Home > Real-World Economics Review > RWER issue 56: Wade and Sigurgeirsdottir

RWER issue 56: Wade and Sigurgeirsdottir

Iceland’s meltdown:The rise and fall of international banking in the North Atlantic
Robert H. Wade and Silla Sigurgeirsdottir [1]   [London School of Economics and University of Iceland]

Iceland should be a model to the world” (Arthur Laffer, November 2007)

 “They [the Icelandic banks] shouldn’t be worried about the fundamental soundness of their business model. I think it is very sound and very good”. (Richard Portes, May 2008)

In 2007 average income in Iceland was almost $70,000, about the fifth highest in the world and 1.6 times that of the United States. Reykjavik’s shops brimmed with luxury goods, its restaurants made London look cheap, and sports utility vehicles (SUVs) choked its narrow streets. Icelanders were the happiest people in the world according to an international study in 2006, just ahead of Australians.  They also enjoyed the least corrupt public administration in the world, according to Transparency International’s Corruption Perceptions index, an honour shared with New Zealand and Finland in 2007.  They had a life expectancy at birth of  80.8 years by 2008,  putting them 11th in the world   (well above the US at 78.2 years and the UK at 79.9 though well below Japan at 82.2 years). The prison population per 100,000 was 60, lowest in the world (equal with Japan and Finland).

What was there not to like about this model? Iceland’s boom began in 2001 after the US Federal Reserve began cutting interest rates and pumping cheap money into the global economy. At about this time the Icelandic government privatized what had been small  “utility”-oriented banks and set them free, much as the US government liberalized the Savings and Loans banks  in the 1980s. The new banks discovered the alchemy of borrowing cheaply abroad,  buying assets abroad, and then transforming the revenue streams into dramatically higher profits, wages, tax revenues and political support at home. Within only six years or so three Icelandic banks, with no prior experience of international banking, shot into the league of the world’s 300 biggest banks. Looking only at the results and overlooking how they were being achieved, just about everyone applauded while the borrowing lasted. Clever people streamed into finance, too few served the state.  The politicians, regulators and most economists thought that all they had to do was keep out of the way while the financiers performed their magic. Of course, much the same happened in the US, Britain, and Ireland. But Iceland stands out from the other cases as a more transparent illustration of how “masters of the universe” confidence, sophistic ideology, mercenary gain, mendacity and sheer ignorance combined to drive the boom and bust.  

From rags to riches, and the emergence of international banking


Iceland’s prosperity developed from an economy which was about the poorest in western Europe at the end of the Second World War, and which for most of the post-war period was more regulated, politicized and inward looking than its European neighbours.  Its fast economic growth – especially between 1960 and  1980 — was driven by a combination of Marshall Plan aid; an abundant export commodity with the unusual property of a high income elasticity of demand — cold-water fish; a foreign-exchange earning US/NATO military base which was large relative to the rest of the economy; and a small population (about 300,000 as of the mid 2000s), with a high average level of education, a Lutheran work ethic, and a strong sense of national identity rooted in the Icelandic language and literature.

Through the second half of the twentieth century a bloc of some 14 families (popularly known as the “Octopus”[2]) constituted the economic and political establishment, based in fishing, transport, oil importing and distributing, provisioning the NATO base, and domestic banking and insurance.  This establishment provided the leaders of the two political parties which formed most of the coalition governments since the 1930s, and which divided up the spoils of office between core supporters. The dominant party was always the Independence (conservative) party, allied most of the time with the much smaller Progressive (agrarian) party.  Occasionally social democrats and communists got a look in.   Oligopoly and monopoly characterised the economy until the 1990s.

In the 1970s a dozen or so men studying law or business administration at the University of Iceland formed a group to promote neoliberal ideas, and took over the editorship of a journal called “The Locomotive”.  As they moved into positions of influence and power they remained a network of mutually-promoting friends, more loyal to each other than to the organizations for which they worked.  Known as the Locomotive group, they constituted a segment of Iceland’s “shadow elite”, using their influence in the Independence party and other organizations to win opportunities for themselves and refashion the society as a neoliberal model (far from the norms of Nordic social democracy, which they disparaged).[3]  Several of them stepped out of the shadows into the limelight, taking the top political and juridical positions.

[1] Robert Wade is professor of political economy at the London School of Economics. Silla (Sigurbjorg) Sigurgeirsdottir is lecturer in public policy analysis at the University of Iceland.

[2]  Örnólfur Árnason, (1991). Á slóð Kolkrabbans; Hverjir eiga Ísland? Bókaútgáfan Skjaldborg. Reykjavík 1991.. 


[3] Wedel, J. R. (2009). Shadow Elite: How the world’s new power brokers undermine democracy, government, and the free market.  Basic Books 2009, NY.

You may download the whole paper at: http://www.paecon.net/PAEReview/issue56/WadeSigurgeirsdottir56.pdf

  1. director@nrhc.org
    March 15, 2011 at 10:01 pm

    I think this is the best all-round summary of Iceland’s financial crisis, public or private to date– and I’ve read most of the reports and studies, both short and long, official and non-official.
    It is thoughtfully salient and, most importantly, readably comprehensible by average people (Icelanders, are you listening…?); yet it leaves out no important detail for being so.
    Its authors deserve highest praise, IMO, for their public service here.

    That said, what deepens the still-sinking-feeling I have about this de facto indictment of crony capitalism is that, like their fleeced average-citizen counterparts in the USA and elsewhere, too many Icelandic citizens just want to “get past it all,” w/o really understanding why or how to prevent future repeats of similar disasters.

    The fact that the Independence Party of Iceland, for one, is still not only a viable/credible party but apparently is also making a political comeback, suggests something akin to a Stockholm Syndrome going on in Icelanders’ psyches.
    Just like Americans’ 2010 re-embracing of the GOP after its deregulatory principles precipitated OUR meltdown — it really requires something more than mere economics, to comprehend. Something maybe like the insights offered by Wm Reich’s old book –The Mass Psychology of Fascism…..

  2. Leith Cameron
    November 29, 2011 at 2:32 am

    A brilliant paper and summary, thank you.

    Here in Aotearoa/NZ, the people have just re-elected a Prime Minister. He is a former investment banker with his eye fixed on selling off our ‘dead asset’ rivers, national parks, etc, who gives tax breaks to the wealthy and who epitomizes the ideals of people who have shed morality in the pursuit of individual wealth and power

  3. manic
    December 18, 2011 at 10:00 am

    This really is a fantastic paper. So well done !

    I’m from Finland and we’ve been having neo-liberal governments since the 1980s. It doesn’t matter which parties get voted in because they all subscribe to the same economic theory. I think the problem is that these neo-liberals are really the only ones that can explain themselves to ordinary people. It doesn’t matter that their monetarist theories are all wrong and don’t relate to the real world. The thing is they sound convincing because no-one else can explain themselves. The left demands more social spending without explaining why it makes sense economically. They justify social spending and public works as being morally right, not because it’s economically sensible (which it is of course because it stimulates aggregate demand).

    I believe in a mixed economy and I also believe we can change things for the better for the real economy instead of the financial sector. But it needs the social movements to know economic theory and then to explain it to other people in an understandable way. In my view, the post-keynesian theories make perfect sense and we should use them as the platform for economic thinking.

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