Monday, April 11, 2011

The Economic Crisis in Iceland: "IMF Medicine" is not the Solution

by Prof. Michael Hudson

Will Iceland Vote “No” on April 9, or commit financial suicide?
A year ago, in March 2010, Iceland’s economy was so small that it did not warrant much attention when 93% of its voters rejected the Social Democratic-Green government’s surrender to Gordon Brown and the Dutch, the European Union (EU) bureaucracy and IMF demands that it impose austerity as penance for believing the neoliberal fairy tales about how bank deregulation and “free markets” would make it the richest, happiest country in the world. Indeed it seemed to be, according to United Nations data. But the dream was dashed after the Icesave electronic Internet bank branches abroad were emptied out by their proprietors.
Britain and the Netherlands paid out more than $5 billion to some 340,000 of their own depositors whom their own bank oversight agencies had failed to warn the about looting going on. Iceland’s taxpayers were told to bear the cost, as virtual tribute.
The dream was the neoliberal promise that running to debt was the way to get rich. Nobody at the time anticipated that taking private (and indeed, fraudulent) bank losses onto the public balance sheet would become the theme dividing Europe over the coming year, dividing European politics and even threaten to break up the Eurozone.
A landmark in this fight is to occur this Saturday, April 9. Icelanders will vote on whether to subject their economy to decades of poverty, bankruptcy and emigration of their work force. At least, that is the program supported by the existing Social Democratic-Green coalition government in urging a “Yes” vote on the Icesave bailout. Their financial surrender policy endorses the European Central Bank’s lobbying for the neoliberal deregulation that led to the real estate bubble and debt leveraging as if it were a success story rather than the road to national debt peonage. The reality was an enormous banking fraud and insider dealing as bank managers lent the money to themselves, leaving an empty shell – and then saying that this was all how “free markets” operate. Running into debt was promised to be the way to get rich. But the price to Iceland was for housing prices to plunge 70% (in a country where mortgage debtors are personally liable for their negative equity), a falling GDP, rising unemployment, defaults and foreclosures.

In conclusion, Professor Hudson states:

The moral is that creditor foreclosure – or voluntary forfeiture to pay international bankers – has become today’s preferred mode of economic warfare. It is cheaper than military conquest, but its aim is similar: to gain control of foreign property and levy tribute – in a way that the tribute-payers accept voluntarily. Land is appropriated and foreclosed on – or, what turns out to be the same thing, its rental income is pledged to foreign bank branches extending mortgage credit that absorbs the net rent. The result is economic austerity and chronic depression, ending the upsweep in living standards promised a generation ago.

Iceland’s government seems to have become decoupled from what is good for voters and for the very survival of Iceland’s economy. It thus challenges the assumption that underlies all social science and economics: that nations will act in their own self-interest. This is the assumption that underlies democracy: that voters will realize their self-interest and elect representatives to apply such policies. For the political scientist this is an anomaly. How does one explain why a national parliament is acting on behalf of Britain and the Dutch as creditors, rather than in the interest of their own country accused of owing debts that voters in other countries have removed their governments for agreeing to? Article published here

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