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Shadow Elite: The "Inside Job" That Toppled Iceland's Economy

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"Inside Job", the highly-touted documentary about the global financial crisis, opened last week in theaters, and director Charles Ferguson told the New York Times that he could have done a separate film just on Iceland, where the former Prime Minister was indicted in recent weeks for "gross neglect" of the economy. Ferguson was amazed by the havoc caused by an elite so small, "you could practically fit them into a restaurant."

This week, Iceland is the focus of the second in an occasional series examining a trend in which networks of public-private players, purporting to serve the public interest, instead capture official information to serve their own interests. Robert Wade of the London School of Economics and Silla Sigurgeirsdottir of the University of Iceland show how the trend played out disastrously in Iceland. - Janine Wedel & Linda Keenan

What explains Iceland's financial debacle? The bankers' wild behaviour is a textbook case of accounting control fraud. In the end, however, the responsibility lies with the government led by former PM Geir Haarde and Haarde's longtime ally/mentor David Oddsson, who led the Central Bank after serving as PM from 1991-2004. The parallels with US and UK politicians and central bankers are obvious: Iceland's leaders remained in denial while their policies pumped up the bubbles, year after year. And their modus operandi shows that these leaders are part of a new breed of power broker who fuse state and private power to achieve their own ends.

These players debuted with the end of the Cold War and amid the growth of privatization and of new information technologies, part of a new system of power and influence identified in Janine Wedel's Shadow Elite. Iceland appears to be a stark example of the shadow elite in action, with operators multiplying their influence by coordinating their efforts as part of an exclusive and self-propelling team that Wedel calls a "flex net."

Iceland's flex net operated on the edge of and partly in opposition to a traditional elite, a bloc of some 14 families known popularly as the Octopus, which dominated Icelandic capitalism from the start. In the early 70's, some university students took over a journal called The Locomotive to promote free-market ideas--and, not least, to open up career opportunities for themselves, rather than wait for Octopus patronage. The two future PM's, Oddsson and Haarde, were members.

They were devoted to neoliberal policies, and privatized publicly-owned enterprises, to the benefit of their Locomotive cronies. In 1991 Oddsson began his reign--not too strong a word--as PM, explicitly invoking Reagan and Thatcher as models and drawing on the same ideas of "New Public Management," which sanctioned large-scale outsourcing of government work to private actors. Then he set in motion the dramatic growth of Iceland's financial sector, before installing himself as Central Bank Governor in 2005. Finance Minister Haarde took over as PM shortly after.

While manuevering themselves and their allies into key roles relevant to achieving their agenda, the leaders also locked up should-be public information in their own network --these tactics are both key flex net features. A glaring case of this can be seen when, as the collapse gathered speed, Oddsson, as Central Bank Governor, moved to peg the krona at close to the pre-crisis rate, a crazy move by all economic counts, but it might have allowed cronies in-the-know to spirit their krona into safer currencies in the few hours that the rate lasted. He consulted only his protégé, Haarde. Even the Central Bank's chief economist was kept in the dark.

With near-exclusive access to information, power brokers can also brand it for the media and public to suit their own purposes, with only a few able to counter them. The Oddsson and later Haarde government proved masterful at this. They relied primarily on the banks' research departments for economic analysis. Iceland's National Economic Institute had built a reputation for independent thinking and, at times, published unwelcome reports, warning that the economy's management was going haywire. Oddsson abolished it in 2002. Statistics Iceland, the public data agency, was notably cowed into suppressing unfavourable information. And the University of Iceland bowed to pressures to make its Economic and Social Research centres self-funding--that is, to rely on finding buyers for commissioned research--with the convenient result that they no longer published big-picture reports with a critical edge.

In 2006, the Icelandic Chamber of Commerce commissioned an expensive report from
Columbia Business School economist Frederic Mishkin, which affirmed the banks' stability with few qualifications. The following year the Chamber of Commerce commissioned another one from London Business School's Richard Portes, which reached much the same conclusion. (After Iceland's collapse, Mishkin's report, called "Financial Stability in Iceland" was re-listed on his CV as "Financial Instability In Iceland". Mishkin told Inside Job director Charles Ferguson that it was a typo.)

With independent information centres neutralized, the big financial players were better able to capture the key Ministries and Central Bank; indeed, in such a small pool, one could say that they all they captured each other. The line they fed themselves and the public was that, because the three main banks - Landsbanki, Kaupthing and Glitnir - paid much better than any government body, they must therefore attract the best talent. (Of course, this "talent" joined the Central Bank or the Financial Services Authority with the aim of learning enough to then land a private bank job and double their salary.) Therefore, it was only sensible for the government and the public to rely on information supplied by the best talent - the banks themselves.

The Chamber of Commerce, for its part, functioned almost literally as the bankers' executive committee: it has been estimated that at least 90 per cent of its recommendations were translated into legislation. Almost everything the bankers wanted became government policy, and grateful bankers provided grateful politicians with generous rewards. The government's decision to provide unlimited deposit guarantees after the crash - rather than the statutory amount -- illustrates its beholdenness to the financial elite.

In Shadow Elite, Wedel points out that the new breed of power broker is skilled at evading accountability - often by using ambiguity to create built-in deniability. As the Iceland crisis unfolded, senior ministers, answering mainly to each other, established an ad hoc crisis coordination group. But it had no clear mandate or formal reporting procedures and did little more than throw ideas around. Iceland's Special Investigative Commission later revealed that the group did not report to ministers in any way that could be verified, allowing the latter to evade legal responsibility and later to deny that they knew how serious the problem was becoming.

This new kind of power broker is also skilled at turning failure into opportunity. Case in point: David Oddsson. Far from being held accountable, Oddsson was rewarded in September 2009 with the position of Editor-in-Chief at the leading Icelandic daily. From there, he orchestrates coverage of the crisis, yet again helping to brand events for the public. This is roughly the equivalent, as one commentator has pointed out, of appointing Nixon editor of the Washington Post during Watergate. External investors who have bought into some Icelandic firms at knock-down prices are urging the Icelandic government to 'move on' and not keep raking over the past. Another crucial outside actor - the IMF- is headed in Reykjavik by a former roommate of Haarde's (Brandeis in the 1970s), and still close friend. And strangely, despite an expansive team of 30 people, and after 20 months of work, the special prosecutors' office has brought only one case to court so far. It involves a very minor figure.

Even Parliament's recommendation last week to indict Geir Haarde is a letdown for those demanding real accountability: the parliament voted to charge Haarde, but not three others facing similar charges. The former ministers who prescribed the policies of the bubble economy, i.e. David Oddsson and his then partner in a coalition government, face no charges whatsoever because of a 3 year statute of limitations. Meanwhile the current leadership is unable to avoid one thing: popular outrage - misleadingly directed at it rather than at the previous leaders responsible. The Guardian reported that politicians had to flee 2,000 angry protestors at the recent Parliament opening. Polls show that "trust in parliament" is running at about 10%. One can hope that those responsible for Iceland's implosion will face more consequences than hurled eggs, but Geir Haarde, for one, is undaunted at the prospect of being the first world leader indicted for economic mismanagement. He told Bloomberg News two weeks ago that he will be "completely vindicated", and called the charges "absurd."

This article was adapted from a lengthy analysis of the Iceland crisis by Robert Wade and Silla Sigurgeirsdottir, appearing in the September/October issue of the New Left Review.