After almost four years of rapid economic expansion, the entire Icelandic banking system melted down last October, resulting in the biggest banking collapse that any country has suffered, relative to its size. The country’s financial success from 2003 to 2007 — during which the Icelandic stock market multiplied by nine times — turned out to be a debacle when the nation’s three biggest banks collapsed, leaving 300,000 citizens to bear the responsibility for $100 billion of losses. Icelanders ultimately amassed debts amounting to 850 percent of their G.D.P.
Following the collapse, the Icelandic government tapped Yale economics lecturer Sigridur Benediktsdottir GRD ’05 to be a part of its special Investigation Commission. Benediktsdottir, who currently teaches “Intro Macroeconomic Analysis” and “Financial Markets,” will work with the commission this summer to analyze the causes and consequences of the banking crisis. She sat down with the News on Friday to discuss her upcoming work with the commission and her insight into Iceland’s economic meltdown.
Q: How were you contacted about this position?
A: Basically the Nancy Pelosi of Iceland just called me and asked me to be a part of this effort. I told them no because I would be teaching at the time that they mentioned. Then they called me again on Dec. 30 and said that they would still like me to work with them, but this time in the summer.
Q: Why do you think you were selected for this commission? What about your past work relates to the work you will do in the summer?
A: I am a financial economist and I worked at the Federal Reserve Board in D.C. for two years in the financial market section. So most of the work I have done to date will help me in the work this summer.
Q: What is the current timeline for this commission?
A: I’m moving there from early May to mid-November to work. We are supposed to hand in our report by Nov. 1.
Q: What kind of work was the commission established to do?
A: We’re supposed to build a case for what went wrong for this to have happened. We’ll probably go back to when the banks were made into private companies. We’re going to try to figure out maybe if the ownership of the banks were not regulated efficiently, and how this led to the complete failure of the banking system. We’re also supposed to look at the whole regulation around it: how they regulated [the three main private banks] and how they could have done it differently; the central bank and how they regulated that system; and the mandates which were to keep the system intact.
Q: Will it involve more economic analysis or policy recommendations?
A: My work is to look at the analysis as an economic researcher. I will look at the economic risk and the system management, and also the practices, right down to the salaries to see how bonuses were given.
Q: In preparation for the case you will present this summer, what points would you like to bring up?
A: It’s a very complex problem that is at the same time very easy to see. You’ll understand why it collapsed when I tell you the size of the system. The banks were 10 to 20 times the GDP; after the fall of the Lehman Brothers, there was no way the central bank could save them. It should have been obvious that this was not viable.
Q: How do you personally feel about the banking failure? Do you see it resolved in the foreseeable future?
A: I am disheartened by this failure; I feel it is a result of extreme greed on the part of many and reckless complacency by the institutions that were in charge of regulating the industry and in charge of ensuring financial stability in the country. Iceland will end up with a huge foreign debt as a result, which may not be the worst of it, since our reputation is completely tattered. This will take future generations some time to work through. We do, however, have a lot of natural resources and are a very highly educated, resilient population.
Q: How are the Icelandic people handling the crisis? How much will the public opinion factor into the road to recovery?
A: I don’t know if I can talk for all the people in Iceland, but many of whom I have talked to have said that the worst thing about all this is that we are now known for this. Not for our beautiful exotic country, not for our fresh fish, not for our use of renewable energy, not for our Geysir and not for Bjork or Sigurros, but for the collapse of our banking system. Many people also feel cheated and are rightfully demanding that those who got the country into this position answer for it. They want to know the truth as to what happened.
Public opinion will factor a lot into the road to recovery. We are a small nation — little over 300,000 people — so it is extremely important that people get together to build up a nation we want to live in. Knowing Icelanders, I am more than sure that we will succeed.
Q: What kind of lessons can we draw from this crisis?
A: I think we can actually draw lessons from America. We have a strict regulatory system in America, whereas the Icelandic banks were allowed to do things that should have been regulated. Some of the financial institutes also should have been regulated. The systemic risk of this global financial market is much greater than we expected. It’s definitely closer to the savings and loans crisis from the ’80s.