Where did all the money go?

More than six months on from the spectacular collapse of the less-important bits of the Icelandic economy, most mere mortals are still at a loss to answer the simple question of "where did all the money go?"

To remind readers who don't share my love of the absurd, three Icelandic banks had borrowed the equivalent of more than seven times Iceland's GDP, only to find that they couldn't pay the money back. The Central Bank of Iceland had been running the printing presses on overtime, with the number of krónur in circulation increasing by 56.5 per cent, while the economy was growing at a healthy but somewhat more conservative 5 per cent. The result was financial meltdown in this ancient nation of 340,000 souls (who themselves had an average personal debt of more than twice their annual disposable income). Apparently, it was all the fault of the British, but more of that later! Journalist Mica Allan described it as "Free Money" and "chasing rainbows", in probably the most sensible description of events I've yet to read.

All the same, 50 billion euros is an awful lot of money to lose, even for a bank. Madoff seems to have managed it, but it took him more than thirty years and even now there are plenty of people who don't believe that the money is really lost. The three Icelandic banks and their political accomplices managed to sink the Icelandic economy in less than a decade following their deregulation.

The image on this post is Smáralind, the biggest shopping centre in Iceland, better known to followers of Alda's excellent blog as "Penis Mall", for obvious reasons. Now Reykjavík has another, older shopping centre called Kringlan, as well as city centre shops in what is, after all, the capital of the country and home to more than half the national population. "Penis Mall" opened in 2001 and claims more than eighty stores, along with a cinema and restaurants. Why build it? Why spend all the money on expensive imported construction materials and even more expensive local architects to have a third large shopping centre in the space of a few kilometres? Who was going to shop there, and hence allow the stores to pay the rent which pays for the construction?

I've been trying to find out how much "Penis Mall" cost to build. The 2007 annual accounts are here, if any kind soul can make sense of them for me. Did it cost 6 billion krónur, or 15 billion krónur, or some other figure? It certainly cost a lot of money, money which was lent by Iceland's commercial banks, which they themselves had borrowed from abroad. The rent from the shops in Penis Mall goes to pay off this debt, so long as people actually shop there. To ensure that people shopped there, the same Icelandic banks lent money to the shoppers in the form of personal loans: again, this money had been borrowed by the banks from abroad. So the money which was being used to pay off the constructions debts of Penis Mall was itself money that had been lent by the very same commercial banks. All of this was fine while there were still people willing to lend money to Icelandic banks, greedy enough to take advantage of the 15 per cent interest rates without asking themselves why rates had to be so high. But in fact, it was just one big pyramid scheme, with the money of new depositors being used to pay off the older debts. No new wealth was being generated, except by the Polish builders who sweated to construct the damn thing: all the rest was financial scam, with Iceland playing the role of the Emperor in Kejserens nye Klæder, the one who never actually got his wonderful new clothes.