The First Sovereign to Fall?

It would appear that Iceland will be the first sovereign imperiled by this spreading financial crisis (McVeigh, Tracy, “The Party’s Over for Iceland, the Island that Tried to Buy the World, The Observer, 5 October 2008):

Iceland is on the brink of collapse. Inflation and interest rates are raging upwards. The krona, Iceland’s currency, is in freefall and is rated just above those of Zimbabwe and Turkmenistan. One of the country’s three independent banks has been nationalised, another is asking customers for money, and the discredited government and officials from the central bank have been huddled behind closed doors for three days with still no sign of a plan. International banks won’t send any more money and supplies of foreign currency are running out.

People talk about whether a new emergency unity government is needed and if the EU would fast-track the country to membership. On Friday the queues at the banks were huge, as people moved savings into the most secure accounts. Yesterday people were buying up supplies of olive oil and pasta after a supermarket spokesman announced on Friday night that they had no means of paying the foreign currency advances needed to import more foodstuffs.

Iceland is outside the Euro zone so they are facing a currency crisis as well. Take a look at ECB exchange rate data. The Icelandic krona has fallen 181 percent against the euro, from €86.25 one year ago to €156.13 on Friday.

I wonder if there’s any substance to the idea of fast-track E.U. membership. Just like this crisis has precipitated a wave of bank consolidation, maybe it will allow the E.U. to snap up a few holdouts as well. I notice that that hole in the E.U., Switzerland, is also overrepresented as the homecountry to a number of troubled banks.

Update, 6 October 2008: Iceland had to bailout its third largest bank, Glitnir. The problem is that Iceland’s top three banks have assets nine times the GDP of Iceland (Magnusson, Niklas and Helga Kristin Einarsdottir, “Iceland Savers Fear ‘House of Cards’ May Collapse After Glitnir,” Bloomberg, 3 October 2008). One of’s bloggers points out the obvious (Salmon, Felix, “Iceland: When Too Big To Fail Becomes Too Big To Rescue,” 3 October 2008):

Received opinion has it that if Iceland backstops the Icelandic banks, then the other Nordic countries, or someone, will backstop Iceland.

This was my point in emphasizing the idea of fast-track E.U. membership, E.U. membership being more dignified than IMF intervention.

The Federal Reserve Does Not Buy Mortgage-Backed Securities

When I saw the following story in the New York Times on Friday (Peters, Jeremy W. and Wayne Arnold, “Stocks Are Volatile After Global Sell-Off,” 10 August 2007) I fucking freaked:

The E.C.B. injected another 61 billion euros ($84 billion) into the banking system, after providing 95 billion euros the day before. The Federal Reserve today added $19 billion to the system through the purchase of mortgage-backed securities, then another $19 billion in three-day repurchase agreements. The Fed added $24 billion on Thursday.

It’s not the amounts of money that are unusual. Yes, this indicates a fairly aggressive attempt to preserve liquidity in financial markets and it is definitely earning the headlines it is getting in The Financial Times and The Wall Street Journal. But that the Federal Reserve might engage in the direct purchase of $19 billion worth of mortgage-backed securities would indicate a real problem and the adoption of extraordinary, panic measures on the part of the Federal Reserve. On Friday I was thinking how I might reinvest my 401k into gold doubloons.

Thankfully, on Saturday Dean Baker pointed out (“The Fed Does Not Buy Mortgage-Backed Securities!!!!!!,” Beat the Press, 11 August 2007) that this was just incompetence on the part of the economic reporting at The New York Times and The Washington Post (who also reported the story). That what really happed was that the Federal Reserve made a more routine loan through the discount window and accepted the $19 billion in mortgage-backed securities as collateral for the loan.

While you’re there, his post (“Tell The Post: The Problem Isn’t Subprime,” Press, 11 August 2007) pointing out that the cause of our current financial woes is not the subrime market (dirty, irresponsible poor people) is a useful reminder. The real problem is the bursting of the housing bubble more generally. The subprime market is just the first place it’s really being felt.