Five ingredients for a populist backlash - Niall Ferguson

The Age of Rage

David Mitchell 

Six years ago, as the financial crisis hit, David Mitchell began writing a weekly column for the Observer. In this extract from his new book, an anthology of his best writing, he recalls how austerity left a permanent mark on the mood of the nation

• 
• • David Mitchell
  • The Observer, Sunday 2 November 2014

David Mitchell: 'As a nation, we have lost confidence and creativity.' Photograph: Chris Floyd

When I started writing regularly for the Observer in 2008, a new world era began. It was a coincidence, I hasten to add. Despite patches of enthusiasm on Twitter and, on one occasion, a mention on Andrew Marr’s TV show, my weekly attempt at a public moan with jokes hasn’t quite ushered in a new age. It sometimes comes quite high up the “most viewed” list on Comment is Free (when people have hated it, that is – not so much when they haven’t), but in historical terms it’s no fall of Constantinople.

But, looking back now, with the tiny amount of hindsight that remaining alive for six more years generates, I’m pretty sure that 2008 marked the end of, and the beginning of, an era.

You’ve always got to have an era on the go, you see. Once one era ends, another begins automatically. In fact, the first one probably ends because the second one has begun and totally stolen its thunder. But it’s very much a “the King is dead – long live the King” kind of set-up. You’re absolutely not allowed a calm era-less interregnum of unremarkable pottering – a couple of years when the global situation is “between projects”, like an ageing celebrity who can pick and choose thanks to sky-high credibility and accumulated property equity.

With history, the moment the 20s stop roaring, the Depression starts slumping and then the Nazis start rising and then the world starts warring and then the instant, the very instant, the war ends, it’s postwar. Can you believe it? Not a millisecond that isn’t either the war or the postwar era. It’s fucking relentless (to paraphrase Herodotus) but it’s the only system we’ve got.

Of course, some era changeovers are harder to pinpoint than the end of a war. The one I’m talking about was like that. No new toothy smiling suit had been swept to office, no nationally beloved beauty had been chased to death by photographers, no building had been blown up or completed, no new technology suddenly launched or discredited, no disease gone pandemic or been cured. But, as when a Premier League football team runs on in front of an away crowd, and opposition fans reach vindictively for their 2ps, change was palpably in the air.

In fact, this change was all about money. Money may not bring you happiness but, if there’s one thing the credit crunch of 2008 showed, no money brings a hell of a lot of grief. And that’s what we were at risk of experiencing that autumn: no money. Anywhere. At all. The sudden absence of money – its collapse as a human construct.

Money isn’t really anything, after all. Humans don’t need money – we need food and shelter. Living the sophisticated life of the westerner, it appears that you need money in order to obtain food and shelter. But that’s not actually, fundamentally, true. Food and shelter come from farming and building. The fact that the products of those activities are swappable for money is just a convention. There’s nothing about the money itself that anyone actually requires.

Even when it was backed by gold or, before that, made of gold, it still didn’t have intrinsic value. No one needs gold (I know it’s in microchips but that’s a side issue – King Midas didn’t go all funny in the hope of reinvigorating the Lydian tech sector). It’s just shiny and it doesn’t rust, so it was convenient to develop the convention whereby little roundels of it were exchangeable for items of value. The subsequent convention that numbers on a computer screen were equally exchangeable for such items was even more convenient, but also even more dependent on everyone’s confidence in and adherence to the convention.

What started in the mists of early history as a useful aid to barter had become, by 2008, a vital element of the world as we knew it. So vital that many people who worked in the financial sector seemed to have completely forgotten that money, and credit, were just a convention – and had begun to believe that they were something solid: an actual, tangible, useful thing. Something invulnerable, something which undeniably exists.

Illustration by David Foldvari.

And so the piss-taking began.

And, by “piss-taking”, I mean casino banking: the buying and selling of the intrinsically worthless. The immoral exploitation of the market in denial of its fundamental purpose – which was supposed to be to facilitate trade, to bring resources to enterprise, not to pass round empty financial concepts before anyone realises that they have no actual value, just a transitory and astronomical price. A system of money-making which involves no real wealth-creation at all – nothing made, no useful service provided, nothing done which remotely conforms to the ancient and fundamental laws of “what you should get paid for”.

And by “began”, I mean “intensified”. I may be a pitifully naive financial analyst but I’m not quite a shit enough historian to think that any of this market immorality was unprecedented. Dishonest but somehow legal bucks have probably been made since a microsecond after the invention of the buck. I know none of this was new – but the scale of the activity certainly was. As was the terrifying computer-driven speed at which it was practised.

And I assume it’s obvious what I mean by “And so the”.

The result of all this, as we know, was the collapse of many financial institutions and, subsequently, economies, coupled with expensive efforts to prop others up using taxpayers’ – ie ordinary people’s – money. The climax of the crisis, for Britain at least, was a weekend in October 2008 when, had the Royal Bank of Scotland not been bailed out by the government, its cashpoints wouldn’t have been working on Monday morning. And not for the usual reasons of being smashed in and/or covered in sick because of all the stag dos we indulge in to sustain turnover in our hospitality sector. This time it would be because the bank had run out of money, and also of people to call to borrow money. That terrifying eventuality would have led to a run on other, healthier banks – and no bank in history, however prudent, has ever been able to return all of its investors’ money at once.

That was the moment when money nearly broke. It became clear that all the numbers on screens didn’t add up any more. Suddenly the value that these institutions were claiming to represent had to be found, and they didn’t have it. So we, the normal people, would have to – and I shudder at the injustice of the phrase – give it to them.

Never has the weirdness of what money really is – what a service economy is, how distant we’ve become from our basic survival needs, and yet how pervasive those needs remain – been more evident. “Why can’t we just pretend the money is still there?” we thought. “Send the number from the screen to the electricity people to increase the number on their screen and they’ll give us the power to keep the screen on, won’t they?”

Sadly, it turned out that’s what had already been happening for quite a while. The global fiscal Wile E Coyote had long since run off the edge of the cliff and had been scampering ineffectually in mid-air for some time. But now the period during which he has yet to start falling, because he still hasn’t noticed the absence of solid ground beneath him, was ending. We’d collectively looked down. We were caught in the beat of stillness, the panicked look to camera, that precedes the plummet.

Money didn’t collapse. Credit became terrifyingly scarce – institutions which a month earlier were betting billions on three-legged horses were suddenly withdrawing loans from solvent businesses – but the basic convention of currency just about held. That was probably for the best.

But the eye-watering injustice of the bailout – the disconnect between guilt and punishment – soured the national mood. We were angry. But we were also frightened. We were struck simultaneously by sudden and severe national poverty, after a decade of unthinking prosperity, and with something beyond poverty: a deep and deracinating sense that our previous wealth had been an illusion. The expensive frothy coffees of the early 2000s retrospectively turned to ashes in our mouths.

And, while the economic downturn brought on by the crisis was felt all over the world, it did not hurt everyone equally. Of course, that’s always the case, but the nature of that inequality had changed. Britain remained among the richest nations on Earth but, for the first time anyone could remember, countries like ours didn’t get off lightest. True, there were still plenty of people unimaginably less fortunate than ourselves. But now there was also the unsettling emergence of people who might be, or come to be, more fortunate.

The fast-growing economies of countries such as India, Brazil and, most unnerving of all, China, barely suffered a blip, while ours dropped off a cliff, still pointlessly clutching its Acme Giant Credit magnet. For the first time since the cold war, the west, the world’s dominant politico-economic force for 500 years, seemed fallible and fragile. The frailty of money and the financial services industry having been laid bare, we were forced to contemplate where real wealth comes from: making stuff and selling it. And, reality TV and artisanal cheese aside, more and more of that manufacturing was being done by the Chinese.

Illustration by David Foldvari.

The Blair-era dream of remaining rich and becoming richer, of driving our economy purely by providing services and dining out regularly, with maybe a bit of web design and party planning thrown in to keep us honest, was suddenly revealed as foolish. We felt at once deeply stupid and deeply resentful. We despised one another, and of course the government, for the mistakes that had been made, but were also nostalgic for the prosperous feeling we’d had while it was happening.

I realise the shine had been taken off New Labour long before 2008. That war in Iraq went down like a cup of cold piss, for a start. But I’m not sure that really upset Britain as much as we’re apt to think. The war made Britons shake their heads, but the credit crunch had us banging them against walls.

You only have to look at Blair and Brown’s relative electoral fortunes: Blair won a general election after getting the country involved in an unpopular and unsuccessful war, a war of which he remained unashamedly in favour; yet Brown lost one after a global economic downturn which he admittedly failed to avert, but for which he certainly wasn’t primarily responsible.

It turns out that it’s not the morality or otherwise of our foreign policy that predominantly affects the national mood, it’s money. We might not have thought we were money-obsessed, but then we probably don’t think we’re oxygen-obsessed. But you certainly get to thinking about it if someone takes it away.

The horrible shock of 2008, much more than any horrible shocks we allowed our military to impose abroad, changed our national personality. It’s as if Britain was a sprightly and twinkly pensioner who then, in the autumn of 2008, had a serious fall. It survived but has never been quite the same – it’s more timorous and judgmental, envious and angry. As a nation, we’ve lost confidence and creativity, and we’re readier to blame each other and slower to laugh at ourselves.

This is the glum conclusion I’ve come to from looking back over all the columns I’ve written. I didn’t think any of this when I started writing them six years ago. I was just glad things were going wrong because that makes it easier to write jokes – utopia is a living hell for satirical columnists. I probably fretted about what it would be like if there was a fiscal apocalypse and we were reduced to growing our own food – satirical columnists also have a rough ride in subsistence economies. But I only thought about it in economic terms: how bad and how long would the crisis be?

I thought about it a lot. Most people thought about it a lot. And thinking was what had precipitated the crisis in the first place. It wasn’t foolish and feverish speculative investments that caused the crash – it was thinking about those investments. It was realising they were foolish and ultimately valueless. As with Wile E, it was the realisation, not gravity, that made us plummet.

It had to happen at some point, I suppose. The realisation was inevitable, and so the plunge was too; it could have happened later and been worse. But it’s hard not to blame all that thinking, just as we blame, rather than thank, the surveyor who finds dry rot.

And having sparked the whole thing off with thinking, we couldn’t get out of the habit. “What does this crisis mean? How unfair is it? Where does this leave Britain now? Is anything certain any more?” We thought and thought and thought. We locked ourselves into the mindset of emergency. It became like Queen Victoria’s mourning: unhelpful, self-indulgent, but very difficult to argue against or snap out of.

“I hope you know there’s a lot of massive shit going down!” became the country’s perpetual Facebook status. Being cheerful or optimistic just allowed others to say you didn’t realise how bad things were – and to imply that therefore you, as one who’d got off lightly, were part of the problem, that you were on the wrong side of the casino-banker/thankless-nurse national divide.

As a result, this new era has been enormously and relentlessly recriminatory and angry. What started off as righteous fury at the investment banker community for their incompetence and amorality has spread to almost every aspect of public life. First,Russell Brand and Jonathan Ross’s misjudged Radio 2 broadcast invoked a storm of rage, directed not just at them but against all broadcasters and celebrities. Then MPs were pilloried for fiddling their expenses in a way that didn’t just lead us to tweak how parliamentarians were financed, but to dispute the honesty of our entire political class. That group subsequently had its revenge on the pesky scrutinising newspapers when theillegal hacking of Milly Dowler’s mobile phone provided the opportunity to question the whole basis of a free press. Newspapers, politicians, the BBC and celebrities have all regularly been put through the mill. It’s as if the whole culture is screaming: “Everything feels all wrong!”

Illustration by David Foldvari.

How much of this is justified by current circumstances? How much of it is justified by the unsatisfactory nature of the human condition? How much is self-perpetuating and self-indulgent? When the current coalition government took office, it did so stating explicitly that the Conservatives and Liberal Democrats had come together in statesmanlike response to the emergency the country was facing. This is one of the few of that administration’s assertions to be left largely unquestioned. We miserably and crossly accepted the premise that everything was deeply and unprecedentedly screwed. By then, that feeling had already dominated our contemplations for the best part of two years.

I think this pervading fury and sense of crisis has reached crisis levels. Which is ironic, if you think about it (which I don’t recommend). I reckon there actually is a good reason to be angry and deeply concerned, and that’s the pervasiveness of anger and deep concern about everything else. I think it imperative that everyone calm down. I think a loud emergency “Chill out!” alarm should screech from every rooftop till everyone relaxes. I told you thinking didn’t help.

If we could just let our angrily folded arms drop to our sides for one minute, we’d feel so much better. Most of us, anyway – to some, it would feel like failure or defeat.

I was particularly savagely slated on the Guardian website and Twitter for a column I wrote in March 2012, in which I argued against trade unionist Len McCluskey’s assertion that “The idea the world should arrive in London and have these wonderful Olympic Games as though everything is nice and rosy in the garden is unthinkable.” I reckoned that, despite the country’s problems, we weren’t undergoing a calamity sufficiently grave to call off the world’s premier sporting event, something that had previously been cancelled only during world wars. I wasn’t saying things were fine; I was saying they were less serious than in 1940.

I stand by that. However, many online commenters considered it a disgraceful underestimation of the problems facing the NHS/ retail sector/disabled/homeless/donkey sanctuaries – that any reference to our current problems in less than utterly superlative terms was a disgrace. That exemplified, for me, a pervading and angry loss of perspective.

Saying that things could be worse, and that they have been worse for the overwhelming majority of humans throughout the overwhelming majority of history, is not the same as being complacent. It is stating an undeniable fact. It is retaining a sane sense of proportion. It should be reassuring, but at the moment many people hate to hear it.

This wilful loss of perspective – this self-importance about our own times – means that we could do dangerous things. Our disdain for the bathwater is making the baby give us anxious looks. We’re thinking hard, casting around for solutions: a privatised NHS, an independent Scotland, pulling out of the EU, a mansion tax, getting rid of the licence fee, greater press regulation, more Tasers, a German water cannon. We’re not ruling anything out – except being careful we don’t destroy something precious, except resisting the urge to act hastily and in anger, except a period of tranquil reflection. We desperately need a break from this era. But you know the rules: as soon as it ends, another one will only start.

Another financial crisis looms if rich countries can't kick their addiction to cash injection

Five years on from the last crash, quantitative easing remains the weapon of choice for governments unwilling to challenge the current economic model

• 
• • Ha-Joon Chang
  • The Guardian, Friday 30 August 2013 18.00 BST

Illustration by Matthew Richardson

Just as people started to think that things were getting calmer – if not exactly brighter – in the rich countries, things have become decidedly slower and more volatile in the so-called "emerging market" economies. At the centre of the (unwanted) attention at the moment is India, which is seeing a rapid outflow of capital and thus a rapid fall in the value of its currency, the rupee. But many other emerging market economies, other than China, have also seen similar outflows and weakening of currencies recently.

This is not necessarily a bad development. The currencies of many emerging market economies, especially those of Brazil's real and South Africa's rand, had been significantly over-valued, damaging their export competitiveness. Devaluation could actually help these economies put their growth on a more sustainable path.

However, people are rightly worried that too rapid flows of capital out of these countries may cause excessively fast devaluations, resulting in currency crises and thus financial crises, as happened in eastern Asia back in 1997. Situations like this can arise because the currencies of the emerging countries have been propped up by something that can quickly disappear – that is, the large inflows of speculative capital from the rich countries. Given its nature, such capital is ready to pull out at any moment, as an increasing portion of it has been doing for several months.

This is a stark reminder that things are still not well with the world economy, five years on from the outbreak of the biggest financial crisis in three generations in September 2008.

We have had such huge capital inflows into the emerging economies mainly because of quantitative easing (QE) by the central banks of the US, Britain, and other rich countries, which injected trillions of dollars into the world economy, in a desperate attempt to revive their moribund economies.

In its initial phase, QE may have had acted like an electric shot to someone who just had a cardiac arrest. But subsequently its boosting effects have been largely through the creation of unsustainable asset bubbles – in the stock market, in property markets and in commodity markets – that may burst and generate another round of financial crises. On top of that, it has caused much collateral damage to developing countries, by overvaluing their currencies, helping them generate unsustainable credit booms, and now threatening them with the prospect of currency crises.

If its effects are at best debatable and at worst laying the ground for the next round of financial crises, why has there been so much QE? It is because it has been the only weapon that the rich country governments have been willing to deploy in order to generate an economic recovery.

QE has become the weapon of choice by these governments because it is the only way in which recovery – however slow and anaemic – could be generated without changing the economic model that has served the rich and powerful so well in the past three decades.

This model is propelled by a continuous generation of asset bubbles, fuelled by complex and opaque financial instruments created by highly leveraged banks and other financial institutions. It is a system in which short-term financial profits take precedence over long-term investments in productive capabilities, and over the quality of life of employees. If the rich countries had tried to generate recovery through any other means than QE, they would have to seriously challenge this model.

Recovery driven by fiscal policy would have involved an increase in the shares of public investment and social welfare spending in national income, reducing the share going to the rich. It would have generated new public sector jobs, which would have weakened the bargaining power of capitalists by reducing unemployment.

Recovery based on a "rebalancing" of the economy would have required policies that hurt the financial sector. The financial system would have to be re-engineered to channel more money into long-term investments that raise productivity. Exchange rates would have to be maintained at a competitive level on a permanent basis, rather than at an over-valued level that the financial sector favours. There would have to be greater public investment in the training of scientists and engineers, and greater incentives for them to work in and with the industrial sector, thus shrinking the recruitment pool for the financial industry.

Given all this, it is not a big surprise that those who benefit from the status quo have persisted with QE. What is surprising is that they have actually strengthened the status quo, despite the mess they have caused. They have successfully pushed for cuts in government spending, shrinking the welfare state to the extent that even Margaret Thatcher could not manage. They have used the fear of unemployment in an environment of shrinking social safety nets to force workers to accept more unstable part-time jobs, less-secure contracts (zero-hour contracts being the most extreme example), and poorer working conditions.

But is this maintenance, or even fortification, of the ancient regime likely to continue? It may, but it may not. Greece, Spain, and other eurozone periphery countries could explode any day, given their high unemployment and deepening strains of austerity. In the US, which is considered the home of quiescent workers, the call for living wages is becoming louder, as seen in the current strikes by fast-food restaurant workers. The British are (overly) patient people, but they may change their mind when the full extent of budget cuts unfolds in the coming months.

All of these stirrings may amount to little, especially given the weakened state of trade unions, except in a few countries, and the failure of the parties on the left of centre to come up with a coherent alternative vision. But politics is unpredictable. Five years after the crisis, the real battle for the future of capitalism may be only just beginning.

Possible Options for the Euro

The single currency has arrived at a three-pronged fork in the road

There are three possible ways out of the eurozone crisis: austerity, investment or the route taken by Argentina in the 90s

• 
• • Larry Elliott
  • guardian.co.uk, Sunday 15 April 2012 18.28 BST 
  • 
    

Greeks protest outside the headquarters of the Bank of Greece in Athens. Photograph: Simela Pantzartzi/EPA

The next 12 months will decide the fate of the eurozone. The single currency's problems have not gone away and will again dominate this week's meeting of the International Monetary Fund in Washington. Every one of those attending knows that the crisis could erupt again at any moment; last week's selloff in Spanish and Italian bonds was like the puff of smoke billowing out of a volcano getting ready to blow.

Here's a summary of how things stand. The euro was constructed on the false premise that monetary union would lead to a harmonisation of economic performance across member states. Greece would become like Germany; Portugal would be similar to Finland. Instead, the euro has led to a widening gulf between rich and poor, and this has been brutally exposed by the financial crisis and its aftermath.

It became clear that the countries on the periphery of the eurozone had a cocktail of problems. Their economies were much less productive than those at the core, so they were gradually becoming less competitive. They had shaky banking systems. And they had weak public finances. Investors, unsurprisingly, came to believe that holding Greek, Italian or Spanish bonds was risky, and demanded higher interest rates for doing so. This added to the pressure on banks and governments, and by pushing up borrowing costs, affected growth prospects as well.

By late last year the eurozone was on the brink of meltdown. At that point, the European Central Bank stepped in and announced long-term refinancing operations (LTROs). These pumped unlimited ultra-cheap money into the eurozone banking system to satisfy the funding needs of banks for three years.

The idea was to kill two birds with one stone. Banks would have more cash and could use it to buy government bonds in their own countries, thus driving down interest rates and so boosting growth.
This was a high-risk strategy that depended on the crisis-affected countries quickly returning to steady and robust growth. If they didn't, their banks would be loaded up with government bonds and vulnerable to a selloff in the markets.

In the past couple of weeks this possibility has dawned on markets. They have started to mull over a scenario in which a deepening recession in Spain leads to the government missing its deficit-reduction targets, prompting rising bond yields and eventually necessitating an international bailout.
There is much talk in European circles about how Greece was a one-off. Few in the markets believe that.

In the very worst case the euro will break up entirely, leaving the ECB nursing big losses and ruing the day when it embarked on an expansion of the money supply.

As George Soros noted last week, the Bundesbank perceives the risk, which is why it is campaigning hard against any further LTROs. The message from Germany, and from other core countries, is that it is time for Spain, Italy, Greece and Portugal to start delivering on their promised structural reforms.
All that explains why Christine Lagarde, managing director of the IMF, keeps insisting that Europe has bought itself just a little time to sort out its problems. Lagarde is absolutely right about that: the single currency has arrived at a three-pronged fork in the road.

Route number one is Austerity Avenue. The eurozone continues on the same road, the poorer countries on the fringe making themselves more competitive by what is known as internal devaluation. This involves driving down production costs via wage and welfare cuts, and state assets selloffs. Living standards take a big hit for a prolonged period, but eventually countries such as Greece bridge the gap between themselves and Germany.

Economic and political problems beset this route. Austerity is killing growth, making it harder to reduce government borrowing, and it inflames populations unhappy at the prospect of falling living standards year after year. It's a bumpy road; it could also prove a short one.

Next up is the High-Investment Highway. The premise for this route is that the single currency can survive but only if measures are taken to stimulate growth. Soros proposed a plan last week in which all countries could refinance their debts at the same rate – but, as he admitted, this would never get past the Bundesbank.

Another idea, suggested by the former Labour MP Stuart Holland, is bond-financed investment programmes modelled on Roosevelt's New Deal. This would have two components: Union bonds, under which a country could convert up to 60% of its national debt into non-traded Union bonds; and Eurobonds, which would be traded and actively marketed to fast-growing countries of the emerging world wanting an alternative to dollar reserves.

The idea, which caught the interest of France's socialist presidential candidate, François Hollande, would be to use Union bonds to stabilise debt and Eurobonds to finance investment.

As with the Soros plan, this would no doubt run into stiff opposition from Germany. It would also involve a much higher degree of fiscal integration. But if Austerity Avenue is a dead end and High-Investment Highway a road to nowhere, that really leaves only one other exit: Buenos Aires Boulevard.

A paper published last week by Capital Economics described the similarities between the struggling eurozone countries today and Argentina in the late 1990s. Argentina had fixed the peso against the dollar irrevocably at the start of the 90s but, after a few good years of strong growth and low inflation, by the end of the decade was under severe strain.

The solutions tried now in Greece – austerity, debt rescheduling, IMF programmes – were tried in Argentina to no avail. Indeed, output crashed, making the country's debt position even worse. Eventually the pressure was too much and Argentina devalued and defaulted.

But far from the sky falling in, which was what the IMF and the other proponents of orthodoxy predicted, Argentina's growth averaged 9% a year from 2003 to 2007.

As Andrew Kenningham, of Capital Economics, accepts, Greece would not be expected to do nearly as well as post-crisis Argentina, which benefited from rising commodity prices and did not have to cope with the inevitable contagion effects arising from a country leaving a single currency. But, he says, Argentina's example offers a "painful but viable" exit from the crisis that the current deflationary policies do not. And unless policymakers in Europe can offer their citizens somethingmore enticing than endless austerity, a stroll down Buenos Aires Boulevard will look increasingly enticing.

The first politician to face charges over 2008 financial crisis

• Rupert Neate and agencies
• guardian.co.uk, Monday 5 March 2012 18.30 GMT

Former Icelandic prime minister Geir Haarde (right), and his lawyer Andri Arnason, appear at his trial in Reykjavik. Photograph: S Olafs/EPA

 

The former prime minister of Iceland has become the first politician in the world to stand trial over the 2008 financial crisis.

Geir Haarde, who was ousted after Iceland's three biggest banks collapsed and the country's economy went into meltdown, could be jailed for two years if found guilty of gross negligence in failing to prepare for the impending disaster. He denied the charges and claimed that "only in hindsight is it evident that not everything was as it should have been".

Haarde was instrumental in transforming Iceland from a fishing and whaling backwater into an international financial powerhouse before the credit crunch caused the economy to crash almost overnight.

The Icelandic parliament's "truth report" into the causes of the crisis that forced the country to borrow $10bn (£6.3bn) to prop up its economy, accused him of "gross negligence". He is also accused of failing to rein in the country's fast-growing banks, whose paper value before the crash had ballooned to 10 times the gross domestic product of the island state of 320,000 people. And he is alleged to have withheld information that indicated the state was headed for financial disaster.

The country's three biggest banks – Glitnir, Kaupthing and Landsbanki – went bust within weeks of each other after the collapse of Lehman Brothers in the US sparked the credit crunch in 2008.
"None of us realised at the time that there was something fishy within the banking system itself, as now appears to have been the case," Haarde told the court in the capital of Reykjavik on Monday. "I think it's illogical to think that I or anyone else in the government could have reduced the size of the
banks to a greater extent than was done at the time."

He is accused of failing to prevent the contagion from spreading to the UK by not insisting that Icelandic banks ringfence their overseas operations. The crisis sparked a diplomatic row with the UK as the demise of Landsbanki brought down its British internet banking arm, Icesave, leaving British councils, universities and hospitals more than £1bn out of pocket.

Gordon Brown, who was British prime minister at the time of the collapse, accused Haarde of "unacceptable" and illegal" behaviour over its failure to guarantee to reimburse UK customers of the bank. The British government stepped in to protect most savers, at a cost of £3.2bn but it is continuing to demand compensation from Iceland to cover the cost.

The crisis also led to the demise of Baugur, the British retail investor which owned stakes in House of Fraser, Debenhams and Woolworths.

Haarde, who led the right-leaning Independence party and was prime minister from 2006 to 2009, rejected all the charges as "political persecution" from the country's left-leaning government, and said he would be vindicated by the trial. He said Icelanders' interests were his "guiding light" and insisted that his conscience was clear.

The trial is expected to last until mid-March, with the court taking another four to six weeks to deliver its verdict.

Haarde has become the first person to ever stand trial at the country's Landsdómur criminal court, which was created in 1905 to hear charges brought against ministers. He was one of four former Icelandic ministers blamed by the "truth report" for causing the crisis, but parliament voted last year that he should be the only person to stand trial.

The others named in the report were the former finance minister Árni Mathiesen and former minister of commerce Björgvin Sigurdsson, and Davíd Oddsson, a former prime minister who was running the country's central bank at the time.