[...]... investments in the early 2000s When housing prices run amok, the income level of the population cannot follow suit at a certain point This happens in every bubble That point arrived in Ireland in 2006 There was not sufficient demand any longer for the extremely expensive houses The skyrocketing house prices stopped increasing further, and because of the decreasing demand, even dropped by 18% In 2007, existing... signaled the problems on March 21, 2006.18 The OECD and IMF also “pointed out repeatedly that in recent years fiscal policy was not restrictive enough during the economic upswing.”19 Interest rates started increasing for Iceland to borrow money In order to limit the decline in the price of their shares, the big banks started taking loans and buying their own shares By 2008, they bought 44% of their own... year.8 This increase was so spectacular that, in less than a decade, the assets of these banks reached ten times the total GDP of the country The three leading banks rose to the ranks of the world’s 300 biggest banks The share of banking in the production of the nation’s income doubled and reached 9%, while fishing’s role halved to 4% in those years The combined debts of the three banks, mostly from abroad,... introduced by a coalition of the Independence Party and the Progressive Party included the coastal shipping line, the printing industry, insurance business, fertilizer, Internet, and pharmaceutical companies, and most of all the big banks By 2000, privatization was accomplished, and the state withdrew from several areas while deregulating the financial sector The government gave up the fixed exchange rate... touched the border of criminal actions The owners of the banks were their biggest borrowers and they also appointed the board members Small wonder that they enjoyed “abnormally favourable deals.”14 The Icelandic banking system has been based [on the principle of] financing of owners’ equity They maximized the interests of the larger shareholders, who managed the banks, rather than running solid... Lending to foreign parties recklessly increased by 120% in the first six months of 2007, “magnifying the refinancing risk.”10 Meanwhile, the Icelandic banks turned to extremely risky short-term loans in order to be able to continue their expansion In 2008, the banks became “unable to redeem” their investments from short-term credits “to meet their obligations.”11 Interest payment to foreign countries increased... Ivar Kreuger’s name is in Scandinavian text books, but the lessons of his type of business activity were seemingly forgotten—at least in Iceland The Icelandic banking industry followed in his footsteps The dramatic, borrowing-based overexpansion of the three leading banks led to the dangerous relative decrease in the strength of the Central Bank of Iceland “By the end of 2007 the nation’s short-term... measures, increasing or decreasing interest rates, and pumping money or not into the economy, they thought they could guarantee sustained economic growth and eliminate crises They thought and triumphantly declared that economic cycles belonged to history Classical economics since Adam Smith already had the strong belief in the genuine harmony of the market, if it is not disturbed from outside The market... system and turned to a floating rate The Prime Minister pushed the Central Bank to lower interest rates As a Parliamentary investigation later concluded,5 the restraints in the fiscal policy were almost nonexistent The freedom of credit institutions to make riskier investments was greatly increased inter alia with the authorization of investment banking in conjunction with the traditional activities... Between February and May, the Board of Governors met with the Prime Minister and other members of the government five times, but actions did not happen and records were not even made of the meetings The catalyst for the collapse was the 2008 international financial crisis that emerged from the United States The milestone of the event was the Lehman Brothers bankruptcy The international financial market was . privatization program intro- duced by a coalition of the Independence Party and the Progressive Party included the coastal shipping line, the printing industry, insurance business, fertilizer, Internet,. however, blinded the experts. The clouds of a coming new thunderstorm already started gathering around the turn of the millennium, but the boom was still culminating in those years. The summer. somewhere in the world economy: the American savings and loan crisis in the early 1990s, the Japanese banking and real estate crisis in the entire 1990s, the Mexican financial crisis in 1994–5, the