Developing a resilient financial system lessons from iceland

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  • 8% of total GDP and 41% of total corporate profits
  • Developing a resilient financial system lessons from iceland

    1. 1. Developing A Resilient Financial System: Lessons from Iceland By Raf Manji
    2. 2. Outline• Global Financial Crisis• The Iceland Story• Could It Happen Here?• Problems for NZ• Lessons from Iceland
    3. 3. Global Financial Crisis - Overview• Collapse in House Prices• Credit Markets Freeze• Banks collapse in US, UK and Europe• Collapse in Global Stock Prices• Global contagion• Global Recession• European Sovereign Debt Crisis
    4. 4. Ground Zero – The US Housing Bubble
    5. 5. Irrational Exuberance? Prices vs. Rent
    6. 6. Driven by the Debtmobile
    7. 7. Financialisation of the Economy
    8. 8. Causes – The End of History?• Excessive Credit• Speculation• Predatory Lending• Deregulation• Fraud• Risk Modeling• Complexity• Hubris
    9. 9. Neo-liberalism: there is no alternative!!!• Open markets for capital and trade (not labour!)• Privatization of public assets• Deregulation• The “Free Market”
    10. 10. The Smartest Guys in the Room – Exhibit A• Long Term Capital Management• Nobel Prize Winners• “Finest Finance Faculty in the World”• $4b loss• Not so smart after all
    11. 11. The Smartest Guys in the Room – Exhibit B• Enron• Fortune’s “America’s Most Innovative Company” 1996-2001• Innovative and complex accounting fraud• One of the biggest Corporate bankruptcy cases in history• Shareholder loss of $11b• Not so smart after all
    12. 12. The Smartest Guys in the Room – Exhibit C• The Famous Five• Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns.• 2004: Self-regulation please• 2008: System Meltdown• 2008: $700b taxpayer bailout• Not so smart after all
    13. 13. The New Vikings: From Fishing to Finance• Dominant Neo-Liberal ideology• Bank Privatization• Political and Business Elites• Banking and Media Oligarchy• Low level of regulatory oversight
    14. 14. The New Vikings: European Invasion• Huge leveraging of balance sheets• Related party lending• Cross shareholdings• Debt financed buyouts• Major expansion into UK• Arthur Laffer: “Iceland should be a model to the world”• Icelandic banks over 75% of total market value (2006)
    15. 15. Mania Takes Hold - Iceland• Population 320,000, GDP $13 billion, Bank losses $100 billion
    16. 16. The New Vikings: In the Kreppa• Icesave: Desperate for deposits• £4.5b from the UK, €1.7b from the Netherlands• Credit Squeeze• The Great Unraveling• Bubble finally bursts
    17. 17. Iceland: Surviving the Crash• Took over the banks (Oct 2008)• Icesave Resolution on Deposit Guarantees (2008-2011)• UK Reaction: Anti-Terror Bill• The Icesave Bills• Referenda• EFTA case
    18. 18. Iceland: The Cutlery Revolution• The Peoples’ Voices• PM and Government Resigned• Board of Supervisory Authority Resigned• Central bank Governor Resigned• Special Investigation Commission• New People Driven Constitution• New Mayor: A Comedian 
    19. 19. Iceland: 2013• Recovering Slowly: GDP 2.7%, Inflation 4%, Unemployment 6%• Still Major Household Indebtedness and Currency Index Loans• Government Debt still high 80-100% of GDP• Capital Controls Still in Place• Lack of new Investment• Still Better than Most: PIGS and Cyprus
    20. 20. New Zealand – Too Small to Fail?• “Well managed and regulated financial system” – Yeah Right!• Finance Company Collapse: $8.5b funds affected• External debt $147b (71% of GDP) set to grow to 84% by 2017• Net Public debt $41b (20% of GDP) set to grow to 29% by 2017• Bank Assets 160% of GDP• Household Debt 140% of Disposable Income
    21. 21. New Zealand – Too Small to Fail?
    22. 22. Spending more than we earn - since 1973
    23. 23. New Zealand – Too Small to Fail?• Living Beyond Means• Cowboy Capitalism• Sub Prime NZ style• SCF Bailout• Addicted to Debt
    24. 24. Problems for NZ• Excessive Credit• Speculation in Housing• Poor regulation• No capital taxes• Complacent Governance• Overseas Ownership• Debt Addiction
    25. 25. Lessons From Iceland• Sovereign Currency• Proper oversight and regulatory authorities• Stable and well capitalised banking system• Simple financial products• Low external debt and balanced budgets• Transparent Political Interests (Oddsson and Brash)• Improved Financial Literacy• Diversified Economy
    26. 26. Mea Culpa “With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called light regulation hadn’t prevented any of this” Governor, Bank of England, Mervyn King, May 2012
    27. 27. Real problem “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.” Adair Turner, Chairman, FSA (UK), Nov 2012
    28. 28. And Finally… “Why are banks considered to be the holy churches of the modern economy?” Olafur Ragnar Grimmson, President of Iceland, January 2013

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