Notes on the Financial Crisis and Deregulation

Overview of Iceland

• Stable democracy with high standard of living
• Low unemployment and government debt until 2000
• Modern infrastructure: clean energy, food production, fisheries, healthcare, and education
• Environmental deregulation led to economic devastation

Deregulation and Its Consequences

Timeline of Deregulation

• 2000: Iceland's government began broad policy of deregulation.
• Allowed multinational corporations to exploit natural resources (e.g., geothermal, hydroelectric).
• Privatized three largest banks.

Financial Deregulation Experiment

• Resulted in significant financial instability.
• Banks borrowed $120 billion (10x Iceland's economy) in five years.
• Massive financial bubble formed, with stock prices increasing ninefold and housing prices doubling.
• Consequences included tripling of unemployment and loss of savings for many citizens.

Role of Financial Regulators and Institutions

• Regulators failed to act responsibly, allowing banks to operate with minimal oversight.
• Many regulators moved to lucrative positions within banks.
• American accounting firms and credit rating agencies failed to identify risks.

Massive Financial Bubble and Collapse

• Involvement of American accounting firms and credit rating agencies.
• Upgraded ratings for Icelandic banks led to increased risk-taking.
• 2007: Rating agencies labeled banks as AAA, despite emerging issues.
• By 2008: Lehman Brothers collapsed, triggering global financial crisis.

Global Financial Crisis (2008)

Major Events

• Lehman Brothers declared bankruptcy, leading to widespread market panic.
• The crisis resulted in tens of trillions of dollars in losses and widespread unemployment.
• Key statistics:
  • 30 million people unemployed globally.
  • Significant increase in poverty levels worldwide.

Deregulation Practices in the U.S.

• Since the 1980s, the financial sector has grown more powerful, leading to frequent crises.
• Financial deregulation under President Reagan and subsequent administrations.
• 1999: Repeal of Glass-Steagall Act allowing risky investments by banks.

Consequences of the Crisis

Changes in Banking Operations

• Investment banks became too big to fail, leading to systemic risks.
• Introduction of complex financial products (e.g., derivatives, CDOs) with little regulation.
• Credit Default Swaps: Led to increased risk-taking without accountability.

Lack of Accountability and Prosecutions

• No significant criminal prosecutions of senior bank executives following the crisis.
• The Obama administration's inability to implement meaningful reforms.
• Wealth inequality worsened, with financial gains concentrated among the top 1%.

Cultural Issues in Finance

• High compensation levels in financial services, despite failures.
• Culture of greed, with excessive risk-taking and poor ethical standards.
• Incidents of drug use and illicit behavior among financial professionals.

Conclusion

• The financial crisis was a culmination of deregulation, lack of oversight, and systemic risk-taking.
• Need for significant reforms in the financial system to prevent future crises.