When the banks of the Sweden, Norway and Iceland went out of control, the people refused to bail them out, and the economies of all three countries were the better for it. Instead of allowing themselves to be bullied by international investors represented by the IMF and the European Union, the Cypriots who are facing a similar crisis today might want to learn from the Viking example.
The Cyprus banking sector went rogue to the point that it became eight times larger than the rest of the country’s economy. Perhaps the bankers thought they would become too big to fail, requiring the country to rescue them. But why should citizens rescue bankers?
There is a better way, which is what the Scandinavians insisted on.
When it comes to a financial crisis, what’s needed is the combination of popular will and the existence of an alternative. The Vikings combined smart economics with the organizing muscle to make it happen. As a presidential candidate in 2008, Barack Obama said he knew that the Swedes handled their banking crisis in the correct way, but he also acknowledged that the United States wouldn’t follow the Swedish path. Why? Obama believed that we wouldn’t back him with a mass direct action movement in a confrontation with Wall Street.
So, what is the alternative to bailouts for rogue banks? And what can a movement do when the party in power is in bed with the 1 percent?
What democracy looks like when banks go out of control
In the 1980s, Norway and Sweden set aside what had been working for them — democratic socialism — and flirted with neo-liberalism. They deregulated, setting free the financial sectors. The private banks speculated, creating housing bubbles. By the early ’90s, the bubbles burst. Both nations headed into crisis.
In Sweden, 90 percent of the banking sector experienced massive losses. Fortunately, the Social Democrats, the party of the working class, was in power and decided against bailouts. The government nationalized two of the banks, sheltered some that looked like they could survive, and allowed the rest to go bankrupt. Stockholders were left empty-handed.
As it turned out, three of the other large banks were able to raise necessary capital privately. Regulation was re-imposed and Sweden came back strong.
This Swedish version of “tough love” put the economy in such a strong position that when the 2008 financial crisis hit most of Europe, Sweden could use a series of flexible measures that minimized disruption. Its banks had already been cleaned up. Its famous social safety net kept Swedes accessing unemployment insurance, health care, education and job training.
The result: By 2011 the Washington Post was calling Sweden the “rock star of the recovery,” with a growth rate twice that of the United States, lower unemployment and a robust currency.
When Norway’s banks went out of control, the Labor government seized the three biggest banks of Norway, fired the senior management and made sure the shareholders didn’t get a krone.
The now publicly owned banks were given new, accountable management and time to clean up. The government told the rest of the private banking sector that it were on its own: If bankers had money in their mattresses with which they could re-capitalize, fine; if not, they could go bankrupt. There was no way Norwegian citizens would bail them out.
The lesson for Norway’s entire financial sector was unmistakable. No more moral hazard: Risk your own money, not other people’s. Failing banks will be allowed to fail, no matter what their size.
The government gradually sold its shares in the banks it had seized and made a net profit. It kept a majority stake in the largest bank, probably as a safeguard to prevent the bank from being sold to foreign owners.
The St. Louis Federal Reserve Bank’s vice president, Richard G. Anderson, studied the responses of Sweden and Norway to their parallel financial crises: “The Nordic bank resolution is widely regarded as among the most successful in history,” he concluded. By bouncing back through effective governmental intervention, Norway and Sweden avoided the “lost decade” syndrome that dogged Japan after its crash in the early 1990s and that is now the reality for the United States and much of Europe.
For activists in the many countries now confronting austerity programs, these examples can serve as a concrete alternative with a track record of success.
But what if your government is in the hands of the 1 percent?
For decades, Iceland followed the “Nordic model,” with high standards of living, free university education, universal health care, full employment and a robust labor movement. The government owned the major banks.
Then, in the late ’90s, Iceland’s political leadership shifted. It began to privatize banks and joined the international trend initiated by the repeal of the Glass-Steagall Act in the United States, a law that separates investment banking from ordinary banking. Now the banks were free to take ownership stakes in their customers’ companies.
Building on Iceland’s economic credibility, the largest banks opened branches abroad and bought foreign financial institutions. They made the Norwegian and Swedish banks’ mistake of creating a real estate bubble, and then went beyond that by making high-risk loans to holding companies. Like Cyprus, Iceland’s banks blew themselves up like balloons, becoming several times the size of Iceland’s gross national product.
In 2008, Iceland suffered one of the worst banking collapses in history. Unemployment and inflation shot up. By September the Icelandic economy was in free fall.
Activists formed a grassroots nonviolent movement to demand resignation of the government. They massed outside the parliament building, banging pots and pans to disrupt the meetings inside — the “Kitchenware Revolution,” they called it.
The crowds grew to 10,000 — out of a total population of 320,000 — and the increasing turbulence forced Prime Minister Geir H. Haarde to announce that he and his cabinet would resign and new elections would be held. Although the politicians responsible for Iceland’s financial life were resigning, the campaigners didn’t stop there; they demanded — and won — the resignation of the governing board of the Central Bank.
The party representing the working class stepped in and pledged that there would be no bailouts, and the three largest banks therefore failed. The government made sure that Icelandic depositors got their money back and gave debt relief to struggling homeowners. For businesses facing bankruptcy but experiencing a positive cash flow, debts were forgiven. The government devaluated its currency in order to support Iceland’s important export market.
The next part will be especially interesting to Cypriot activists who want to fight back: Iceland then repudiated the billions of dollars of debt owed to U.K. and Dutch citizens who had invested money through online subsidiaries of Icelandic banks. The move sent shudders through the international financial world, but still ordinary Icelanders refused to accept responsibility for the frenzied behavior of their bankers. The question was twice put before voters in referenda, and twice Icelanders said “No.”
Instead of trying to pacify international investors, Iceland created controls on the movement of capital. Instead of demanding austerity, the government expanded its social safety net. The result? Iceland is recovering. By July 2012 unemployment was hovering at 6 percent and falling. The economy was expected to grow by 2. 8 percent.
As The Independent’s Ben Chu has pointed out, ever since the 2008 international crisis both European politicians and ratings agencies “have demanded that national governments honor the debts of their banking sectors, protect their exchange rates, eschew capital movement restrictions, and impose massive austerity to earn back the confidence of bond markets.”
Iceland largely ignored those demands. Did the investors punish Iceland for being so smart and self-respecting? No. In June 2011, the government issued $1 billion in sovereign debt at 6 percent interest, an offering that was twice oversubscribed by investors.
It may be time for Cyprus to join Iceland in treating the bullies like, well, bullies. It may be the little countries that need to act like grown-ups and enforce accountability: Those who make the mess should clean it up. But it will take people’s movements to make sure that happens, movements that have an idea what the alternative is.
One thing that is different with Cyprus is that its banking system was being used as an off-shore haven for tax evaders whereas the Nordic and Icelandic banks weren’t doing that. That adds a new perspective to the situation.
This is an excellent review of the financial issues and events, but it’s marred by two highly misleading passages. To make it worse, the misrepresentations are motivated by partisan politics.
The first concerns the US: ” As a presidential candidate in 2008, Barack Obama said he knew that the
Swedes handled their banking crisis in the correct way, but he also
acknowledged that the United States wouldn’t follow the Swedish path.
Why? Obama believed that we wouldn’t back him with a mass direct action
movement in a confrontation with Wall Street. [like Iceland’s, I presume; Norway and Sweden benefited from governmental initiatives.]”
In the first place, this claim is completely unsupported. I’m sceptical. In the second place: you mean like Occupy Wall Street – which was a response to Obama’s own presidency? We all know why there was no “mass direct action” in the US in 2008: it was co-opted by the election, and by the Obama bandwagon in particular. In reality, of course, that “bandwagon” was an advertising campaign so successful (and expensive) that it won the national award from the advertising industry. Obama himself, who could have led such a mass movement, was making sure it didn’t happen.
The Icelanders, like Argentina before them and the Cypriots now, engaged in “mass direct action” to overthrow a conservative government (Argentina had 5 presidents in a year). Just as he was careful to obfuscate Obama’s betrayal, Lakey is careful not to tell us the winners of the new election in Iceland: the Social Democrats AND THE GREEN PARTY. They divide the government between them to this day – but it’s the Green Party that’s responsible for the referendums and the hard-nosed policies that Lakey praises.
Why would he omit that remarkable fact? For the same reason he made excuses for Obama: Democrats like to pretend the Green Party doesn’t exist. They CERTAINLY don’t want to give it credit for its successes.
Given his activist record, such obfuscation is especially shocking.
I must agree. That by using partisan references usually disqualifies the argument. Not only is the “1%” issue a target for dismemberment, but the two-party dictatorship must go also. That dictatorship is the source of most of our unequal society, because they make the rules, period!
People have to understand it’s the political system which makes the rules, period! “Strings” being pulled by the “1%” is a diversion from accepting the truth of a lack of personal responsibility. Humans continually what to believe in their own infallibility.
I make mistakes everyday day in and day out, so what. I learn from attempting the new.
The mistakes made today are not admitting the source of our discontent – a lousy set of rules favoring one type of people verses the rest. Class is immaterial and is likewise a false argument. Class arises from the set of rules governing the system, with the actual construction done by the ambitious wealth and power seekers, as has been throughout known human existence.
Those people, for whatever reasons drives their destructive behavior, are enabled by the system they didn’t create.
Our system in the USA started a certain way, and within 10 years was abandoned without the People changing it as required. Jefferson and Madison reasoned correctly the hope of their enlightenment was lost by 1799. Sadly they succumbed and left the future to fate, not wisdom, nor work. And, over time, the ambitious people took advantage of the system to further their desires, with most of those desires dark and unfriendly ones.
Many social democrats in Norway and Sweden had become shaky in their confidence in their own vision by the 1980s and the race to the cliff (a) shocked them to return to their own DNA which includes “don’t trust the banks!” and (b) absolutely had to listen to their grassroots constituents (the workers and small farmers) or lose all credibility. In other words, what OREGONCHARLES seems to dismiss as “government intervention” in Sweden and Norway was much more interesting — it was a social movement returning to itself.
I suspect we see Barack Obama very differently. I thought it was clear from years earlier that he decided not to follow the path of, say, Eugene V. Debs or Martin Luther King or Jesse Jackson, all idealists who were able to position themselves in relation to a mass base such that they could have some political relevance. Instead of being a prophet or that sort, Obama decided to be a pragmatic politician, and he has consistently been exactly that. Over and over he told us that. He said the correct health care policy was single-payer (we often call it “Medicaid for all”) but that he wouldn’t reach for that because it was a non-starter. That’s the judgment call of a pragmatic leader who knows the correct course but can read the power realities. He turned out to be right on this as he was about fighting the banks; do you remember the anemic, pitiful health care reform coalition that was put together to push for a policy? The coalition was so sad that Obama himself had to start attacking the insurance companies (which is the job of the people’s movement to do, not the President’s). While a candidate Obama kept saying that change was only going to happen when he was President if we went to Washington with him; that is to say, as Franklin Delano Roosevelt said before him, “force me to do what I want to do.” And the liberal left sat on its hands and expected him to do the job. “Lead me, lead me,” some of my friends cried, caught in their dependency. Why were they surprised that he didn’t lead them to make major change? After all, he knew he was signing on to a job whose description includes protecting the interests of the 1 percent and the U.S. empire. He wouldn’t have gotten there if he wasn’t OK with that.
Obama didn’t betray me because I thought he was so much more honest with us than the hyped up hopes and fantasies that a lot of (especially white) people had. We the people need to find our dignity and our power and end this dependency on Great Leaders, in my view. That’s one reason I’ve always been highly critical of grassroots movements that get in bed with the Democrats; they become dependent on the flavor of the month leader who appears to have something more fresh and promising and then tell themselves that THIS time that leader will transcend the fact that the 1 percent own and control the Democratic Party.
I do apologize for not describing the role of the Green Party in Iceland, although I will include it in my book on the Nordic model. The Icelandic Social Democrats had also gone into a tepid mode and not only needed the shock of disaster to wake them up but also the pushing of the party that emphasizes alternatives, the Greens.
George
Sweden, Norway, and Iceland could deal with their financial crises any way they wanted to. Each of those countries has its own currency. Cyprus uses the euro and has to co-ordinate its financial policies with the European Central Bank, with other international institutions, and with the other countries in the euro zone. Cyprus is not free to choose to handle banking and other economic matters just the way it would like to – or the way Sweden, Norway, and Iceland did.
I read this piece and I thought “this seems like it could use a good, solid fact-check.” I decided to take it on. Most of it is fine, but there are a few glaring errors.
“In the 1980s, Norway and Sweden set aside what had been working for them — democratic socialism — and flirted with neo-liberalism.”
There seems to be an amorphous definition of neoliberalism here- I’m guessing by neoliberalism Lakey means “bank deregulation”. Most definitions of neoliberalism combine deregulation with a reduction of social expenditures as a percentage of GDP- a phenomena that did not occur. In any case the deregulation of the financial industry and specifically the credit market continues in earnest today.
http://www.frbsf.org/publications/economics/letter/2012/el2012-19.html
As the above link demonstrates, Norway is in actuality currently undergoing a housing bubble far beyond what occurred in the United States leading up to the financial crisis. This evidence significantly undercuts Lakey’s argument that Norway is a shining light for the rest of the world to follow.
“Instead of trying to pacify international investors, Iceland created controls on the movement of capital. Instead of demanding austerity, the government expanded its social safety net. ”
Actually, the new EU deal with Cyprus includes restrictions on capital flight- so it seems that this is a more mainstream issue than one might seem. Also, this is the first piece I have read that denies the existence of austerity in Iceland- while far less discipinary than say, Greece, Iceland has most certainly undergone trying and unnecessary austerity policies- imposed by the so-called “party of the working class”.
Finally, and most significantly, as another commenter pointed out- the existence of the European Monetary Union makes the experience of Iceland and Norway irrelevant to the topic at hand. A Cypriot exit from the EU would result in the immediate decimation of the Cypriot economy- with a devaluation of up to 50% predicted. Because Cyprus is such a small country, recovery would be long and arduous. However, if Cypriots joined with Europeans in Greece, Spain, etc. and demanded a systemic resolution to the crisis- i.e. some major confrontation with capitalism, perhaps it could be solved.
I’m always happy when people find flaws in what economists call the Nordic model, because I’m not interested in selling utopian fantasies. Norwegians themselves regard one of their traits to be “a nation of complainers.” But the article cited by Matthew Cunningham-Cook leaves it an open question about whether the rise in housing prices in Norway is dangerous or not; the authors conclude that time will tell. Maybe the boom will be followed by a bust — and then, based on their track record, they’ll fix that without abusing the people themselves.
Yes, I did mean by “flirtation” with neo-liberalism exactly that, a flirtation, expressed largely through de-regulating banks. If it were a marriage instead of a flirtation, they would also have done what Margaret Thatcher and Ronald Reagan did: run down the economic support system for the people. The basic point I was making had to do with bank regulations: they continue to be strenuous in Norway (and indeed regulations on all businesses) and the neo-liberals just hate that. And I admit, I love heavily regulating all businesses if the regulations are pro-worker, like forcing them to let a mom or dad stay home with a new baby for a year and then requiring them to let the parent back into the job. Wouldn’t that be a good idea here?
I realize there is dispute within Iceland (as there would be in any democracy) about how much belt-tightening is necessary in order to claw one’s way back back up the cliff after one of the most massive crashes in history (much greater than Greece or Spain). But there is simply no comparison between the massive suffering in the latter two countries and the modest restraint in Iceland, nor in the distribution of the discomfort in the population. In the article itself I shared a sample of the statistics: Iceland’s unemployment at 6% and what is it in Greece and Spain?
I leave it to others to develop a fine-tuned strategy for Cypress; I just don’t know enough to do that. My intention was simply to point to real-life examples of countries that tried alternatives to the neo-liberal framework and found them superior to the neo-liberal way. Not perfect, but superior. Perfection isn’t available in a planet this dominated by . . . well, you fill in the blank. So ranting against less-than-perfect solutions doesn’t seem useful to me. What encourages me to be a visionary activist is to look for best practices that cut against the grain, that surprise us with more viability than we might have expected, and then expand those with our imagination. You’ll find in my book the story of the Norwegian Labor Party that dissented from capitalist utopian thought and Communist utopian thought, and in its dissent came up with something better than the Communist model it once revered or the capitalist model it flirted with.
What I like most is that we’re dialoguing in the domain of vision. Let’s never stop doing that!
George
I live in Europe but not in Cyprus – and wonder, if Cyprus newspapers mention anything about the Iceland example. I have not seen any comments in this regard from newspapers I peruse: UK, Germany, Switzerland. Norway does not belong to the EU.
Norway twice had a referendum on the question of joining the EU, and twice said “No.” Despite its tradition of being fiercely internationalist, most years being number one per capita in aid to the Global South, etc., famously involved in the UN and international NGOs etc. So enthusiastic are they about internationalism, and then saying “No” to the EU, and that “No” came especially from the grassroots, from workers and small farmers and radicals and left liberals. What do they know that the grassroots of the EU countries preferred not to see? (Hint: the Occupy movement nailed it.)
George
My take on this article is that we must settle our fates ourselves. Each country needs to determine the purpose for having their country. Who does the aggregate effect of the country serve? People first or other?
People must always be the sole purpose for a country to be around. My grasp is obvious, because as an idiot it’s natural for me.
These monetary systems are funded arbitrarily, continue with invented funds, swindle much, return little of real worth. Oh, we are living in more comfort, have more things than 200 years ago, but many still go hungry through no real fault of their own.
With much work to be done and millions unemployed, the money to bring these two together is held hostage by evil people. Gross flaws of the economic system can be said to be:
Only people working can create wealth. Our time is a fixed quantity, with skills and need of skills the only variable in question. Do skills and need of skills force a 50,000 to 1 difference in compensation? Does it? Should it? Must it?
The more layers of complexity added to our systems seems to garner more compensation for those new layers without showing the need for increased skill. In fact no extra skill is required, because each layer is roughly the same within each layer. A new layer is more or less like the last layer with elevation the only difference. Managing remains fixed in the number of tasks a person can do. A person can only do the work of one person no matter the job. A CEO does not manage all of those of a corporation, thus can not rightly garner 500 to 1 or 50,000 to 1 in compensation. Reason this out please.
While I may offer a seemingly simplistic view, is it? Rewarding intentional deception in thinking someone does more work by the number of those in an organization is the crime going unreported.
Here’s a link to a related article
http://www.dissentmagazine.org/online_articles/social-democracy-for-centrists
I think we tried a movement here in the United States. The police beat everyone up and made them go home.
En Ecuador hicimos lo mismo y también estamos mejor, comenzamos por hacer una auditoría de la deuda y descubrimos que gran parte de la deuda era ilegal y otra parte inmoral.
I’m Swedish and very certain that this statement about the political situation in Sweden at the time of the banking crisis is just wrong:
“Fortunately, the Social Democrats, the party of the working class, was in power and decided against bailouts.”
The Social Democrats in Sweden lost the general election to a center-right coalition in 1991 and did not regain power in 1994. The banking crisis culminated in 1992, leaving the critical decisions to the center-right government of which the Social Democrats were not a part. I think they were mostly supportive of the way it was handled, and continued these policies when they resumed power, but the main credit should definitely go to the government in power at the time.
This is all from memory, but confirmed by the sources below:
http://en.wikipedia.org/wiki/Swedish_banking_rescue
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html
http://en.wikipedia.org/wiki/Bildt_Cabinet
Correction: “did not regain power in 1994” should have been “did not regain power until 1994”.
Thank you, Rickard, for this. I’ll correct the text in the book I’m writing on the larger subject of economics, equality, and freedom in the Nordic model.
George
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