A Cacerolazo In Reykjavik
by Charles Lemos, Mon Jan 26, 2009 at 06:37:49 PM EST
Thousands of angry citizens have joined noisy weekly protests against the government's handling of the economy, clattering pots and kitchen utensils in what some commentators called the "Saucepan Revolution."
A cacerolazo in Reykjavik? Not surprising given the depths to which Iceland has been plunged. Iceland has been mired in crisis since late September, when the country's three largest banks collapsed under the weight of debts (more on 'securitization' below the fold) amassed during years of rapid expansion. The value of the country's krona currency has plummeted over 30%, hitting many Icelanders who took out special loans denoted in foreign currencies for new homes and cars during the boom years. In addition, Iceland must repay billions of dollars to Dutch and British citizens who held accounts with subsidiaries of collapsed Icelandic banks. Prime Minister Geir Haarde's government attempted to combat the crisis by nationalizing the banks and negotiating about $10 billion in bailout loans from the International Monetary Fund and from a number of countries, including other Nordics, Russia and the United Kingdom. Still, economists expect the Icelandic economy to contract 9.6%. Life for an Icelander may yet again be just "salted fish". The above clip is from the second day of the biggest protests against the government in Iceland since 1949 when people protested against Iceland joining NATO.
A cacerolazo (cacerola is Spanish for pot) is a form of popular street protest and demonstrations in Latin America which consists in a group of people creating noise by banging pots, pans and other utensils in order to call attention to political and social grievances. Cacerolazos date back to Salvador Allende's Chile when housewives took the streets of Santiago and other major Chilean cities to protest stagflation and severe shortages in 1970-1973. The empty pots weren't good for anything else. The practice remains fairly common in Latin America and has spread elsewhere. Cacerolazos erupted last Spring when Argentine President Cristina Fernández de Kirchner attempted to raise export tariffs on a variety of agricultural commodities setting off six months worth of political and social unrest in the South American country. Now cacerolazos have come to Reykjavik.
Iceland's coalition government collapsed Monday in part to due the pressure of on-going protests against the government. Prime Minister Haarde said he was unwilling to meet the demands of his coalition partners, the Social Democratic Alliance Party, which had insisted upon getting the post of Prime Minister to keep the coalition intact. Elections had been already moved up to May but now are likely in the next six to eight weeks. More from the New York Times and the UK Guardian.
Why Iceland's cacerolazo matters is because Iceland's economy collapsed to due the bad bets that Iceland's banks placed in a class of financial instruments created through a process called securitization. Securitization involves taking a real asset and issuing a bond or other form of `security' on the basis of it. Securitization is part of a new class of financial instruments that have been created since the deregulation of the global finance industry began in 1979. It is a sophisticated process of "financial engineering" that allows global investment to be spread out so as to minimize risk. Essentially, investment assets are bundled together and then sliced and diced to form a unified paper asset designed to generate multiple income streams. For example, thousands upon thousands US home mortgages were bundled and then divided and sold as a security. You don't own the liability on an individual mortgage but rather a piece of thousands of mortgages. One mortgage could default but its loss would be offset from the gains of the still performing mortgages. The problem arose when the mortgages en masse began defaulting. The other problem is that these instruments are so complex that the full exposure to risk is unclear. The assets are known to be toxic but the level of toxicity is unknown.
These paper or electronic `securities' have taken on a life of their own, traded on their own - and excessive gambling with them is part of what has led to the current global financial crisis. But global managers deem securitization as to "essential to wealth creation" and they are resisting demands for regulation even though the process is so arcane that perhaps only a group of five thousand or so technical market specialists worldwide fully understand how they are created. One of global finance consultant David Smick's major worries, as outlined in his defense of globalization tome, The World Is Curved, Hidden Dangers to the Global Economy, is that Congress will try to regulate a process no one fully understands and thus kill "the golden goose" of global capitalism. How convenient an argument. You can't regulate what you can't even begin to understand runs Mr. Smick's argument.
Perhaps then Congress might understand this, the exposure of the financial sector to securitization runs into the trillions of dollars. The size of these markets alone warrants regulating them. There will be more cacerolazos in 2009 and we will be lucky if they are as peaceful as Reykjavik's.