European Political Science

, Volume 10, Issue 3, pp 292–300 | Cite as

Iceland's Financial Iceberg: Why Leveraging Up is a Titanic Mistake without a Reserve Currency

  • Herman Schwartz
Symposium

Abstract

Iceland's boom and bust replicate in miniature the causes, development and trajectory of the absolutely larger but proportionately smaller American boom and bust, except for Iceland's costly lack of a reserve currency and its banks’ preference not just for speculating in but also overpaying for shaky assets. In the aggregate, both the US and Icelandic economies sold short-term, passive, and liquid assets to the world, consumed part of that borrowing, and reinvested outward in fixed, long-term and active investments. The key differences between Icelandic and US banks are that Iceland's banks made their titanic gambles without the benefit of an international reserve currency. The United States survived its catastrophe and continues to have access to global credit markets without much penalty because the dollar is the international reserve currency. By contrast, Iceland has mortgaged its economy and economic independence for decades to bail out banks that had overpaid for dodgy assets.

Keywords

deregulation privatization financial speculation insider trading 

References

  1. Aizenman, J. and Jinjarak, Y. (2008) ‘Current account patterns and national real estate markets’, NBER Working Paper 13921.Google Scholar
  2. ASÍ. (2009) Icelandic Labour Law: A Summary of Basic Rights and Obligations on the Private Labour Market, Reykjavik: ASÍ.Google Scholar
  3. Bloomberg, ‘Capitalization of the Icelandic stock exchange’, http://www.bloomberg.com/apps/quote?ticker=WCAUICEL%3AIND, accessed 1 June 2010.
  4. D’Arista, J. and Griffith-Jones, S. (2006) ‘The Dilemmas and Dangers of the Build-up of US Debt’, in J.J. Teunissen and A. Akerman (eds.) Global Imbalances and the US Debt Problem, The Hague: Fondad, pp. 53–86.Google Scholar
  5. Dølvik, J.E. (2007) ‘Den Nordiska Kollektivavtals- och Fackföreningsmodellen’, Nordens Fackliga Samorganisation, http://nfs.net/dokument/dolvik_-_the_nordic_model.pdf, accessed 20 April 2011.
  6. Gourinchas, P.-O. and Rey, H. (2005) ‘From World Banker to world venture capitalist: US external adjustment and the exorbitant privilege’, Chicago: NBER. NBER Working Paper 11563.Google Scholar
  7. Lewis, M. (2009) ‘Wall street on the Tundra’, Vanity Fair, April.Google Scholar
  8. Mjøset, L. and Sigurjonsson, B.B. (nd) ‘Memo on wage bargaining in Iceland’, Unpublished manuscript, University of Oslo.Google Scholar
  9. OECD. (2001) OECD Economic Survey: Iceland, 2001, Paris: OECD.Google Scholar
  10. OECD. (2003) OECD Economic Survey: Iceland, 2003, Paris: OECD.Google Scholar
  11. OECD. (2006) OECD Economic Survey: Iceland, 2006, Paris: OECD.Google Scholar
  12. OECD. (2008) OECD Economic Survey: Iceland, 2008, Paris: OECD.Google Scholar
  13. OECD. (2009) OECD Economic Survey: Iceland, 2008, Paris: OECD.Google Scholar
  14. Schwartz, H. (1994) ‘Small states in big trouble’, World Politics 46 (4): 527–555.CrossRefGoogle Scholar
  15. Schwartz, H. (2009) Subprime Nation: American Power, Global Capital and the Housing Bubble, Ithaca, NY: Cornell University Press.Google Scholar

Copyright information

© European Consortium for Political Research 2011

Authors and Affiliations

  • Herman Schwartz
    • 1
  1. 1.Politics DepartmentUniversity of VirginiaCharlottesvilleUSA

Personalised recommendations