Islandia eta DTM (Bill Mitchell-en eskutik) (2)

Sarrera: ikus Islandia eta DTM (Bill Mitchell-en eskutik) (1)1


Islandiako Diru Subiranoko [Sistemaren] proposamena (DSP):

(a) DSP: ikuspegi orokorra2

(b) Ikertzeko kasu berezia: Islandiako Parlamentuko Ikerketa Bereziaren Komisioa (IBK)3

(c) Neoliberalismoa Islandian4

(d) Krisia ezker ikuspuntutik5

(e) Unibertsitatekoak lekuz kanpo6

(f) Zer erakusten du Islandiako esperimentuak7

(g) Ondorioak

Hurrengo bi sarreretan ikusiko dugunez, afera ez datza gaurko DSP delakoa hobetzean, sakonagoko erreformak behar dira, non bankuek beren eginkizuna bete behar duten, kredituak sortuz8

(Segituko du)

2 Ingelesez: “Iceland’s Sovereign Money Proposal – Overview

The Iceland Sovereign Money [System] Proposal (SMS) claims the regulatory changes to the financial system since the 2008 financial crises have been substantial (“increasing bank capital and liquidity requirements, developing bank resolution plans, and requiring derivatives trading to go through central clearing houses”).

In his introduction to the Icelandic Monetary Reform report, Adair Turner then claims:

But they have still failed to address the fundamental issue – the ability of banks to create credit, money and purchasing power, and the instability which inevitably follows. As a result, the reforms agreed to date still leave the world dangerously vulnerable to future financial and economic instability.

The Monetary Reform report goes to this “fundamental issue”.

It concludes that the:

the fractional reserve system may have limited the Central Bank’s ability to control the money supply while giving banks both the power and incentive to create too much money.

This is the nub of issue for this group. They somehow consider that all the major ills of the capitalist system can be traced to the ability of the private banks to create loans without necessarily having the reserve backing in advance.

A whole host of proposals come under this umbrella – “100% Reserves, Narrow Banking, Limited Purpose Banking” etc. They have nuances with differentiate them but they are essentially united in their desire to stop banks creating credit.

The so-called “Sovereign Money proposal” says:

only the central bank, owned by the state, may create money as coin, notes or electronic money. Commercial banks would be prevented from creating money.


In modern monetary economies, the central bank clearly does not control the money supply. It controls the interest rate. Please read the following blogs for more information:

1. Money multiplier and other myths.

2. Money multiplier – missing feared dead.

The Report acknowledges that:

The Central Bank of Iceland must provide banks with reserves (money in accounts at the CBI) as needed, in order not to lose control of interest rates or even trigger a liquidity crisis between banks. The Central Bank of Iceland therefore had to create and provide new central bank reserves to accommodate banks as they expanded the money supply nineteen fold between 1994 and 2008.

This is clearly valid. But it also conflates several points. First, the CBI did have to supply reserves on demand to ensure the clearing system worked each day. All central banks have to do that and as we will see that capacity would not really change under this proposal.

The central bank operations might be called something different and the fancy names given to accounts but essentially the money supply would still be endogenous under this proposal unless the central bank was willing to tolerate the interest rate going beyond its control or a lack of funds available for borrowing. I will discuss that more in Part 2.

Second, this is not the reason that the privatised banks went crazy. The provision of reserves as Lender of Last Resort can be easily supplemented with other legislative powers either vested in the central bank or a related prudential authority to ensure that banks behave as banks.

Consider the following case study of the Icelandic banking explosion before we go on.

It is clear that the capacity to create credit was not the reason Iceland’s banking system went overboard.

3 Ingelesez: “Case study: The Iceland Parliament’s Special Investigation Commission (SIC)

The Iceland Parliament’s Special Investigation Commission (SIC) published a major report in 2010The Report of the Investigation Commission of Althing – covering the Icelandic Banking collapse in 2008.

An English language version of aspects of the – Report of the Special Investigation Commission (SIC) – covers Chapters 2, 17, 18, 21 and Appendixes 3 and 8. There is also an English version of the main conclusions of the Working Group on Ethics available.

We learned that:

1. “The main cause of the failure of the banks was the rapid growth of the banks and their size at the time of the collapse” – the “big three banks grew 20-fold in size in seven years”.

2. The “quality of the Icelandic banks loan portfolios eroded under these circumstances” and internal incentive structures drove the growth rather than commercial risk analysis.

3. The rapid expansion of “global debt financing markets drove the growth of the banks”.

4. The “Icelandic banks received high credit ratings, which was mostly inherited from Iceland’s sovereign debt rating” – the three banks issued more than Iceland’s GDP in 2005 into foreign debt markets and most of the debt was relatively short-term (3-5 years), which meant it required refinancing around 2008.

5. The international debt funding markets dried up as early as 2006 and by 2007, “foreign deposits and short-term securatised funding became the main source of funding for the three banks”. This was highly market-sensitive funding.

6. Massive repayment burdens emerged in 2008 while funds available to refinance had dried up.

7. The prudential regulator was inexperienced and understaffed given the massive foreign exposure of the banking system.

8. The Central bank of Iceland did not have sufficent foreign currency reserves relative to the foreign deposits in the banking system (more than 8 times the forex reserves) and the short-term, foreign currency liabilities (more than 16 times the forex reserve).

There was no chance the central bank could underwrite the banking system at that stage. It is clear that the central bank was aware of the massive exposure of the system to increased risk and warned the neo-liberal government accordingly. The government chose to talk up the safety of the banking system rather than intervene.

There was a massive rise in foreign deposits (in Dutch and British branches of the banks) from late 2006 to the middle of 2007. Ridiculous deposit rates were being offered to shore up the funding bases. From mid-2007, there was a huge outflow of wholesale deposits from the banks “much more than the inflow rate of retail deposits”

9. Things get murkier when you consider that the corporations that owned the three main banks – Kaupthing, Landsbanki and Glitnir – “were the banks’ principal owners”. Was lending done “at arms length”?

It was found that the owners had created a sequence of shelf companies with fictitious transactions to hide what was going on.

The SIC found that:

The operations of the banks were in many ways characterised by their maximising the benefit of majority shareholders, who held the reins in the banks, rather than by running reliable banks with the interests of all shareholders in mind and to show due responsibility towards creditors.

10. The “banks risks exposure due to funding of own shares was excessive”. That is, they financed the equity of the owners based on borrowing from foreigners.

As a result, the capital structure was dodgy in the extreme and “did not reflect the real ability of the banks nor of the financial system as a whole to withstand losses”.

The inflated (but essentially fictitious) capital allowed the banks to grow further than they could if the equity was stronger.

11. Several large Icelandic investment companies (non-bank financial speculators) borrowed huge amounts in foreign currencies and gained securities from the Icelandic banks, who utlimately had to take “over the financing so that loans to foriegn banks could be paid up”.

What did these investment companies do with the loans? The:

loans were largely made in order to finance the purchase of shares in the banks themselves. To prevent sales of the shares the banks overtook the financing in an effort to maintain the value of the shares.

Again, to maximise the wealth of the banks’ owners!

The banks were also buying up their own shares to maintain value for the owners.

12. By November 2008, the asset values of the three big banks which were on the books as IKR 11,764 billion were adjusted downward to IKR 4,427 billion – a 60 per cent write-down.

The SIC said that in 2008, Iceland’s GDP was around IKR 1,476 billion, which means “that the write-down of the assets of the financial companies” was equivalent to around 5 years of GDP – five years of national production and income. Massive, in other words.”

4 Ingelesez: “I know there is debate about the role that neo-liberalism played in Iceland. The free market lobby claim that the period of market liberalism which began in the early 1990s, ended around 2004. After that, Iceland should be better described as being a ‘crony capitalist’ nation, and it was this period that coincided with the massive credit growth.

But it was the market liberalism that gave birth to the crooked bankster class.”

5 Ingelesez: “A coherent left view of the crisis in Iceland is presented by Martin Hart-Landsberg in the Monthly Review, 2013 (Vol 65, Issue 3) – Lessons from Iceland: Capitalism, Crisis, and Resistance.

He argues that:

In 1991, the Icelandic government began an aggressive program of liberalization and privatization which gave rise to the hyper-expansion of three Icelandic banks.

He provides an interesting historical account of the transition from the large, state-owned banks that rationed capital between industries and home-owners” with the central bank setting nominal interest rates under the control of the government.

The system was not perfect but “by the 1980s [Iceland] had attained both a level and a distribution of disposable income equal to the Nordic average.”

The privatisation of the banking system which began in the 1990s and was complete by 2003, favoured those with political influence in the new free market-oriented government.

The banks became cash cows for the owners who used the funds, in part, to fund the political parties that gave them favour. In this sense, the liberalisation was really reinforcing the crony nature of the state-corporate nexus that dominated Iceland in the Post World War 2 period.

We learn that:

While the banking elite used their access to funds to purchase control of many Icelandic businesses, they also engaged in heavy investing outside of Iceland. Major targets were fashion outlets, toyshops, soccer teams in Britain, and supermarkets in the United States and throughout Scandinavia.”

6 Ingelesez: “They used their influence within the Icelandic government and Chamber of Commerce to build a smokescreen of stability. In this blog – Wrong is still wrong and should be disregarded – I traced the role of the credit rating agencies and consulting reports provided by hired academics, which waxed lyrical about the solid state of the economy.

One of those academics was Columbia University’s Frederick Mishkin, who featured in the 2010 movie Inside Job and was paid a considerable sum by the Iceland Chamber of Commerce in 2006 to produce the report the – Financial Stability in Iceland.

At the same time that Mishkin and his co-author were giving the financial system in Iceland a clean bill of health, the Icelandic banks were engaged in elaborate and not so elaborate growth schemes based on refinancing debt with extra borrowing using both accounting mirages and illegal manipulation of markets to allow them to become many times bigger than they could justify on fundamentals.

After the crisis broke, Mishkin was caught changing his CV by renaming the paper ‘Financial Instability in Iceland’.

When the Inside Job challenged him about this during an interview, he stumbled, in a dissembling fashion and eventually managed to get it out that it must have been a ‘typo’.

The following year (2007) LSE Professor Richard Portes co-authored a 65-page consulting report – also for the Iceland Chamber of Commerce – The Internationalisation of Iceland’s Financial Sector which the NLR says he was paid £58,000. It was actually co-authored by Icelandic economist in collaboration with the Iceland Chamber of Commerce.

It also said that the banking system in Iceland was “highly resilient” and that “Overall, the internationalisation of the Icelandic financial sector is a remarkable success story that the markets should better acknowledge”.

7 Ingelesez: “There were many cases documented of that sort of behaviour and deception.

What the Icelandic experiment demonstrated was that the instability of capitalism and its tendency to promote dishonest behaviour by the owners of capital will lead to breakdowns more quickly and more profoundly in an unregulated environment.

It also demonstrated that if the State intervenes as it did in 2008 and 2009 when the banking system collapsed stability can be restored relatively quickly.

Ask yourselves whether the problem was the credit-creation capacity of the banks or other factors that drove Iceland’s banking crisis.

What other factors?

1. Banks speculating in foreign-currency debt and assets and no longer behaving like banks.

2. The ownership of the banks engaging in devious and self-serving behaviour.

3. A lack of prudential control.

Neo-liberal government serving the interests of the wealthy and ignoring their responsibilities to advance general well-being.”

8 Ingelesez: “I will consider the mechanics of the SMS in more detail and tell you why it is not an improvement on the current system.

I will also outline why broader, quite radical reforms are needed to the banking and financial sectors, which do not involve restricting the capacity of ‘banks’ to create credit.”

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