Iceland Is Wrong to Blame Its Leaders for the Financial Crisis, and So Are We

Americans and Europeans might see inspiration in the former Icelandic prime minister facing criminal charges for his "negligence," but this misunderstands how democracy works.

hh mar6 p.jpg
Former Icelandic prime minister Geir Haarde leaves the Reykjavik courthouse / Reuters

Monday, Iceland opened a criminal trial against its former prime minister, Geir Haarde. His alleged crime is negligence: failure to prevent the 2008 financial crisis.

On first glance, this sounds ridiculous. How was the prime minister of Iceland supposed to prevent the financial crisis? On second glance, the case looks like a leftist's dream come true.

The case is, in a sense, about how much responsibility politicians have for a banking system they are supposed to regulate. As The New York Times puts it, "Mr. Haarde is charged, in effect, with doing too little to protect the country against the depredations of its bankers as they pursued wildly expansionary lending that resulted in financial disaster for the country." Written like that, it sounds like something that Occupy Wall Street would support.

On the broadest level, the appealing aspect of this case is the suggestion that it's the government's job to protect its people, and that job now includes protecting them not just from missile attacks or crooked salesmen but from financial crises -- from predatory or incompetent men in suits.

Iceland's response is so far unique, but so was its crisis. As Michael Lewis put it his post-crisis book Boomerang, Iceland is a case where "an entire nation without immediate experience or even distance memory of high finance had gazed upon the example of Wall Street and said, 'We can do that.'" The result was Icelanders' debt running to roughly 850 percent of the country's GDP -- a startlingly high proportion of the small state's economy. Inhabitants got swept up in the frenzy, and though many experts warned Iceland that it had a problem, the warnings were ignored. Lewis, at least, seemed skeptical about politicians' protests of innocence. "The prime minister would like me to believe that he saw Iceland's financial crisis taking shape but could do little about it," Lewis wrote.

The urge to blame someone, preferably a banker or a politician, though, isn't exclusively Icelandic. And that raises the question: Should other European states or even the U.S. be holding its politicians more accountable, too? Wouldn't that make more sense than hauling out the pitchforks for the bankers who, after all, were doing exactly what they were paid to do? At least politicians are being paid to protect us.

On the one hand, there's a pretty clear outsourcing element to Western government: we elect, either directly or indirectly, people whose job it is to pay attention to certain things we don't have the time or the expertise to figure out ourselves. In that sense, if you believe that bankers constitute the very sort of threat that government is supposed to be monitoring, the political leaders do bear some responsibility for the financial crisis.

But it's possible to get too self-righteously outraged about government negligence and miss another practical component of Western government: that though we pay the government to take care of things we can't take care of personally, we also pay them in large part to take care of the things we want them to take care of. The more direct the democracy, the more direct the effect: politicians follow polls and pressures -- whether it comes from money (the financial industry is a huge source of political donations) or public sentiment. It's a rare politician who follows his conscience against the tide, and in the United States, at least, we regularly accuse politicians who do just that of ignoring the will of the people.

Prior to the financial crisis, neither the American people nor the Icelandic people were paying enough attention to the financial industry for regulating it to be worth the governments' while.

One of the beauties of Margin Call, the brilliant and under-appreciated 2011 movie loosely based on the Lehman Brothers collapse, was its skepticism of easy answers. Yes, the banker characters are obscenely rich, arrogant, irresponsible, and many of them incompetent, but the average man isn't let off the hook, either. "The only reason that they all get to continue living like kings is cause we got the fingers on the scales in their favor," says Paul Bettany playing an arrogantly unconcerned Wall Streeter with an alarmingly good hold on uncomfortable truths. "I take my hand off and then the whole world gets really fucking fair really fucking quickly, and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also want to, you know, play innocent and pretend they have no idea where it came from. Well, that's more hypocrisy than I'm willing to swallow."

The problem with blaming the 1% for the current economic downturn is that plenty of people in the 99% were in a position to know what was going on, and to make a noise if they really cared about it. That doesn't just mean the people who took out loans they had almost no chance of ever repaying. Anybody who met with a Wall Street recruiter in college -- or whose friend or classmate or family member met with one of those countless recruiters -- should have seen enough of the system to understand that Wall Street treats high finance as a game, that its pay-outs are so ludicrously high that there's no possible way the game is a safe one, and that when so many bright young people give up their dreams of medicine or teaching to go push around numbers on a computer, maybe society has a problem. There were lots of people close enough to the global financial system, or who at least heard about how it worked, to understand that there was a problem. We as a society had a responsibility to push our leaders, whether they're in Reykjavík or Washington or Dublin, to at least look into it. We didn't, and now we want to blame those leaders for a collective failure in which all of us share responsibility.

One of the things the U.S. founding fathers and foreign observers alike realized very early on in the American experiment was that democracies depend on an informed and engaged citizenry. Yes, politicians are elected to, among other things, provide full-time scrutiny of what most citizens can only scrutinize for a very small part of the time. But that doesn't mean citizens can check out completely.

Whether in the U.S. or in Iceland -- where democracy is more indirect and the prime minister is appointed, not elected -- the problem is the same. Holding politicians accountable for crises citizens didn't see coming either might be cathartic. It may even make more sense than holding bankers accountable for doing their (sometimes irresponsible) jobs -- particularly since boom-and-bust cycles seem to occur pretty regularly throughout history. But even if a politician could have done more and didn't, and even if he or she can be convicted of that, it shouldn't let the rest of us off the hook. One result of the transition from monarchies and dictatorships to democracy is that we can't blame one person anymore when things get screwed up.