If you think you are going broke and you watched your retirement vaporize before your eyes last week, be glad you live in the United States and not in Iceland.
Iceland has borrowed 10 times the value of its Gross Domestic Product, its banks have collapsed into insolvency, its currency is in tatters (thus, it can no longer print its way out of debt) and one of its chief creditors, the United Kingdom, has invoked War powers to seize all overseas Icelandic assets within the UK’s reach.
All in all, it was a bad week for Iceland.
Since this is a real estate blog, why Iceland?
The mainstream media has demonized US real estate as the engine of the world collapse. While it certainly contributed to the collapse, US real estate is not and was not the only cause of the collapse.
The US housing bubble injected some of the cash that pumped up the world credit bubble, but not all.
Consider the home grown mortgage problems in Iceland – they seem very similar to ours. Thus, their own housing mess – not the United States housing market – contribute, in large part, to Iceland’s fall.
But the days when the economy seemed capable of gravity-defying feats are gone. So are the days when investors went on an international buying spree, adding some of the biggest names of the British and American retailing industries to their portfolios? Gone too, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik. "It's difficult; the landscape is very difficult," said Franch Michelsen, a watch dealer in central Reykjavik, as he took a break Wednesday from cleaning his shop window. Some ordinary Icelanders face a similar problem to the one that brought down the banks. In recent months, many mortgages were taken out in foreign currencies - marketed by the banks as a way to benefit from lower interest rates abroad, as rates in Iceland rose into the double digits. Now, with the Icelandic krona plunging, homeowners suddenly have to pay back far more expensive euro or dollar values of their mortgages. At the same time, house prices are falling. Iceland is all but officially bankrupt, International Herald Tribune, Eric Pfanner, October 9, 2008.
This collapse looks on a global level so much like the US Savings & Loan collapse of 1989 – 1991, it is scary. You would think we would learn, but perhaps not. We deregulated the S&L’s; they moved into questionable loans. 15 years later, we deregulated banks (partially), investment houses and insurance companies. They plunged headlong into questionable loans and questionable exotic debt instruments. Drexel, Burham & Lambert crashed in 1990; it was the poster child of bad investment banking and newly minted junk bonds. Today, not only Lehman Brothers, but every similarly situated Investment bank crashed on Wall Street or begged to be merged into a regulated commercial bank. (Say it ain't so.)
A quick review of Iceland’s troubles shows the troubles are based on deregulation and massive overuse of credit. Sound familiar. Consider that Iceland has borrowed $120 billion of debt when their entire GNP is only $20 billion. By comparison, we (the US) would have to have borrowed $137,800 billion of debt, given that our GNP is $13,780 billion.
To put that into comparison, we have injected somewhere in the range of 1 to 1.4 Trillion dollars in the last month or so to attempt to stanch the credit bleeding. That is 700bn committed by Congress with 350bn presently allocated. An additional 630bn was recently injected by the Federal Reserve (which may actually be supported by new Treasury Bill sales); and, about we also saw 500bn of various injections from the Fed, the Treasury and the Administration.
The Treasury’s first injection of “rescue” capital into the world economy is limited to 250bn. One half of that entire amount would be required to stanch the bleeding in Iceland alone. That ignores the bleeding in the UK, France, Spain, Italy (fully bankrupt in their own right, yet again), Germany, Austria, Sweden, Norway, Denmark, India, Egypt, Indonesia, … and the list goes on.
In an address on Thursday, Prime Minister Haarde warned his countrymen of "the inevitable cut in living standards" that the country is facing. One of the most immediate results of the frozen credit market has been the ongoing devaluation of the krona. The currency has lost 30 percent of its value against the dollar in the last 30 days and inflation has soared to 14 percent. Iceland's currency lost 10 percent against the euro last week alone. In short, with the country's economy dominated by the banking sector, Reykjavik has little choice but to find a way to shore up Iceland's financial system. But even as the country's banks are too big to let fail, they might be too big to save should global credit markets not loosen up rapidly. Iceland's Financial Woes Could Push It Closer to EU, Der Spiegel, Oct 4, 2008.
If you had $100,000 in the bank in Iceland, (with or without bank insurance), its only worth $70,000 right now and its still in freefall. Look outside your window. Milk and Meat Prices are moving up at 15% per year – and that inflation rate is predicted to increase. Also, Iceland’s 401(k)s (It’s an analogy, ok) crashed at twice the rate yours did in the United States. They fell along with the world’s collapse, losing at least 50% in value across world markets AND the ones that were denominated in Icelandic krona, fell 30% in addition to the 50% loss of market value.
So, if you suffered a loss of your 401(k) from $100,000 to $50,000, Icelanders fell and additional 30% based on currency collapse. Thus, Krona denominated savings fell from $100,000 to $35,000.
We are going to feel a lot of pain as we wean the US off a fat laden diet of debt. However, our diet will feel nothing like some of countries of Europe and that of Iceland.
One thing that is clear. US real estate is not the scapegoat of the world. An objective view of world financial data shows that the US housing mess is not the sole cause of the world credit meltdown.
Hugh Wood, Atlanta, Georgia.
& & & &
The US Economy is 700 times larger than Iceland’s. $13.78 trillion (2007 est.) is US GDP; Iceland’s is 20bn. CIA World FactBook. 2008. In the American system one billion is 1,000,000,000 and a trillion is 1,000,000,000,000 so one trillion is one thousand times one billion. We have 300M they have 300,000 in population. Iceland has 1% of the population of the US.
Iceland has borrowed 10 times the value of its Gross Domestic Product, its banks have collapsed into insolvency, its currency is in tatters (thus, it can no longer print its way out of debt) and one of its chief creditors, the United Kingdom, has invoked War powers to seize all overseas Icelandic assets within the UK’s reach.
All in all, it was a bad week for Iceland.
Since this is a real estate blog, why Iceland?
The mainstream media has demonized US real estate as the engine of the world collapse. While it certainly contributed to the collapse, US real estate is not and was not the only cause of the collapse.
The US housing bubble injected some of the cash that pumped up the world credit bubble, but not all.
Consider the home grown mortgage problems in Iceland – they seem very similar to ours. Thus, their own housing mess – not the United States housing market – contribute, in large part, to Iceland’s fall.
But the days when the economy seemed capable of gravity-defying feats are gone. So are the days when investors went on an international buying spree, adding some of the biggest names of the British and American retailing industries to their portfolios? Gone too, are the days when ordinary citizens effortlessly joined in the fun, taking out second mortgages to finance their own trips abroad or at least to the Laugavegur, the main shopping strip in Reykjavik. "It's difficult; the landscape is very difficult," said Franch Michelsen, a watch dealer in central Reykjavik, as he took a break Wednesday from cleaning his shop window. Some ordinary Icelanders face a similar problem to the one that brought down the banks. In recent months, many mortgages were taken out in foreign currencies - marketed by the banks as a way to benefit from lower interest rates abroad, as rates in Iceland rose into the double digits. Now, with the Icelandic krona plunging, homeowners suddenly have to pay back far more expensive euro or dollar values of their mortgages. At the same time, house prices are falling. Iceland is all but officially bankrupt, International Herald Tribune, Eric Pfanner, October 9, 2008.
This collapse looks on a global level so much like the US Savings & Loan collapse of 1989 – 1991, it is scary. You would think we would learn, but perhaps not. We deregulated the S&L’s; they moved into questionable loans. 15 years later, we deregulated banks (partially), investment houses and insurance companies. They plunged headlong into questionable loans and questionable exotic debt instruments. Drexel, Burham & Lambert crashed in 1990; it was the poster child of bad investment banking and newly minted junk bonds. Today, not only Lehman Brothers, but every similarly situated Investment bank crashed on Wall Street or begged to be merged into a regulated commercial bank. (Say it ain't so.)
A quick review of Iceland’s troubles shows the troubles are based on deregulation and massive overuse of credit. Sound familiar. Consider that Iceland has borrowed $120 billion of debt when their entire GNP is only $20 billion. By comparison, we (the US) would have to have borrowed $137,800 billion of debt, given that our GNP is $13,780 billion.
To put that into comparison, we have injected somewhere in the range of 1 to 1.4 Trillion dollars in the last month or so to attempt to stanch the credit bleeding. That is 700bn committed by Congress with 350bn presently allocated. An additional 630bn was recently injected by the Federal Reserve (which may actually be supported by new Treasury Bill sales); and, about we also saw 500bn of various injections from the Fed, the Treasury and the Administration.
The Treasury’s first injection of “rescue” capital into the world economy is limited to 250bn. One half of that entire amount would be required to stanch the bleeding in Iceland alone. That ignores the bleeding in the UK, France, Spain, Italy (fully bankrupt in their own right, yet again), Germany, Austria, Sweden, Norway, Denmark, India, Egypt, Indonesia, … and the list goes on.
In an address on Thursday, Prime Minister Haarde warned his countrymen of "the inevitable cut in living standards" that the country is facing. One of the most immediate results of the frozen credit market has been the ongoing devaluation of the krona. The currency has lost 30 percent of its value against the dollar in the last 30 days and inflation has soared to 14 percent. Iceland's currency lost 10 percent against the euro last week alone. In short, with the country's economy dominated by the banking sector, Reykjavik has little choice but to find a way to shore up Iceland's financial system. But even as the country's banks are too big to let fail, they might be too big to save should global credit markets not loosen up rapidly. Iceland's Financial Woes Could Push It Closer to EU, Der Spiegel, Oct 4, 2008.
If you had $100,000 in the bank in Iceland, (with or without bank insurance), its only worth $70,000 right now and its still in freefall. Look outside your window. Milk and Meat Prices are moving up at 15% per year – and that inflation rate is predicted to increase. Also, Iceland’s 401(k)s (It’s an analogy, ok) crashed at twice the rate yours did in the United States. They fell along with the world’s collapse, losing at least 50% in value across world markets AND the ones that were denominated in Icelandic krona, fell 30% in addition to the 50% loss of market value.
So, if you suffered a loss of your 401(k) from $100,000 to $50,000, Icelanders fell and additional 30% based on currency collapse. Thus, Krona denominated savings fell from $100,000 to $35,000.
We are going to feel a lot of pain as we wean the US off a fat laden diet of debt. However, our diet will feel nothing like some of countries of Europe and that of Iceland.
One thing that is clear. US real estate is not the scapegoat of the world. An objective view of world financial data shows that the US housing mess is not the sole cause of the world credit meltdown.
Hugh Wood, Atlanta, Georgia.
& & & &
The US Economy is 700 times larger than Iceland’s. $13.78 trillion (2007 est.) is US GDP; Iceland’s is 20bn. CIA World FactBook. 2008. In the American system one billion is 1,000,000,000 and a trillion is 1,000,000,000,000 so one trillion is one thousand times one billion. We have 300M they have 300,000 in population. Iceland has 1% of the population of the US.
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