When the banks of the Sweden, Norway and Iceland went out of control, the people refused to bail them out, and the economies of all three countries were the better for it. Instead of allowing themselves to be bullied by international investors represented by the IMF and the European Union, the Cypriots who are facing a similar crisis today might want to learn from the Viking example.
The Cyprus banking sector went rogue to the point that it became eight times larger than the rest of the country’s economy. Perhaps the bankers thought they would become too big to fail, requiring the country to rescue them. But why should citizens rescue bankers?
There is a better way, which is what the Scandinavians insisted on.
When it comes to a financial crisis, what’s needed is the combination of popular will and the existence of an alternative. The Vikings combined smart economics with the organizing muscle to make it happen. As a presidential candidate in 2008, Barack Obama said he knew that the Swedes handled their banking crisis in the correct way, but he also acknowledged that the United States wouldn’t follow the Swedish path. Why? Obama believed that we wouldn’t back him with a mass direct action movement in a confrontation with Wall Street.
So, what is the alternative to bailouts for rogue banks? And what can a movement do when the party in power is in bed with the 1 percent?
What democracy looks like when banks go out of control
In the 1980s, Norway and Sweden set aside what had been working for them — democratic socialism — and flirted with neo-liberalism. They deregulated, setting free the financial sectors. The private banks speculated, creating housing bubbles. By the early ’90s, the bubbles burst. Both nations headed into crisis.
In Sweden, 90 percent of the banking sector experienced massive losses. Fortunately, the Social Democrats, the party of the working class, was in power and decided against bailouts. The government nationalized two of the banks, sheltered some that looked like they could survive, and allowed the rest to go bankrupt. Stockholders were left empty-handed.
As it turned out, three of the other large banks were able to raise necessary capital privately. Regulation was re-imposed and Sweden came back strong.
This Swedish version of “tough love” put the economy in such a strong position that when the 2008 financial crisis hit most of Europe, Sweden could use a series of flexible measures that minimized disruption. Its banks had already been cleaned up. Its famous social safety net kept Swedes accessing unemployment insurance, health care, education and job training.
The result: By 2011 the Washington Post was calling Sweden the “rock star of the recovery,” with a growth rate twice that of the United States, lower unemployment and a robust currency.
When Norway’s banks went out of control, the Labor government seized the three biggest banks of Norway, fired the senior management and made sure the shareholders didn’t get a krone.
The now publicly owned banks were given new, accountable management and time to clean up. The government told the rest of the private banking sector that it were on its own: If bankers had money in their mattresses with which they could re-capitalize, fine; if not, they could go bankrupt. There was no way Norwegian citizens would bail them out.
The lesson for Norway’s entire financial sector was unmistakable. No more moral hazard: Risk your own money, not other people’s. Failing banks will be allowed to fail, no matter what their size.
The government gradually sold its shares in the banks it had seized and made a net profit. It kept a majority stake in the largest bank, probably as a safeguard to prevent the bank from being sold to foreign owners.
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The St. Louis Federal Reserve Bank’s vice president, Richard G. Anderson, studied the responses of Sweden and Norway to their parallel financial crises: “The Nordic bank resolution is widely regarded as among the most successful in history,” he concluded. By bouncing back through effective governmental intervention, Norway and Sweden avoided the “lost decade” syndrome that dogged Japan after its crash in the early 1990s and that is now the reality for the United States and much of Europe.
For activists in the many countries now confronting austerity programs, these examples can serve as a concrete alternative with a track record of success.
But what if your government is in the hands of the 1 percent?
For decades, Iceland followed the “Nordic model,” with high standards of living, free university education, universal health care, full employment and a robust labor movement. The government owned the major banks.
Then, in the late ’90s, Iceland’s political leadership shifted. It began to privatize banks and joined the international trend initiated by the repeal of the Glass-Steagall Act in the United States, a law that separates investment banking from ordinary banking. Now the banks were free to take ownership stakes in their customers’ companies.
Building on Iceland’s economic credibility, the largest banks opened branches abroad and bought foreign financial institutions. They made the Norwegian and Swedish banks’ mistake of creating a real estate bubble, and then went beyond that by making high-risk loans to holding companies. Like Cyprus, Iceland’s banks blew themselves up like balloons, becoming several times the size of Iceland’s gross national product.
In 2008, Iceland suffered one of the worst banking collapses in history. Unemployment and inflation shot up. By September the Icelandic economy was in free fall.
Activists formed a grassroots nonviolent movement to demand resignation of the government. They massed outside the parliament building, banging pots and pans to disrupt the meetings inside — the “Kitchenware Revolution,” they called it.
The crowds grew to 10,000 — out of a total population of 320,000 — and the increasing turbulence forced Prime Minister Geir H. Haarde to announce that he and his cabinet would resign and new elections would be held. Although the politicians responsible for Iceland’s financial life were resigning, the campaigners didn’t stop there; they demanded — and won — the resignation of the governing board of the Central Bank.
The party representing the working class stepped in and pledged that there would be no bailouts, and the three largest banks therefore failed. The government made sure that Icelandic depositors got their money back and gave debt relief to struggling homeowners. For businesses facing bankruptcy but experiencing a positive cash flow, debts were forgiven. The government devaluated its currency in order to support Iceland’s important export market.
The next part will be especially interesting to Cypriot activists who want to fight back: Iceland then repudiated the billions of dollars of debt owed to U.K. and Dutch citizens who had taken loans through online subsidiaries of Icelandic banks. The move sent shudders through the international financial world, but still ordinary Icelanders refused to accept responsibility for the frenzied behavior of their bankers. The question was twice put before voters in referenda, and twice Icelanders said “No.”
Instead of trying to pacify international investors, Iceland created controls on the movement of capital. Instead of demanding austerity, the government expanded its social safety net. The result? Iceland is recovering. By July 2012 unemployment was hovering at 6 percent and falling. The economy was expected to grow by 2. 8 percent.
As The Independent’s Ben Chu has pointed out, ever since the 2008 international crisis both European politicians and ratings agencies “have demanded that national governments honor the debts of their banking sectors, protect their exchange rates, eschew capital movement restrictions, and impose massive austerity to earn back the confidence of bond markets.”
Iceland largely ignored those demands. Did the investors punish Iceland for being so smart and self-respecting? No. In June 2011, the government issued $1 billion in sovereign debt at 6 percent interest, an offering that was twice oversubscribed by investors.
It may be time for Cyprus to join Iceland in treating the bullies like, well, bullies. It may be the little countries that need to act like grown-ups and enforce accountability: Those who make the mess should clean it up. But it will take people’s movements to make sure that happens, movements that have an idea what the alternative is.