Monday, 31 October 2011

The Iceland Recovery IMF Conference

The Icelandic Recovery conference organised by the IMF and the Ministry of Finance in Iceland was not totally the "we did an awesome job in Iceland" thing I halfway expected it to be. I managed to follow most of the panels through the internet and I have to admit that Shafik from IMF surprised me: she seemed really reasonable, was quoting heterodox economic theory - with care but mentioning it all the same - and although she did seem to be a bit proud of the "feat" of IMF in Iceland, she was not bragging too much about it.

None of the Icelandic participants surprised me that much. Gylfi Zoega (he taught me Macro II = IS-LM and such at University of Iceland) was wittiest and straightest to the point. His "some people call this lending to connected parties but we call it banking" comment was epic! Gylfi Arnbjornsson surprised me a bit though by making a fool of himself, grasping for clich├ęs such as that the EUR would save the Icelandic economy and such. Most notoriously he said that Icelandic labour unions didn't fear the EUR in case of high inflation and interests in Iceland after EUR adoption - which he and other EUR ideologists think will be impossible - the economy would "just go for an internal devaluation." He said this while on panel with Krugman, too bad the webcast didn't show Krugman's face, I'm sure his jaw dropped down to earth's core when he heard this. 

Of the foreigners, Johnson was spectacular! He was so good that I went on Amazon while listening to him and bought his book "13 Bankers". Haven't started it yet, still finishing Steve Keen's Debunking Economics while working at the same time on my book and PhD. 

After the conference, EUR supporters were certainly not chuffed. Majority of economists that attended the conference celebrated the ISK for saving what could have been saved of the carcass of an economy that the Icelandic one is. Wolf and Krugman were probably the most notable players on the chess board that highlighted the role of the ISK in the "resurrection" of the Icelandic economy. That's all fair and square, any sensible person immediately sees the different effects of the exchange rate between Iceland and the PIGS. But it's true what the EUR supporters did point out: not many words were about how the ISK had a hand in getting us into this mess that we're in. Because it's true, ISK did play a role through e.g. carry trade and such. But blaming it totally for the stinking carrion we're trying to revive is a bit of an overshoot. And to say the EUR will do the reviving almost automatically through EU membership is so distant from reality it is in the domain of neoclassical-economics-nonsense. 

One thing that was not discussed to any extent was the systemic impossibilities that my book focuses on: the indexation of mortgages and the 3.5% real interest rate minimum the pension funds are legally required to demand. Krugman shortly mentioned that the indexation of mortgages made the inflationary way out of a debt-trap impossible, and that's absolutely true. But there was no mentioning of the dynamics of such an economic system or why it's bound to crash. 

I think none of the foreign guests understood how indexation of mortgages in Iceland is done. That suspicion makes it all more important for me to explain it in details how this devil-of-a-detail works so the effects on the macro-economy can be properly understood. I'm seriously thinking of sending Krugman a copy of my book when I finish it, hoping it would teach him something about this economy which he seems to like so much to make references to. 

IMF did a decent job in Iceland, nobody can take that away from them. If the Icelandic basket-case opened the eyes of IMF to heterodoxy - such as it's OK to let banks go bust if you do it with a bit of support instead of American "let Lehman go and don't anything to mitigate the effects but bail out the dominoes" way of doing things - it certainly was worth more than we can imagine to let IMF experiment with things in Iceland. But IMF didn't fix the underlying problem - astronomically high domestic gross debt - or point out the systemic factors that cause that problem: the widespread use of indexation of loans and the 3.5% real interest rate requirement of the pension system. Until those systemic factors are changed, there will be no Icelandic Recovery.

P.S. Check out the conference videos here


  1. Great review, thanks. Look forward to read your book. When will it be out?

  2. Hopefully in February or March 2012, given I can get on with the PhD as well. So lets cross fingers.