The Icelandic Volcano Erupts: A New Era of People Power in the Streets?

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The boom in this once fairly egalitarian nation created a new class of the super-wealthy whose private jets landed in the airport in downtown Reykjavik and whose yachts, mansions, and other excesses sometimes made the news, as did charges of corruption in business and in the government that countenanced that business. It wasn't corruption, however, that did in the Icelandic economy. It was government-led recklessness and deregulation. I had expected to find that, in such a small country, democracy would work beautifully, that the people would be able to hold their government accountable, and that its workings would be transparent. None of those things were faintly true, as I noted in a cheerless pre-collapse report I wrote for Harper's Magazine on "Iceland's Polite Dystopia."

A lot of people muttered then, in hapless dismay, about what the government was doing -- notably destroying the country's extraordinary wilderness to create hydropower to run the energy-intensive aluminum smelters of transnational corporations. A small group of dedicated people protested, but their sparks never seemed to catch public fire or do much to slow down the destruction. Icelanders generally seemed to tolerate privatizations and giveaways of everything from their medical histories and DNA to their fishing industry and wilderness, and a host of subsidiary indignities that went with this process.

Take, for example, the transnational retail empire of the Baugur Group (as of last week essentially bankrupt and owing Icelandic banks about two billion dollars), run by father and son team Jón Ásgeir Jóhannesson and Jóhannes Jónsson. Their Bónus stores, with a distinctive hot-pink piggybank logo, had managed to create a near-monopoly on supermarkets in Iceland. They provided cheap avocados from South Africa and mangos from Brazil, but they'd apparently decided that selling fresh fish was impractical; so, in the fishing capital of the Atlantic, most people outside the center of the capital had no choice but to eat frozen fish.

Icelanders also ate a lot of American-style arguments in favor of deregulation and privatization, or looked the other way while their leaders did. Kolbrún Halldórsdóttir, then an opposition Left-Green parliamentarian, now Minister of the Environment in the new government, didn't. She told me last summer, "The nation was not asked if the nation wanted to privatize the banks." They were not asked, but they did not ask enough either.

Fortune magazine blamed one man, David Oddsson, prime minister from 1991 to 2004, for much of this privatization.

"It was Oddsson who engineered Iceland's biggest move since [joining] NATO: its 1994 membership in a free-trade zone called the European Economic Area. Oddsson then put in place a comprehensive economic-transformation program that included tax cuts, large-scale privatization, and a big leap into international finance He deregulated the state-dominated banking sector in the mid-1990s, and in 2001 he changed currency policy to allow the krona to float freely rather than have it fixed against a basket of currencies including the dollar. In 2002 he privatized the banks."

In 2004, he was replaced as Prime Minister, but in 2005 he took over the Central Bank. By the mid-1990s Iceland had, through dicey financing and lots of debt, launched itself on a journey to become one of the world's most affluent societies. Fortune continues:

"But the principal fuel for Iceland's boom was finance and, above all, leverage. The country became a giant hedge fund, and once-restrained Icelandic households amassed debts exceeding 220% of disposable income -- almost twice the proportion of American consumers."

Throwing Eggs at the Bank

The first of the hedge-fund-cum-nation's three main banks, Glitnir, collapsed on September 29, 2008. A week later, the value of the króna fell by nearly a third. Landsbanki and Kaupthing, the other two banking giants, collapsed later that week. Britain snarled when Landsbanki froze the massive Internet savings accounts of British citizens and turned to anti-terrorism laws to seize the Icelandic bank's assets, incidentally reclassifying the island as a terrorist nation and pushing its economy into a faster tailspin.