developing a resilient financial system lessons from iceland
TRANSCRIPT
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Developing A Resilient Financial System:
Lessons from Iceland
By Raf Manji
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Outline
• Global Financial Crisis
• The Iceland Story
• Could It Happen Here?
• Problems for NZ
• Lessons from Iceland
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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
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Ground Zero – The US Housing Bubble
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Irrational Exuberance? Prices vs. Rent
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Driven by the Debtmobile
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Financialisation of the Economy
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Causes – The End of History?
• Excessive Credit
• Speculation
• Predatory Lending
• Deregulation
• Fraud
• Risk Modeling
• Complexity
• Hubris
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Neo-liberalism: there is no alternative!!!
• Open markets for capital and trade (not labour!)
• Privatization of public assets
• Deregulation
• The “Free Market”
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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
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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
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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
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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
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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)
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Mania Takes Hold - Iceland
• Population 320,000, GDP $13 billion, Bank losses $100 billion
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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
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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
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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
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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
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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
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New Zealand – Too Small to Fail?
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Spending more than we earn - since 1973
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New Zealand – Too Small to Fail?
• Living Beyond Means
• Cowboy Capitalism
• Sub Prime NZ style
• SCF Bailout
• Addicted to Debt
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Problems for NZ
• Excessive Credit
• Speculation in Housing
• Poor regulation
• No capital taxes
• Complacent Governance
• Overseas Ownership
• Debt Addiction
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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
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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
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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
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And Finally…
“Why are banks considered to be the holy churches of the modern economy?”
Olafur Ragnar Grimmson, President of Iceland, January 2013