Nina Eichacker is a lecturer in economics at Bentley University. This blog post summarizes her recent Political Economy Research Institute (PERI) working paper “Too Good to Be True: What the Icelandic Crisis Revealed about Global Finance.”
Iceland’s 2008 financial crisis should have been foreseen. By 2006, banking and economic data described an overheating financial sector and aggregate economy, and analyses by private and public researchers had reports describing those trends and their likely consequences. However, many were still surprised by the onset of Iceland’s large financial crisis. These events point to the dominance of neoliberal theories about the necessity of financial liberalization, and an assumption that a northern European country would have the institutional sophistication to avoid financial crises like those observed in developing countries that rapidly liberalize their financial sectors. A wider adherence to Keynesian and Minskyian theories of financial crisis would have helped predict Iceland’s crisis, and future such episodes.
One factor that contributed to the Icelandic financial crisis was the lack of financial market transparency. Organizations that could have reported on the conditions of the Icelandic financial marketplace and the state of the Icelandic economy did not. Despite positive reports by Frederic Mishkin and others citing Icelandic institutions’ integrity, (Mishkin and Herbertsson, 2006), the Icelandic state threatened to defund public Icelandic institutions and agencies that published reports contradicting the narrative of a robust financial infrastructure and growth. Iceland’s Chamber of Commerce paid economists like Mishkin hundreds of thousands of dollars to write favorable reports about Iceland’s financial sector and overall economic growth prospects. (Wade and Sigurgeirsdottir, 2010) The Icelandic news media consistently underpublished reports critical of the Icelandic financial sector, while publishing many stories that praised Iceland’s big three banks (Andersen, 2011). Sigurjonsson (2011) identified the root cause of this disparity as the cross-ownership of media company shares by Icelandic financial actors and institutions and financial corporation shares by Icelandic media institutions. The interconnectedness of these industries created conflicts of interest for all involved. The under production of criticism, and the over production of praise for Iceland’s banks skewed public understanding of the nature of Icelandic banks’ activity.