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Michael Lewis is the author of the article titled Wall Street on the Tundra which attempts to describe events that led to the financial crisis that befell Iceland. Even though Iceland’s financial meltdown attracted scant global attention in relation to other calamities that reverberated through the global economic powers, the underlying causes of Iceland’s crisis are synonymous with those found in other countries (Bagus and Howden 1). It is against this background that this paper will analyze the fundamental causes of the financial crisis that befell Iceland (with an estimated population of 300,000 people) from Michael Lewis’ perspective.
Lewis asserts that in 2003, the cumulative assets held by the three largest banks in Iceland were only a few billion dollars (approximately 100% of Iceland’s GDP). However, in a span of three and half years, these assets increased to over $140 billion and surpassed the country’s gross domestic product. According to one economic expert, this growth represented “the most rapid expansion of a banking system in the history of mankind” (Lewis 2). According to Lewis, one of the reasons that prompted the financial crisis can be attributed to the role of financial institutions in the stock and real estate markets. Lewis explains that the banks granted loans to Icelanders to procure real estate as well as stocks. As a result, the value of the real estate and stocks in Iceland increased tremendously. In a span of five years (2003-2007), while the value of the US stock market doubled, the value of the stock market in Iceland increased nine times during the same period. For example, the prices of Reykjavik real estate tripled during this period. In addition, by 2006, the wealth of an average family in Iceland was three times compared to what it was in 2003. What’s more, the newly acquired wealth was attributed to massive investment loans offered by banks to the citizens (Lewis 2).
According to Lewis’ article, the new investment euphoria had a trickle-down effect on learning institutions as well as students. For example, the author observes that the schools of math and engineering introduced new courses on financial engineering. What’s more, university students who were initially studying the economics of fishing courses opted to study the economics of money. Many other Icelanders enrolled for courses on financial management at the university that was not adequately equipped to train hundreds of financiers. According to Lewis, the financial ambitions of Icelanders also contributed to the financial crisis. It thus did not come as a surprise when the three largest banks in Iceland collapsed after they incurred close to $100 billion in bank losses. Lewis states that the over 300,000 Icelanders were partly to blame for these losses which translated to about $ 330, 000 for every citizen, irrespective of their gender or age. In addition, the Icelanders incurred personal losses estimated at tens of billions of dollars from their weird personal foreign exchange speculations. In addition, they lost about 85% of their wealth when the country’s stock market collapsed (Lewis 2).
According to Lewis, the real financial loss incurred by Iceland could not be estimated with certainty because the value of the once stable Icelandic Krona was withdrawn from the market by the government. In the end, the cumulative debt incurred by Iceland was estimated at a staggering 850% of the country’s gross domestic product (compared to the debt of 350% of GDP incurred by the US during the crisis). The three largest banks in Iceland incurred enormous losses which were too big for the Icelanders to bear. Lewis states that the cumulative debts incurred by the three largest banks in Iceland were so huge that, within weeks of the financial crisis, 30% of Icelanders had contemplated migrating out of their native country (Lewis 2).
Lewis dwells in detail on the manner in which the Icelanders contributed to the country’s financial meltdown. Prior to the crisis, a substantial segment of Icelanders had engaged in catastrophic speculation. Although the value of Krona was rising while the domestic interest rate was at 15.5%, the Icelanders decided that the right course of action to take when they wanted to purchase assets they could not afford was to take loans in foreign currencies (Swiss francs and Yen) but not Kronor. They had to pay 3% interest on Yen and earned some money during the transaction. Meanwhile, the value of Krona was increasing. When the Krona collapsed, the Icelanders discovered that they had to pay their loans in Swiss francs and Yen which were many times more expensive. Most of the Icelanders, particularly the young ones, owned Range Rovers valued at $35,000 with $100,000 in loans and houses valued at $500,000 with $1.5 million in mortgages. They had two options to offset their Range Rover debts. One option was to set them ablaze and claim insurance while the other option was to ship them to others countries and sell them using foreign currencies that still had value (Lewis 5).
According to Lewis, the value of foreign assets owned by Icelanders in 2007 was approximately 50 times more than what they had in 2002. They procured private jets and new homes in Copenhagen and London. They spent heavily on services that they did not require. Lewis gives an example of one Icelander who paid Elton John $ 1million to sing two songs during his birthday party. Many Icelanders acquired stakes in businesses they had scant knowledge about. For example, an investment firm known as FL Group acquired an 8.25% stake in an American Airline company even though no one inside the FL Group had prior knowledge about airline operations. Nonetheless, that did not prevent the FL Group from telling American airlines how best to operate an airline. Given their limited knowledge of financial matters, the Icelanders simply did not care what they acquired using their borrowed money (Eichacker 3).
In fact, a certain hedge fund based in London was so mystified by the numerous moribund LBOs funded by Icelandic bank that it enlisted the services of a private investigator to find out what was happening in the Icelandic financial system. According to the report produced by the investigator, the Icelandic financial system was a web of interconnected entities managed by a handful of individuals in Iceland who lacked prior knowledge and experience of finance. These individuals were borrowing short-term loans (in billions of dollars) from abroad then re-lending this money amongst themselves and their colleagues in order to acquire new assets at exorbitant prices (Foster 4). Given the rising value of the world’s assets, these individuals seemed to be raking in huge profits. Consequently, they generated artificial capital by transacting assets at exaggerated prices amongst themselves. This phenomenon explains why the investment firms, as well as commercial banks in Iceland, grew tremendously (Lewis 7).
According to Lewis, the Icelandic government also stands accused of its role in the financial crisis. The author explains how Olafur Ragnar Grimsson, the President of Iceland, gave speeches overseas about the exceptional banking skills of Icelanders. For example, in many of his overseas speeches, the President stated, “our heritage and training, our culture and home market, have provided a valuable advantage” (Lewis 10). It did not come as a surprise when several countries made huge investments in Iceland. For example, the German banks invested $21 billion into Icelandic commercial banks. The Swedish banks gave $ 400 million while the Netherland kicked in $ 305 million. What’s more investors from the United Kingdom (attracted by lucrative 14% annual returns) invested more than $ 30 billion ($28 billion from individuals and companies while the rest came from universities, pension funds, and other public organizations). It is worthy to note that Oxford University invested and lost $50 million (Lewis 18).
There is no doubt that Icelanders paid dearly for the financial crisis that befell them. Many experts (including Lewis) have written several articles that dwelled on the underlying causes of the financial crisis that hit Iceland. In spite of the fact that Iceland took a different path that led to the financial meltdown, the crisis was mainly caused by the new global financial system of liberalized, deregulated, and privatized finance permitted to run riot. In addition, the Icelandic crisis shows the social costs of the financial glut. For example, the three largest banks in Iceland (Landsbanki, Kaupthing, and Glitnir) were allowed by the government to borrow and grant loans irrespective of their abilities to guarantee them. In simple terms, the financial crisis that took place in Iceland can be traced from international speculation in the rapid appreciation of ISK which started in 2000 and continued until 2008 when the global financial meltdown occurred. The Icelandic crisis was also attributed to the risk-loving investment banks in the country that borrowed and granted loans without limits. In addition, the apparent lack of financial knowledge amongst the financial policymakers in Iceland aggravated the crisis (Foster 5). For instance, Lewis points out that the minister in charge of business affairs was a philosopher; the minister of finance was a veterinarian while the governor of the central bank was a poet (Lewis 12). It appears that the lack of financial experts in key positions in government and financial institutions precipitated the crisis.
Works Cited
Bagus, Philip and Howden, David. “Iceland’s Banking Crisis: The Meltdown of an Interventionist Financial System.” 2009. Web.
Eichacker, Nina. “What’s the Difference Between Iceland and Ireland?” 2011. Web.
Foster, Peter. “Michael Lewis Ship of Euro Fools.” 2011. Web.
Lewis, Michael. “Wall Street on the Tundra.” 2009. Web.
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