degrades, not misguided energy investments including funds invested in green technologies to keep global warming at bay, certainly not overlarge policing and "security" forces or even a public court system and the resultant gulags it inevitably spawns.
This is no doubt the nightmare at the fringes of possibility that keeps some farsighted EU politicians up at night and the reason something will probably be negotiated sooner or later. The last thing the EU really wants to do is turn Iceland into a private society – unless it is one well-encumbered by debt. But stripped of its current leftist government, stripped of any government at all, Iceland would be free to be the West's first true entrepreneurial state.
If those in Iceland have really learned their lesson, they might consider backing a new currency with gold. They could emerge as an arctic Switzerland! Yes, this is the "real" leverage that those in Iceland have, even if they don't know it. If those in Iceland make the right privatizing noises, watch how fast the "crisis" is resolved. We'd love to see Iceland declare a gold-backed currency and go its merry way. We would eat cod for breakfast, lunch and dinner.