The Icelandic Economy: Recovering From a Very Hard Landing

By Gylfi Magnússon, Minister of Business Affairs

Adapted from lectures given at Harvard University, February 26^th 2009, and Yale University, February 27^th 2009.

Introduction

Let me begin with a brief outline of the lecture. I will begin with selected background material, to explain how Iceland ended up with a financial system that had a balance sheet which was approximately ten times larger than the annual GDP. This resulted in what has been called the most spectacular collapse of a financial system in the Western World. Whether or not that is true, it certainly is a monumental event in Icelandic history and has been observed abroad with great interest.  I will then discuss how Icelandic authorities tried to prevent this occurrence, and what they did not do.  Next, I will try to explain what has happened since the collapse and look a bit into the future. Finally, I will use Iceland as an example, to the extent possible, to shed light on what may or may not happen in other countries which have been observing what happened in Iceland with great interest, in part, perhaps, because they fear that they too may experience something similar.

Background

Iceland has for decades had a very well-developed economy by most standards, with high GDP per capita and an enviable standard of living by any measure. However, we have never had a very well-functioning banking system. Up until ten years ago or so it could have been described as a small local system, somewhat backward but reasonably solid.  It was not highly leveraged.   It had not been involved in large adventurous investments abroad.   The system's main flaws were that it was somewhat costly and under considerable political influence.  But there was certainly no danger of it collapsing and bringing down the economy.

Historically, we have also had little success in running monetary policy. This was exemplified by very high inflation and an unstable exchange rate. To alleviate this, Iceland has widespread indexation of financial instruments.  This meant that if you borrowed, the payments that you had to make on long-term loans in local currency were linked to the cost of living.  Without this it would not have been feasible to have a market for long-term financial arrangements, such as housing loans, in an economy with a very unstable price level.

Despite these weaknesses in the financial sector the rest of the economy functioned fairly well. Then we had a series of events. The first took place in the early 1990's, when Iceland joined what is known as the European Economic Area, EEA. This meant that Icelandic financial institutions had the opportunity to do business in all of Western Europe by setting up branches or subsidiaries.  So even if Iceland was not, and still is not, a member of the European Union it was, and still is, a part of the EU's common market in most respects, including the financial market.

Initially, the Icelandic banks did not take advantage of these circumstances to venture abroad in any significant way, and no foreign banks chose to operate in Iceland. So the EEA agreement had little immediate effect on the Icelandic financial market.

Unleashing the financial system

At the turn of the millennium the Icelandic Government decided to privatize the banking system, which until then had been mainly in government hands with small private sector players. This changed everything and was the beginning of an economic experiment. This experiment was not unique to Iceland though, because one saw a similar trend in many other countries at the same time. There was a political move towards deregulation and privatization.

In Iceland this led to dramatic changes. The state-owned banks were sold to people that were fairly risk-loving and bold. They hired primarily young and well-educated but fairly inexperienced people to run the banks. This cocktail seemed at first to be a great idea. The bankers sought growth very aggressively. They expanded abroad, both by setting up branches and buying banks and using them as subsidiaries in continental Europe, London and Scandinavia, but not much outside Europe.

To finance this expansion they borrowed quite heavily abroad. They had little access to domestic savings, their home-base being a small country with a low savings-rate, but they had very easy access to the European market, and to some degree also markets outside Europe.  Initially they borrowed both by selling bonds and by taking interbank loans.

At the time – perhaps from 2002 to 2005 or 2006 – funds were readily available for the Icelandic banking system. The banks could borrow abroad at very favorable rates. They had very good credit ratings, which in retrospect, of course, seems hard to explain. For a short period all the three large Icelandic banks even had a triple A rating.

The main reason why the Icelandic banks got excellent credit ratings was that they were considered banks of such systemic importance for a Western economy that their government would never allow them to fail. But this logic was fundamentally flawed. The Icelandic government had quite solid finances by international standards, but a very small balance sheet and very small currency reserves relative to the size of the banks.  So the banks were not too big to fail – they were too big to save. This was easy to see for anyone who looked at the figures for the banks on the one hand and the Icelandic government and the Icelandic economy on the other.

But on the surface the Icelandic banks seemed to be doing very well. They grew very rapidly, made huge profits, paid high wages and hired the best and brightest of Iceland. Their stock soared and made a lot of people rich. For about five years the Icelandic banking system seemed a great success story – as long as you did not do the math and realize that it was based on a bubble. The banking system enjoyed great political and public support in Iceland. There were no serious questions asked or warnings made, at least not in public, neither by politicians nor by supervisory authorities such as the Central Bank and the Financial Supervisory Authority.

At the same time, the banks' easy access to capital meant that they could provide plenty of funds for their customers both in Iceland and outside Iceland. Icelandic corporations took advantage of this situation and started growing very aggressively, both by making domestic investments and by investing overseas, particularly in the U.K. and Denmark. Most of these companies became highly leveraged, borrowing at breakneck speed. They made substantial profits on paper. These profits were usually the result of some sort of asset manipulation, bundling or unbundling, buying and selling assets, rather than operating profits. These profits depended on asset prices continuing to rise. For a while they did. Great paper profits by corporations made stock prices go up, which generated more paper profits. A classic example of a bubble in the making.

The banks also started offering housing loans at favorable terms, both in local and foreign currency. This contributed significantly to a rise in housing prices. This again increased consumption and called for substantial investments in real estate. Household net worth increased dramatically on paper.

Many parts of this story are not unique to Iceland. Much of this should sound familiar to those who have followed news from the U.S. and many other countries in recent years. But the scale of it makes Iceland unique, in particular the scale of everything that had to do with the banking system. In only a few years it grew from having a fairly small balance sheet, less than the one year's GDP, to having a balance sheet that was about ten times annual GDP. It was not just the financial sector that was highly leveraged, the whole economy was.

The fact that Icelandic households and companies borrowed substantial amounts in foreign currency is now one of the problems that we have to address. They also borrowed in their national currency, but since the supply of domestic savings was limited and interest rates were high a lot of the funds that fuelled the Icelandic consumption and investment boom were in foreign currency, particularly low interest-rates currencies such as the Swiss franc or the Japanese yen. Households used borrowed funds to buy cars or houses and went on a consumption spree. Some of them played the stock market with borrowed money.

Corporations borrowed in foreign currency to an even greater extent than households. One significant factor that contributed to this was that interest rates in Icelandic kronas were kept fairly high. This was the Central Bank's policy, aimed at cooling the economy. This, unfortunately, had the effect that people, instead of borrowing in Icelandic krona, borrowed to an even larger degree in yen, Swiss francs or other low interest-rate currencies. The exchange rate of the Icelandic krona rose, making it significantly over-valued. That contributed to a consumption spree and a very substantial trade deficit.  Some years Iceland was close to having a world record trade deficit, in terms of percentage of GDP.

The first signs of trouble

Everything was, however, still rosy, at least on the surface, until 2006. The first significant warnings were issued that year.  Some of these came from within, that is from Iceland, but those that made the largest waves came from foreigners, especially foreign banks and analysts. They started questioning the stability and viability of the Icelandic banking model. After these warning signs  the Icelandic banks gradually found it harder to access capital abroad. They went from having easy access to almost unlimited funds to having to think very seriously about liquidity.

At first this seemed to be a marginal problem. The banks could still borrow, but at higher interest rates than before. This caused some hiccups. The real economy, however, kept growing so this did not seem like a fundamental problem for Iceland.  The banks were nevertheless obviously being squeezed. The stock market finally started sliding downwards in the summer of 2007 after almost uninterrupted growth at breakneck speed for 20 years with an average annual rise in share prices of about 20% in real terms.  After 20 very good years the stock market finally seemed to have reached a plateau and then started sliding downwards.

There were by now obvious problems in this paradise that the banks had created on paper.  The banks had to seek new solutions to keep everything going and asset prices inflated. They needed a new source of cheap funds so that they could continue to grow and pump money into the economy in order to keep the party going. This led to what is now one of Iceland's major headaches.  

Two of the three major banks saw an opportunity to solve their financing problems by attracting deposits in their overseas branches or subsidiaries over the Internet. They were quite aggressive in their marketing of these Internet accounts and they were hugely successful. The Icelandic banks managed to attract billions of euros and pounds as deposits over a very short period of time. They then claimed that this was all they needed to solve all their problems. Now they were on a roll again instead of heeding the warnings that they had seen in 2006. 

Rather than trying to address their problems and downsizing to make them more manageable the banks kept on growing, using funds from deposits to finance the growth. The fundamental problem with this is that this type of bank financing, unlike bank bonds or interbank lending, can cause a severe headache for the government due to deposit insurance.  A bank failure could leave the Icelandic Government with a huge bill.

The Icelandic Government did little, if anything, to try to stop this trend. The banks were on a very dangerous path, especially since the government did not have the means to support them if something went wrong. To give an example, the foreign currency reserves of the Central Bank were approximately equal to 2% of all the foreign liabilities of the banking system. Thus, we had banks that were operating in Western European markets with no credible lender of last resort. That is, of course, not the norm in a western banking system. Typically, banks mainly do business in their own currency and they have their home central bank behind them. The home central bank should always be able to provide local currency. In Iceland, the Central Bank could of course provide local currency, but the Central Bank had no means to provide the currency that the banks were operating in, euros and pounds and other hard currency.

All the three large Icelandic banks collapsed within a week in the beginning of October last year. When the first bank collapsed, it was the one that had the biggest deposit insurance problem. The banks between them had foreign deposits covered by Icelandic deposit insurance equal to approximately 40% of GDP. This is one of the headaches that Iceland is experiencing at the moment and is trying to cure now. It should be kept in mind, though, that the situation is not quite as bad as this figure suggests, as this is the gross amount. When one takes into account the assets of the collapsed banks that will be used to pay depositors the net bill that the government may have to pay is reduced. It will, however, still be quite substantial.

Before the collapse it should have been obvious to any reasonable observer that the Icelandic financial system was very unstable. The banks were highly leveraged and so were their customers. There was an asset price bubble and there was no useful lender of last resort. This was a ticking time bomb. What brought it down eventually was mainly the fact that the global situation was deteriorating. It is quite clear, however, that this system would have collapsed eventually even without a major international financial crisis.

Attempts to save the Icelandic banking system

This was the background, the story of how Iceland ended up in this mess. Now let us examine briefly what was done, or not done, to try to save the system. I expect you have all been following the attempts to prop up the U.S. banking system and banking systems in other major economies. Those attempts all involve, in one way or another, some sort of government assistance. The various governments have been providing liquidity and directly or indirectly taking bad assets of the books of the banks or providing equity directly.

In Iceland none of this was an option. The reason was that the banks were mainly operating in currencies that the Icelandic government had limited means of supplying. The Icelandic government did try to solve this problem by borrowing abroad. The basic idea was that the Icelandic government would borrow huge amounts of money, at least several billion dollars. It would then have reserves which would make the Icelandic Central Bank a credible lender of last resort and make it possible for the Icelandic Government to help the banking system.

This attempt to acquire sufficient reserves by borrowing failed completely. This was, in my view, very fortunate. In retrospect it seems quite clear that if the Icelandic government had managed to secure such a loan it probably would not have been sufficient to save the banking system. In the end the banks would have collapsed anyway. That would have left the government with a huge bill on its hands which would have been a new problem on top of all the other problems resulting from the collapse of the banks.  The reason why this road was not taken was, however, simply that the funds were unavailable. The Icelandic government tried to borrow in foreign markets, both by talking to central banks and private parties, but it was not able to raise the amount that was thought to be needed.

If the Icelandic Government had been able to raise sufficient funds to keep the banks liquid this would have meant that the banks would have become part of the government's balance sheet and thus the government's problem.

The options that the Icelandic government had of course reflect the fact that the country and its economy are quite small and the local currency not widely accepted worldwide. The situation is fundamentally different in the United States, which issues the world's main reserve currency. There may, however, be similarities to the situation in Iceland in other countries with weak local currencies and an over-sized and deeply troubled financial sector. In such countries it may actually be better to have the banking system collapse than to spend enormous reserves to try to save it. The risk is that you try to save the banking system but fail and end up with both a huge bill for the government due to the rescue effort and a collapsed banking system.

The collapse

So instead of being saved, the Icelandic banks collapsed in October of last year. The three major banks in Iceland made up 85% of the banking system. They all closed within a week. The remainder of the banking system that was still operating was badly damaged as well. This is what people refer to when they talk of the most spectacular financial collapse in recent times in Western Europe.

The stock market fell by about 95%. It had previously been worth more than two times GDP, so those who held listed shares lost something like two times GDP on paper. Bond holders and other lenders to the banks lost billions of dollars. No one knows exactly yet what the final bill will be, but the magnitude is staggering, several times GDP. Most of those bond holders are not Icelandic. Many of them are European banks, and the losses will be felt in many countries. Losses by U.S. creditors will not be substantial, however, as the Icelandic banks did not seek much funding here.

The exchange rate fell by about 50%. This caused major problems because of loans denominated in foreign currencies that doubled in local currency. Many of the loans were in Japanese yen or Swiss francs. The strengthening of those currencies has made the problem even worse. The depreciation had a severe effect on the balance sheet of anyone who had borrowed in foreign currency. Liabilities shot up and the asset side was no brighter. Listed equities basically vanished.  Housing prices did not fall quite as dramatically, but they have already fallen by about a quarter in real terms and may fall even more.

The domestic deposit system was saved, but more or less all unsecured creditors of the banks will lose vast amounts. The government is also, as previously mentioned, facing a very substantial bill due to deposit insurance covering the overseas branches of one of the banks.

No matter which financial measure one looks at this is not a pretty picture. Without wanting to sound overly optimistic it should be pointed out, however, that financial measures do not tell the whole story. Several other indicators look much better than the financial indicators. If we look at the real economy, using the Wall Street and Main Street metaphor as often is done in the U.S., we see that the real economy has been hit but not nearly as badly as the news from the financial sector suggests. Most production of goods and services has seen remarkable limited interruption.

One reason for this is that Iceland managed to provide basic financial services with surprisingly little interruption despite the collapse of the banking system. The domestic payment systems continued working without any interruption. It was from a technical viewpoint state of the art and managed to survive unscathed even though the main users, the banks, collapsed. This is something of an achievement. A new banking system was also set up very quickly. The arrangement was fairly standard, even if the scale was staggering relative to the size of the economy. It involved taking each collapsed bank and splitting it into two, setting up a new bank with a healthy balance sheet and new equity from the government. The new banks then continued to operate as regular banks. This was set in motion almost overnight. The old banks, or bad banks, are technically bankrupt, but they hold sizable assets and their holdings now need to be unwound by selling these assets in an orderly fashion to maximize the amounts recoverable by creditors.  

The international payment system, for payments in and out of Iceland, experienced considerable problems for a while. At first the channels that the collapsed banks had been using were all closed, but they were either restored or new channels opened after a few weeks.   This system is still not running as smoothly as it used to, but for all practical purposes the international payment system in and out of Iceland is up and running now. The global slowdown in international trade and problems with trade finance affect Iceland like everyone else. Nevertheless, the problems with trade finance and the international payment system in Iceland are now, five months after the collapse of the banking system, not really out of line with what we see in other countries. This is quite remarkable in light of what happened in Iceland.

Recovery

One reason why the restoration of the Icelandic economy got under way with little delay was that Iceland negotiated an agreement with the International Monetary Fund. This provided several things, including an economic plan and about five billion dollars in loans. This amount is more than sufficient to finance the recovery. Of the five billion dollars about two billion come from the IMF and three billion from various governments, mainly the Nordic countries. This is equivalent to approximately 40% of Iceland´s GDP and means that Iceland now has sufficient reserves to operate and finance the recovery process.

There are some issues that have not been resolved completely, as you can expect, for it is only about five months since the collapse. We have not settled a dispute with Britain and the Netherlands regarding deposit insurance. This is however not an unsolvable problem.

One important factor that helped Iceland in dealing with its problems was the fact that the Icelandic Government had very healthy finances to start with. Gross government debt was about 25% of GDP before all of this happened and net debt, i.e. debt minus financial assets, was practically zero. Unfortunately, many other countries that have been hit hard by the worldwide financial crisis have started from a much worse position in this respect. They had a lot of government debt to begin with. That of course means that the leeway they have to solve problems by the government taking on debt is much less.

Iceland's public debt will rise dramatically.  The gross government debt may equal one year's GDP or even a little more. The exact figure is not known at the moment. Government debt that is equal to annual GDP is fairly high by international standards, but not unheard of. But when the dust settles the assets of the failed banks will have been sold and the currency reserves that we received as part of the IMF program, will not be needed. Net government debt will then probably have increased by something like 50% of GDP. That is of course not a happy result, with the government going from zero netdebt up to 50% of GDP. It is, however, not crippling by any means. Many governments have had to deal with similar debt in the past and it has not been an insurmountable problem.

A few other factors work in the government's favor. For example, we don't have much of a pension problem. Iceland had, before the crash, a fully financed pension system. Even if the pension funds have lost some assets they are still fairly healthy. This means that the government has much less to worry about than other governments which have a looming pension problem with unfunded pension systems and aging populations.

Since the crash we have had our hands full, as you might expect. The most daunting task could be called the financial clean-up, including valuing and subsequently selling or holding to maturity the assets of the failed banks. It is a very delicate and complicated task. There are huge amounts at stake, so the work has to be done properly. The main aim, of course, is to recover as much as possible for the benefit of the creditors of the banks. The recovered funds all go to them. An important step towards regaining the trust that Iceland lost in the collapse is to make sure that these processes are transparent and fair.

At the same time, we face a monumental task in restructuring the finances of the non-financial corporate sector. Many of Iceland's corporations have foreign denominated debt that has now  risen dramatically measured in local currency, while most assets have fallen in value. As a result, many corporations are technically bankrupt. They have to be refinanced by writing down debt and providing new equity. This is an ongoing process which will take quite a while. It is unavoidable to go through with this. Otherwise we would be stuck with an economy of zombie companies with badly damaged balance sheets. Unavoidably, some of these companies will become formally bankrupt but then in most cases be resurrected under new ownership.

An even more delicate task has to be carried out due to similar problems with household balance sheets. Many of them are not very healthy due to foreign currency denominated loans and mortgages and falling asset prices, in particular house prices. When dealing with the financial problems of households, one has to be much more careful than when dealing with corporations to avoid transforming financial problems into social problems. The financial problems of indebted households are being dealt with.

In the real economy, obviously, a lot of things have changed. For one thing, private consumption has already fallen significantly and will continue to fall this year. Over a three-year period it will probably drop by approximately 30%. Exports may increase at the same time, however, and they have already started increasing.   This is of course is a very dramatic change for any economy and calls for major adjustments. The good news is that Iceland managed to turn its massive trade deficit around virtually overnight. By November of 2008 we were already running a trade surplus after having one of the world's largest trade deficits in the previous years, in relative terms of course.  The trade surplus is generated both by increasing exports, which is remarkable given the current conditions in international markets, and also by dramatically reducing imports. For example, there are almost no cars being imported, and imports of items like furniture have fallen by something like 50%. Imports of necessities have not fallen as dramatically, but items such as cars and flat-screen TVs are basically not being imported.

This makes perfect sense from an Icelandic viewpoint, but it is obviously not helpful for countries that export cars or flat-screen TVs. The solution for Iceland may be logical for Iceland, but it is obviously not a viable solution for the worlds' greater problems. We will get back to that a little bit later.

Among the changes needed in the real economy is that the government has to rein in expenditure. The government's finances were quite solid coming into the current situation but they have taken a fairly dramatic hit. The tax base has been eroded and there are serious calls for government expenditure, including funding for unemployment insurance and paying interest on all the debt that the government is facing.  As a result, other government expenditure has to come down and taxes have to be raised. This will principally be achieved over a period of two to three years. There were no dramatic cuts this year, but there are certainly going to be dramatic cuts next year.

Unemployment, as might be expected, rises when something like this happens to an economy. The financial sector has shrunk dramatically, shedding thousands of employees. Construction almost stopped as well, and many service industries contracted substantially. Unemployment has risen from about 1% to 8% in the space of a few months and the projections are that it may rise to about 10%. These figures are not overly dramatic by international standards but in Iceland this is without parallel. Historically, Iceland has almost always had an unemployment rate of 1 or 2%, so seeing figures on the order of 8% or even 10% is very bad news. Whether it will end up in 10% and then start declining, as predicted, is of course not certain. Macroeconomic forecasts come with a margin of error in a normal year but these are really uncharted waters. Trying to make normal macroeconomic predictions in these circumstances is a daunting task and the results must be interpreted with that in mind. A huge margin of error is possible.

If this had to happen somewhere…

One could argue that if this had to happen to any country in the world, Iceland was probably better equipped to deal with a disaster of this nature than most other countries. Icelandic authorities and business leaders made several catastrophically wrong decisions leading to the crash. But Iceland is probably better equipped to deal with the consequences than most other countries.

One factor that comes into play is that Iceland has a fairly flexible labor market. We had in recent years a large number of migrant workers working in Iceland. The domestic labor market was over-heated and attracted a host of workers, mainly from low-wage countries in Europe. Many of them left within a period of a few weeks after the collapse of the banks, at least those that never intended to settle in Iceland. Their paycheck shrank by 50% in euros overnight, if they still had a job which many of them did not. So they had little reason to stay. That takes some of the pressure off those who remained behind.

But we also have other factors, like a tradition of working overtime and even having two jobs. This means that many can cut down the number of working hours without becoming unemployed. Many of people have chosen to go back to school, particularly those that already have a college degree. Many have gone back to school to study for masters' degree. This is an excellent way to leave the labor market for a while and then come back better equipped when demand for labor has recovered. In addition, we have considerable flexibility in both the time when the young enter the labor market and the time when the old exit the labor market. Historically, Iceland has always had a very flexible labor market by Western European standards, much more like the American labor market than the average Continental European market.

And then we also have, which is a mixed blessing, our own currency. The currency has depreciated dramatically. That is causing some serious problems, but it also has the obvious benefit that it helps export industries and reduces imports. With domestic demand falling dramatically increasing exports and substituting domestic goods for imports helps significantly.

Iceland has other strengths. We have a rock-solid social infrastructure, a society which is open, democratic, with a low crime rate and a well-functioning welfare state. It is much easier for a country with this sort of structure to take a hit and come back than countries with an unstable democracy or more violent traditions, where things can turn ugly very quickly if there is social unrest. But there is very little danger of anything like that happening in Iceland.

The export industries are more or less all healthy and up and running, even if they are experiencing some problems because of the state of the international economy. And Iceland has all the strengths of an advanced western economy. With very high GDP per capita you can take a hit and still have plenty of resources to provide all necessities.

An affluent society can go on without some of its former income for quite a while without being pushed below the poverty line. Being a wealthy country makes it far easier to take a hit and come back than being poor to start with. Iceland can go on for quite a while without importing cars or electronics and even without investing in infrastructure.  

What Iceland is doing makes perfect sense for Iceland, but is obviously not a solution for the world economy.  With world demand falling, it is not a viable solution that all countries should simply tighten their belts and reduce imports. That simply makes the problems worse for everybody. In Iceland's case, however, it is the only solution that is available.

Looking forward

If we look at the future one of the questions that Icelanders have to ask is whether we want to get rid of the currency that has caused us such great trouble. That is a complicated story and I am not going to go into it now because of time constraints. Let it suffice to say that an independent currency is a mixed blessing.

To conclude with a few notes on the future it is obvious that short-term prospects are not rosy. Some hard decisions have to be made and implemented. The real economy will contract and unemployment will increase. Financial restructuring of the corporate sector is going to be painful. Equity has been lost, debt needs to be written off, some people will lose control of their businesses, many holding companies will be dismantled and foreign assets sold. None of that is particularly pleasant, but it has to be done to come out of this with a healthy corporate sector that can then go on producing goods and services. There are also going to be painful government cutbacks and tax increases.

But the magnitude of the problem is not such that Iceland will have to scrap its welfare system. There is really no reason to think that Iceland cannot continue with a Scandinavian style welfare system. This is very important to prevent a financial crisis from turning into a social or even humanitarian crisis. There is no danger of that.

The biggest unknown variable is the global situation. Iceland has a plan for solving its own problems, but troubles in the neighboring countries will make that process harder and delay it.

When we come out of this we will have a small and primarily local banking system. This banking system should be sufficient for our needs. It will be healthy but it is hardly going to generate substantial profits like the old banking system did for a brief period, at least on paper.

If we look beyond the time that this reorganization will take, Iceland actually has surprisingly good long-term prospects.

 The main reason for this is that even if our financial sector obviously was severely damaged, the real economy is surprisingly intact and has considerable strength. It possesses more or less all the resources that it possessed coming into all of this. Government debt will be higher than before, but not crippling and probably not out of line with what we could observe in many other Western European countries before the crash. Households and corporations will have considerable debt, but it should be serviceable and will presumably be paid up, or at least reduced, in the long run. There is no reason why this debt problem should not eventually be solved by taking hard decisions initially and then being prudent in the long run.