19 March 2010

Public choice theory in small stressed economies... or: Iceland to Britain "Get a frozen cod up ya!"

Drifting west again, three European economies have grabbed the headlines for the same bad reason – they are broke. Each enjoyed massive booms during the heady days of the last decade and each economy came crashing down in the wake of the GFC. However the different ways they are responding to the issue of private banks racking up huge bad debt is instructive of the level of capture of their respective governments by the banking sector.

The responses of Ireland, Latvia and Iceland are interesting case studies in public choice theory.

Case one: The Irish. Long time cannon fodder of the British Empire, the Irish can be expected to take one for the team pretty much on demand. True to form, they have nationalised private bank debt, firstly by guaranteeing those debts and now with the issue of government bonds for near worthless toxic assets.

To pay for this, they have crushed their public sector salaries, raised taxes and slashed benefits including €760 million from social-welfare programs. The plan is destroying the average Irish citizen, however its winning praise from the financial world for its prudence.

Case two: Latvia. The Latvian government, perhaps just so grateful to be out from under the Soviet thumb, implemented harsh austerity measures following the collapse of the Latvian property bubble. Teachers’ pay was cut by a third, taxes raised and public services cut so drastically that they couldn’t even clear snow from the streets in Riga in the middle of winter. These measures sent 26% of the population into poverty.

But the good news is that Lativa might pay off its foreign creditors 100 cents on the dollar, so happy days...right?

However, just maybe, the Latvians are not as captured as the Irish. Yesterday a major partner of the ruling coalition walked out over the next round of tax increases, at least delaying if not preventing further austerity measures.

The sudden development of a spine in some members of the Latvian parliament might have something to do with the work a group of naughty techies who hacked the tax records of some of the most wealthy in the country and released them on Twitter.

Seems that the average worker finds it hard to understand why they take a cut when the bosses get bonuses.

Case three: Iceland. The Icelanders have a long and proud tradition of telling major countries like the UK where they can shove it. Back in the 70s they sent their tiny navy out to defend their fishing zones from the British and successfully stared down the Royal Navy. So it really came as no surprise that Nordics have shown the least interest in destroying their economy to save foreign creditors of private banks.

A polite enquiry from the UK and Dutch governments as to whether the good people of Iceland would cough up €3.8 billion to cover investor losses in those countries following the collapse of their Icesave accounts was met with and equally polite rejection by 93.5 per cent of voters in a referendum last Saturday.

Now I’m not saying that the Icelanders will get away with thumbing their noses at the Brits and Dutch; the IMF is holding a gun to the Icelanders’ heads by threatening to exclude them from global credit markets if a deal can’t be done. However, the very fact that they haven’t just rolled over like a beaten dog, shows some courage on the part of the Icers.

Its my contention that Ireland’s government has been effectively captured by the banking sector to the point where the ordinary citizens must pay for the excesses of the banks. Latvia’s government was well on the way to capture until an intervening hacker revealed the inequity of the bail out. The Icelanders, on the other hand, put it to the people and the people said “No thanks, generally we get chocolates and flowers before we let people do that to us”.

Lets hope the people of Iceland can hold out, at least for a nice meal and a movie...


  1. A rather well informed and summarised write up..I am impressed if not so surprised.

    The discussion is all about how the country and how the people of that country are affected and have reacted to a similar situation. However there is a fundamental issue to consider here from the perspective of how this situation arose:
    It is my understanding that the majority of the debts are owed to what are essentially private banks, and have been largely accumulated through financial manipulation of the derivatives market (and similar dealings of 'unreal' products - ie investements on invesmtents and risks). The derivatives market on the planet today trades more than direct investments. One may argue that such investments and therefore debts are electronic money (not even 'paper' fiat money). They are just numbers on a screen.

    Is it possible that the different responses from the three nations are not so much due to the cultural and historical differences of how the people react to a given situation. Rather, perhaps the people of the different countries have (on average) a different level of understanding of how the situation arose. Thus they react differently.

  2. Hey Z,

    I'm interested to see you develop this argument. However, I think you have a hurdle to jump. It seems from the reports I'm reading the average Irishman and Latvian are well aware they are being screwed, however, their governments are still agreeing to these conditions without asking them.

    The difference seems to be that the Icelanders got to vote on the proposition directly and rejected it. My guess is the Irish and the Latvians would do the same.