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Iceland struggles with an economic 'hangover'

Magnús Skúlason was invited by the Martindale Center for the Study of Private Enterprise and the Murray H. Goodman Center for Real Estate Studies to discuss the “boom and bust of the Icelandic housing market.”

The citizens of the tiny island nation of Iceland are in an uproar because of a crash in the housing market caused by reckless banks after a period of prosperity, an Icelandic economist said here recently.

“In 2007 it was like there was a big party and [we] thought we wouldn’t see the end of it but we ended up with a huge hangover and we are still recovering,” said Magnús Skúlason, the founder and chairman of Reykjavik Economics.

Iceland’s banks were owned by the government until 2003 when they were privatized, said Skúlason. This led to major economic problems because bankers took too many risks by approving more loans and mortgages than could be sustained.

The Icelandic example shows that a whole economy can be destroyed by reckless banks, Skúlason said. Because of the economic problems in Iceland young people are moving to Norway and other larger countries with higher gross domestic products. Iceland has about 320,000 people. 

There has also been an increase in unemployment in Iceland, which rose from around 2 percent to almost 8 percent since the crash.  “In a country where the culture is to work hard it is very difficult for people who are unemployed,” Skúlason said. 

Skúlason’s presentation, “Global Housing Markets and The Global Banking Crisis: The Boom and Bust of the Icelandic Housing Market,” focused on Iceland as a case study of how banks affect the housing market. He also looked at global trends.

His visit was sponsored by the Martindale Center for the Study of Private Enterprise and the Murray H. Goodman Center for Real Estate Studies.

The lure of low interest rates and easy loan access

Skúlason said he believes that the United States will not experience an economic crash as severe as Iceland’s because the American economic system is more flexible and robust.

One of the most important factors affecting the housing market, he said, is interest rates.

“If interest rates go down, value goes up. That is why housing prices have gone up.”

Low interest rates also encourage people to accumulate debt by buying more things with money borrowed through loans or mortgages, Skulason said. If the market mood changes and interest rates rise, people are often not able to pay off their debts.

Easy access to loans and mortgages also causes people to incur too much debt, Skúlason said. This debt needs to be reduced to bring banks worldwide into a healthier state.

Skúlason is not sure if Iceland was naïve or incompetent in its economic decisions.

“If a fisherman couldn’t find fish he could call his father or grandfather and ask how to find the fish using the winds and currents.

“While a banker in another country could call his father or grandfather to see how to deal with a financial crisis, this is the first one we have had. Hopefully we can learn from it.”


Photography by Douglas Benedict

Story by Kate Karabasz

Posted on Monday, November 01, 2010

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