It's no wonder that so many Icelanders are angry. They live in a country bankrupted by the excesses of their bankers, who took on liabilities 10 times the nation's GDP, betting billions in Britain's property bubble. Bailed out only by a jumbo IMF loan, inflation and interest rates are now 18% and rising. Many are considering emigration. Only membership of the euro, if it can be secured, offers a lifeline.
Ireland made the same bet, and on Friday the government had to nationalise its third biggest bank - Anglo Irish. Like the Icelandic banks, it had been speculating in Britain's property bubble. The joke across the Irish sea is that the only difference between Ireland and Iceland is one letter and six months. But there is another, more crucial, difference. Ireland is in the euro; otherwise, like Iceland, it would be bust.
After what happened to the world's banks last week - and to Barclays Bank in particular, whose share price collapsed 25% in an hour on Friday - it's clear that Britain is at risk of being next in line. We too have a banking system that is huge in relation to our GDP, but, like Iceland, we are not in the euro. Unless we act quickly, decisively and cleverly, the difficulties of our banks could overwhelm us, triggering an enormous run on the pound. Britain, in short, risks bankruptcy.
Friday's warning from the deputy governor of the Bank of England, Sir John Gieve, that more will almost certainly have to be done to save the banking system is a statement of the obvious. As was his grim assessment that the recession will be deeper and longer than anyone thought, even late last year.
Britain's problem is threefold. We have an American-scale property crisis and a credit crunch in our own banking system. But on top, we were uniquely reliant on foreign banks and foreign capital. They support up to a third of all UK lending, and they have gone bust or fled. Britain's banks are in no position to plug the gap. So, the UK government has to put the system back together with a weak, non-reserve currency.
Events in America last week showed how the contagion in so-called investment banking - I prefer casino banking - is murdering honest-to-God commercial banking. Bank of America and Citigroup are fighting for their lives as they are engulfed by losses from their investment/casino operations.
Citigroup has had to break itself up, siphoning off its toxic assets in a separate entity insured by a $306 billion US government guarantee. Bank of America has been shattered by titanic losses in "investment bank" Merrill Lynch, which it bought just months ago. Without $20bn of taxpayer support and a $118bn guarantee of its toxic assets, it would be in receivership.
On top the US is able to keep finance flowing to its housing market only by offering federal guarantees on mortgage-backed securites. It also buys securities backed by car loans, student loans and credit card debt - anathema to the hyper-conservative Bank of England. Americans have the advantage that the dollar is the world currency - 64% of all foreign exchange reserves are held in dollars - so that it can do what it wants. Nonetheless it has taken monumental US taxpayer investment, guarantees of up to $500bn toxic loans and the willingness of the Federal Reserve to buy trillions of dollars of securitised assets even to begin to stabilise matters.
Britain, by contrast, has not begun to mobilise on anything like the same scale - even though in many respects our crisis is more acute. Barclays, for example, is in a position analogous to Citigroup and Bank of America. In 2007 close to half its profits came from "investment banking", now so perilous for its American counterparts. Barclays is the leader in so-called corporate "synthetic" structured investment vehicles - complex and even more dodgy than the securities that have brought low Citigroup and Bank of America. On Friday credit-rating agency Moodys announced new and more demanding criteria for how "synthetics" will be valued in future - implying that bank guarantors will need to find billions extra in capital to support them. Barclays could have to raise up to another £10bn capital to support its investment bank operation; impossible, except from the taxpayer. With the ban on short selling lifted on Friday - an asinine genuflection to the interests of hedge funds - it was an obvious target. The bank rushed out a statement late in the evening declaring good 2008 profits and solid capital ratios. But the issue is 2009, given the new rules. A taxpayer bail-out for Barclays - a view shared by a growing number of officials, if not all - is close to inevitable.
The prime minister is incandescent; the bank has not been straight with either the government or its shareholders about its balance-sheet risks. It did not share in the first round of bank recapitalisation, instead raising cripplingly expensive funds from Arab sovereign wealth funds. When Britain needs all its big banks to act together to stop a credit crunch-induced slump, Barclays, putting its own interests - and bonuses - first instead triggers a second phase of the crisis.
HSBC may also need to raise money - £20bn in the view of analysts at Morgan Stanley. But although it is headquartered in London and formally the responsibility of the UK, the Hong Kong Monetary Authority (a lesson here for the Bank of England and FSA?) has independently regulated its Asian operations, and strictly. It is not - a Barclays, RBS or HBOS - yet. UK depositors owe Hong Kong a thank you.
The cumulative cost of what has to be done is stunning, thanks to the City being such a vast part of our economy. The government must ensure that the banking system, Barclays included, has got sufficient capital to underpin the outstanding loans (at a much cheaper rate). Next it has to be prepared, like the Americans, to offer insurance guarantees on toxic loans which freeze the banks from new lending. Then it has to offer US-style guarantees on new issues of financial securities backed by mortgages, student loans, company loans and even credit card debt; and the Bank of England must be instructed to buy them.
On top of this, there is a budget deficit next year of £118bn, which may have to increase again - with another big Obama-style fiscal stimulus - if the recession deepens. My view is that the financial markets will accept actual spending only if Britain pre-announces that after financial stabilisation has worked, it intends to join the euro - otherwise we will find ourselves in the same position as Iceland.
These are the grimmest economic circumstances since the 1930s. Lives and businesses are being wrecked as I write. There will be little appetite for my proposed measures; how much better to hope that we can muddle through, looking for "green shoots" of recovery and doing little radical.
But after last week the government - and the opposition - have to get serious. Britain is on the edge.
Copyright Speakers Corner 2017