With the news from domestic and global events coming at a pace that can even overwhelm a total news junkie, one item really stands out for further scrutiny. No, it's not the ongoing unrest in the Middle East (which some noted analysts have called a Black Swan event although realistically how could one not expect revolution when oppressing your respective populations for decades.) No, it's not the continuing Japanese saga where workers are furiously battling to gain control of a nuclear reactor complex in a situation that seems to get worse by the day. No, it's not even the ridiculous political theatre here in the United States where the Democratic and Republican Parties have created a phony government shutdown threat in an effort to gain some voter sympathy but in reality very little happens whether the shutdown occurs or not. I might add that the media have been willing dupes in this charade by broadcasting every absurd minute of this non-event and getting the public on both sides of the issue up in arms. The earth shattering news item I am talking about occurred in the tiny country of Iceland and I believe has ramifications for the entire global financial system.
Iceland, a small island nation with a population of just 320,000, is at the center of a financial firestorm that has the potential to ignite a revolution against the established "too big too fail" banks we all know and love to hate. As a refresher course, Iceland's was the first financial system to 'fail' during the most recent global financial crisis. The genesis of the current situation came about when the private Icelandic bank "Landsbanki" offered high interest rate savings accounts in an era where low interest rates were the norm. As a result depositors from across the globe eagerly snapped up these rates under the assumption of some that the full faith and credit of the government of Iceland backed the accounts. The bank which along with several other Icelandic financial concerns was highly leveraged, found itself in deep trouble when the financial crisis hit full on with no apparent way out. The UK and the Netherlands, whose citizens had invested heavily in these Landsbanki savings accounts, were now forced to come in and offer a bailout to prevent their nationals from losing all the money in their accounts. As part of the deal, a loan to Iceland was arranged (which had by now taken control of the bank), and the government of Iceland agreed to pay the British and the Dutch back (with taxpayer money of course). So the deal was that in the short term, the UK and the Netherlands would step in and bail out the bank but Iceland must ultimately pay the debt back. The short-term beneficiaries would be the British and Dutch depositors and presumably a long-term benefit would accrue to the taxpayers in Iceland whereby they would have saved their banking system and would live to borrow another day. Oh yeah, the wealthy bankers didn't have to give back anything in salaries or bonus that they accrued during the period of their mismanagement. Doesn't this scenario sound at least a little familiar?
The problems with the deal began when the president of Iceland (in a political move no doubt) refused to sign the deal that had been brokered by the parliament, setting up a voter referendum. The citizens of Iceland were asked via a direct vote whether they approved of the plan to repay the countries that had stepped in and bailed out what was then a private bank. This effectively meant they were paying back British and Dutch citizens for something they really had no hand in causing. On April 9th, 2011 they said NO!
The ramifications are certainly not good for Iceland at least in the short term. What this referendum means is that a deal essentially guaranteed by the lawmakers in Iceland will not take place and the Landsbanki bank (which had subsequently been taken over by the government) will default on the loans made by the UK and the Netherlands. Defaulting on debt is never a good thing for any government and means that you are effectively removing yourself from the global financial system and your currency will lose value and a host of other constraints will probably make things worse before they get better. But Icelandic citizens have reasoned that they have had enough and I stand and applaud them for their bold action in standing up for their rights. On the plus side, I believe this country will emerge stronger when all is said and done.
The global message that our own ' too' big to fail' banks and their partners in crime in Congress need to grasp is that there is a breaking point after which citizens will not give anymore. Even in a country as large as the US we have already seen the glimmers of pushback with the Tea Party influence on the recent elections. I firmly believe if the current efforts at domestic recovery fail, we will be on the brink just as the citizens of Iceland were, I am not sure we will be given a vote however. Imagine a scenario where the bankers have been allowed to keep all their ill gotten gains and in addition book record profits, pay record bonuses and not do anything to reduce national unemployment and the stage is set. Now add in a faltering equity market and you have a recipe for disaster in the largest economy in the world. This is not as far-fetched as it may seem and I for one will be happy only as long as my equity holdings are growing steadily. Keep in mind we have had more than a decade where growth in equities has been stagnant, as has wage growth all during a period when wealth gap (the gap between the rich and the rest of us) has steadily widened. I would hate to have Ben Bernanke's job if this scenario comes to pass, he may have to enroll in the witness protection program and take on a completely new identity. Perhaps pumping gas would be a good fit, that way he could actually hear the grumbling of the patrons as they curse him out for the ever-increasing cost of filling up.
The first reaction of the UK and The Netherlands was to threaten a lawsuit and in strictly legal terms they probably have a pretty good case. After all the Icelanders did elect the parliament to act on their behalf in just such situations even if they may not agree with the decisions that were made. We find ourselves in an eerily similar situation here in the US. We have an elected Congress to represent us but in many current situations including the bank bailouts, the waging of 3 wars and quite a few other issues, the majority of the populace is against the decisions made. How can this be framed as a democracy when the citizens don't actually have a direct say in how their money is spent or how their military is ultimately deployed? I believe that the first viable political candidate or party that gives voters a true say in their future will gain popularity very quickly. There is also a danger in this because when we make decisions in anger, much as the Icelanders probably have, we may support somebody or something that we may not fully understand. History is studded with examples, the rise of communism in the Soviet Union, the rise of fascism in Italy and Germany, etc. I just hope our current 'representatives' understand how much is at stake here. I believe we should let them know how dissatisfied we are by saying NO to the next bailout, and believe me it's coming. We cannot continue to allow our rights as individual citizens to be usurped in favor of those with connections the average guy simply doesn't have.
At its core, the Icelandic revolution is the same as any other (without the shooting for now). When you have long entrenched governmental institutions that have not served the majority of their citizens it’s almost inevitable that it at some point the human spirit will emerge in self defense. First comes push-back and then if appropriate changes are not implemented in a reasonable time frame, you get push-out. In established democracies the push-out phase can usually be handled cleanly without much trouble if indeed citizens are given reasonable alternatives for change. But when you have political institutions that have become so large and ubiquitous one has to ask the question whether you really have a choice. I think the next 3 or 4 years are going to be among the most tumultuous we have seen in some time, let’s all hope that history will record it as a time for positive change instead of just another roller coaster ride with no safe way to exit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.