You can't milk a dead cow!

Today it is exactly one year since I wrote my "Surreal Reykjavik", describing the feeling of being in a collapsed country. So I think it is appropriate to give you an update on live in Reykjavik, Iceland, one year after the economic collapse.

 

It's all about the money
The third government since the collapse, a left wing coallision government, seems to be about to collapse. The reason is the same in this coallition government as in many marriages - and divorces - in Iceland at the moment. Money. People can't agree on the money and on the debt. They're not satisfied with the solutions being offered. The problem is just that there are only bad options so no matter what we choose, it sucks. We just need to bite it and stick to it.

 

ICESAVE
The Icelandic banks found a great way to finance themselves. They offered superb interest on online bank accounts abroad. The only problem was that, in the case of Landsbankinn, the Icelandic government was responsible if things would go bad. And they did, and now we're left with tremendous debt to pay for banking in Britain and the Netherlands. The people in Iceland is obviously not happy to be paying when the governments in those countries were reaping the benefits but did not take any responsibility. Not only that, they also used anti-terrorist law to confiscate Icelandic banks in Britain making their assets worthless in resale. Of course we can debate on what's fair and what's not. The thing is, we are very few here in Iceland and for a nation of 300.000 to pay for a collapsed bank in a nation of 60.000.000 might be a bit difficult. The amount we are talking about is at least 1 million Icelandic krona per capita. We are a family of seven, so that leaves us with 7 million ISK or 35.000 pounds my family needs to pay, just for that one deal. That is beside everything else that we, the people in Iceland are left with to pay.

 

Our fault?
Of course we can blame ourselves. Blame us for allowing the banks to grow way beyond what the Icelandic economy could carry. But that just exactly it. There's only so much we can carry. Any attempts beyond that breaks us. We've all seen what happens then. If people are confronted with extreme demands, you'll get an extreme reaction. We all know what happened in Germany in the '30s when people couldn't pay the war debt and the economy was in ruins. They voted for someone who was willing to use extreme measures to stop it. I don't want a lunatic prime minister, but desperate people make desperate decisions.

 

Icelandic families
Twenty percent of Icelandic families can't make ends meet as is. Over 40% of Icelandic families are technically bankrupt and over 70% of companies are in serious trouble. People are struggling to keep their homes and bring food to the table. The government has announced that they are offering packages to ease some of the mortage payments so that families have a better chance of surviving. It is obvious that it doesn't benefit anyone to put 40% of homes up for auction. There's no one to buy them and people have to live somewhere.

But at the same time as the government is offering this, they are announcing higher taxes, a reduction in child support and a reduction in all sorts of other support and benefits. For my family it means that yes, we can lower our payment on the mortage, but it is nowhere near the increase in taxes and deduction in support and benefits. We are going to be paying much more than we are now.

It's just like riding a bike. If you're going up a steep hill, you need to change into a lower gear. But the government is changing into a higher gear thinking that will speed things up. And what will then happen? We come to a stop.

 

You can't milk a dead cow
It is simple. Milk it to hard and you get blood instead of milk, untill you've killed the cow. Where will you get your milk from then?

Hjörtur

(Image by Jóhann Ludwig Torfason)

Comments

[twitter.com/anotherlab]

I remember reading your post from last year, thanks for posting this update. What can you country do to resolve your banking crisis?

[Hjortur Smarason]

@Chris First of all, we need to rebuild trust. Our bankers have ruined the whole nation of all trust and credibility. And do that we need to be transparent and we're not doing that nearly enough.

Secondly, we need to get money flowing. There's more money in the banks than ever before, because people are afraid to spend it. Those who have money hold on to it as much as they can. To encourage people to spend and invest money we need some incentives. Something is being done, but taxing everything to death is not part of it.

I believe increasing taxes will not increase income but reduce it, because it will stop money from flowing through the economy. Lowering taxes to encourage sensible spending would have been a better way and more likely to increase the income. That is what I mean with my "riding a bike" metaphor. Of course it matters what taxes we are talking about here.

It just like pricing. What price gives maximum profit? A low price with a low margin that moves the goods fast or a high price with a high margin that moves very slowly? It's tricky to find that balance.

"The problem with socialism is you eventually run out of other people's money." ~Margaret Thatcher - and too many are already out of money. There's nothing more to collect. You can't milk a dead cow.

[twitter.com/AriMagnusson]

A very interesting post. As a half Icelandic, half English person, I feel really stuck in between the bitterness these two countries I am very proud of. What has happened to Iceland is truly heartbreaking and symptomatic of the sheer incompetence of the financial regulators who governed for the year preceding October 08. It was obvious for a while that Iceland had become a plutocracy where the interests of politicians, bankers and business leaders were very blurry (this is expected happen in a small homogenous society) yet when the good times seemed never ending, it did not feel like a problem.

Anyway I have just written a small article on the crisis: http://bit.ly/BsiGb and will be interviewing an Icelandic economist from the London School of Economics tomorrow on Icelandic culture and the financial crash. I was wondering whether you could suggest any good questions to ask him?