Iceland and Madoff: Private and Public Ponzi Schemes

The WSJ has a nice article on the collapse of the Icelandic banking system (and the global consequences).  Essentially, Icelandic banks offered attractive interest rates overseas (in the vicinity of 7%), attracted deposits in large quantities and was able to sell bonds, then collapsed.  Ultimately, there wasn't enough foreign currency in the country to pay off those who expected to have their debts repaid.

The article only gave glimpses of what happened to the money that flowed into Iceland, with some apparently invested in overseas acquisitions.  But one has to wonder whether the country operated a ponzi scheme that made Madoff look puny.  In effect, the banks were offering an interest rate that in a climate of low interest rates was unsustainable.  After all, the 7% interest rate wasn't all that different from the 10% or so offered each year by Madoff.

Sometimes a rate of return is too good to be true.  That's true with respect to private investments.  Its also apparently true with respect to banks, at least those from Iceland.

Comments

[Theodor Gunnarsson]

I am an Icelander, just a common nobody, and I stumbled onto this article by searching for "Iceland+Ponzi". All Icelanders are now totally stunned and confused. Most of us have lost a lot of money, many are loosing their jobs, and the future is uncertain. I think you are right in comparing this to a Ponzi scheme. I don't think it was really intentional, but I cannot be sure. This is the work of a group of about 15 people, and even our politicians appear not to have realized what was going on. There is a lot of anger and frustration here, but what most of us regret most is the loss of our country's reputation. It will most likely take a long time to rebuild.