What Manmohan Singh May Learn from Iceland

July 22, 2012

Current Indian Prime Minister is a veteran Keynesian economist and a so-called economic reformer who, people say, changed the path of Indian economic mobility in 1991. Being a proponent of Austrian economics, I do not think that any advice from me will be appreciated by Manmohan Singh, who is academically, politically and ideologically a Keynesian. However, after pledging for a whooping $10 billion support for the debt-trodden Euro Zone¹ , he may learn a few things from the current economic activities of Iceland, an economy of Euro Zone.

Lessons from Iceland

Iceland suffered the worst strike of the 2008 economic crisis where almost all banks faced failure and bankruptcy. Yet, almost three years after that crisis, Iceland is back again on the track of economic balance and prosperity. The drastic nature of economic crisis in Iceland can be explained by the fact that in early 2008, the GDP or GNP of Iceland was around one-tenth of the total ‘bad assets’ of the three major banks of Iceland. The bank crisis created a chain reaction as in absence of liquid assets and credit; businesses busted like crackers and went bankrupt. In 2008, the Icelandic currency ‘Kroner’ was devalued by 50%. It wasn’t easy for common lenders too as anyone who had taken a bank loan of 1 million Kroner to make a house, had to suffer the burden of paying 2 million Kroner. Deflation of currency breaks the backbone of debtors.

The results were drastic too as the banks were nationalized and the whole burden came on the shoulders of the taxpayers as the government had the only way of taxation to bring back the economy back. Icelandic people under debt of bank loans preferred an easier solution. Instead of paying the premiums and EMI of the houses for long years, they preferred to leave those houses and sent the keys to the banks while managing a cheaper abode. However, the main issue was not of the Icelandic banks or Icelandic debtors, rather it was of the foreign investors who were used to enjoy Icelandic banks as heavens for high interest rates. Around 300,000 British and 120,000 Dutch, and many more from other European countries had deposited huge amounts in Landsbanki, the largest bank of Iceland. British depositors lost some 5 Billion Euros while the Dutch lost 1.7 Billion Euros.

Since the banks were nationalized, the government of Iceland planned to payback the deposits of those foreigners and a bill was introduced in Icelandic parliament which was passed with a thin majority. However, the president of Iceland, Ólafur Ragnar Grímsson denied signing the bill as he wasn’t ready to pay the deposits back to the foreigners. Obviously, it was not the duty of common tax payers to pay the liabilities of banks which were certainly committing a fraud by using and wasting the deposited money of depositors. As a result, a plebiscite was asked for people to decide whether the tax payers of Iceland should pay the money back to British or Dutch or other European depositors. The public of Iceland was delighted as they were asked to make a serious decision that was going to affect their life in a significant manner. 93% of voters rejected the idea of offering compensation for the foreign depositors or to take the responsibility of bad decisions and frauds of private banks that were nationalized after the crisis of 2008. The decision of tax payers was economically and morally sound. They realized that they should not be liable for the wrong doings of the banks; furthermore, they also reasoned out that when things were going well, the banks weren’t sharing their profits with the public.

That plebiscite and the decision of Icelandic public was an unforgettable event as it went against the general idea of the economies worldwide which suggests that the profits of banks and corporate remains private but if those banks or corporate suffers losses, the society or the tax payers are there to suffer the burden of losses. After that decision, the Icelandic people started recuperating against all odds and they are doing fine. The unemployment rate of Iceland is under 5% which is still a little higher, yet the economy is improving and the predicted growth rate of Iceland for year 2012 is 2.5%² (while most of the other Euro Zone countries are suffering to make any growth.) Yet, the price rise in Iceland is still 6% which is a trouble. This price rise is certainly because of the extra currency doled out the government to pay back the domestic liabilities of the banks in bad assets. Yet, Iceland is recuperating very fast and its economic growth is noteworthy especially when the other countries of Europe or Euro Zone³ are still facing ghosts of economic debacle.

What is going on in India?

India suffered a setback due to economic crisis of 2008; however, the government decided to hide it out and to advertize that the heavy regulations and good economic sense of government protected India against economic crisis. On the other hand, the government kept offering bailouts and easements for defaulting banks, companies and corporations in various steps⁴ . As a result, the current economic state of India is drastic. The unemployment rate In India for those with higher qualification is above 10%⁵ . We Indians are continuously facing strikes of price rise in double digits and the Indian currency is continuously suffering devaluation while the economic growth rate is precarious. Yet, Indian government finds no wrong in offering bailouts and monetary help for suffering sectors such as AI and many others⁶ . However, that isn’t a big issue, the bigger issue is the current pledge of our “Underperforming Prime Minister” Manmohan Singh who is ready to pay $10 Billion for Euro Zone as a help in crisis.

Contrasting India and Iceland

Everything is not going well in Iceland as there still is a government and a corrupt and non-essential central banking system of fractional deposit insurance based on Fiat currency. Yet, they have established a good change by going against the ideology of private profits and shared losses by denouncing bailouts and compensation. On the other hand, India is suffering the worst kind of state and central bank evil. Indian fiat currency is hugely inflated, Indian government feels an obligation towards paying bailouts and free money, in spite of suffering huge fiscal deficit, Indian government is continuously increasing its expenses by announcing ridiculous policies like Universal Education and Free Health Care System etcetera, and over all that, the Prime Minister of India feels it as a privilege to announce whooping amount of money in bailouts for foreign economies without even asking for a legislative voting over the issue while he knows that it is not the government but the hard working and already exploited tax payers who will be further exploited to fulfill his ridiculous pledges and promises.

It is the time when Manmohan Singh Ji should take lessons from Iceland and should deny any bailout⁷ for any banks (Including IMF or World Bank), foreign country or domestic sector for any reason and to establish the rule that when profits are private, losses and liabilities should also be private with no bailout or lose money processing.